The Wall Street Journal: Shell to Pay $150 Million in Penalties: “Shell also has arranged with U.S. authorities to grant Dutch and British employees special diplomatic safe passage to and from American shores” (ShellNews.net)

Oil Titan Agrees to Settle With U.S., U.K. Authorities For Overstating Its Reserves

By ALMAR LATOUR and CHIP CUMMINS

Staff Reporters of THE WALL STREET JOURNAL

July 30, 2004; Page A3

The world's third-biggest public oil company reached preliminary settlements with U.S. and British authorities to pay penalties of about $150 million for overstating one of the most vital signs of its future health, its tally of energy reserves.

Royal Dutch/Shell Group unveiled the hefty settlements after months of assiduously trying to right its relationship with regulators. It ousted top executives, turned over troves of documents and shared the full findings of an internal Shell investigation of the company's overstatements of oil and natural-gas reserves.

Shell's lawyers -- led by a European and an American experienced in U.S. corporate-litigation cases -- essentially bet that bending over backward would help the company shorten the regulatory investigations and soften the blow from U.S. authorities, who because of strict U.S. securities rules play a disproportionate role in more and more international corporate scandals.

In the end, Shell has agreed to pay a $120 million penalty to the Securities and Exchange Commission, one of the biggest penalties levied by the U.S. on a foreign company in recent years. The agreement would settle findings by the SEC that the oil giant violated the antifraud, reporting, record-keeping and internal-control procedures of U.S. securities laws and related SEC rules, though the company didn't admit or deny the conclusions.

Shell also agreed to spend an additional $5 million to improve its internal-compliance program. If approved, the $120 million penalty will be paid into a fund and channeled back to Shell investors.

Shell also said it agreed to pay £17 million ($30.9 million) to Britain's Financial Services Authority, which found that it had broken British market-abuse regulations, without admitting or denying the conclusions.

Shell isn't out of the woods yet. The SEC must formally approve its settlement, and it can still bring civil charges against individuals. Prosecutors at the U.S. Justice Department -- who can bring criminal and civil charges -- are continuing their own probe into the reserves. Shell and its executives still could face costly civil settlements.

The settlement was reached in a relatively short time -- just months after Shell disclosed its problems, as opposed to years in several recent corporate scandals in the U.S. While large, the Shell penalty is dwarfed by that of the former WorldCom, which had to pay $750 million following the largest accounting fraud in history, and by others. Still, Shell's settlement is "an unusually high civil penalty," said Russell Ryan, an attorney and former assistant director of enforcement at the SEC.

Shell's penalties represent just 4% of its $4 billion profit in the second quarter. By settling quickly, the company may be able to focus on its main business challenges: the increasing difficulty of finding new deposits of oil and gas, dwindling energy production and rising costs.

Investors and the company hope the settlements will speed Shell's return to its blue-chip status. "I see [the agreements] as a hopeful step of dealing with the reserves issue," said Shell's chief executive, Jeroen van der Veer.

Shell -- owned by Royal Dutch Petroleum Co. of The Hague and London's Shell Transport & Trading Co., in a 60%-40% split -- declined to discuss the specifics of the findings further. A spokesman for the FSA confirmed the agreement. A spokesman for the SEC declined to comment.

Yesterday, Shell reported a 54% increase in second-quarter earnings amid soaring oil prices. Shell said net income for the second quarter was $4 billion, compared with $2.6 billion last year. Revenue was $80.42 billion, up 24% from $64.86 billion in the same period last year. Profit and energy output fell at its key exploration-and-production unit.

It was that unit, in January, that Shell disclosed had overstated its reserves of oil and gas in SEC filings, and eventually reduced its tally by more than a fifth, or 4.47 billion barrels.

In the wake of the scandal, the company ousted its chairman and the head of its exploration unit. Publicly, it offered few details about how the overstatement occurred, although it has since emerged that senior officials were warned about potential overstatements as many as two years before the disclosures.

But, out of the public view, the company acted swiftly to cooperate with authorities. To make life easier for U.S. authorities, Shell employees have been flying from the U.K. and the Netherlands to interview with investigators from the U.S. Federal Bureau of Investigation, U.S. prosecutors and the SEC in offices in New York and Fort Worth, Texas. About 30 Shell employees have been through the process, according to the company.

The SEC and Justice Department tend to look much more leniently on companies that come clean after the first hints of scandal. A burst of cooperation can reduce potential penalties and also quicken the pace of probes, getting scandal behind a company.

But the approach also carries risks, legal experts say. "In every case today, cooperation is a benchmark to the SEC," said Richard Spehr, a partner at U.S.-British law firm Mayer, Brown, Rowe & Maw, who has written about the issue. But "you don't know what benefit you will get until the SEC tells you what benefit you will get," he said.

The SEC and the U.S. attorney's office in New York have led the Shell investigation, as the case centers on U.S. rules about reporting energy reserves. Each year, an oil company must report its reserves -- estimates of the oil and gas holdings the company expects to draw upon -- to the SEC as supplemental information to its financial statements. Dutch regulators also are investigating the overstatement.

The company's top attorney, Beat Hess, a Swiss citizen who came to Shell last year after serving as general counsel at Zurich-based ABB Ltd., where he worked on asbestos litigation, hired an outside team from Washington-based law firm Debevoise & Plimpton LLP. The team was headed by Ralph Ferrara, a former SEC general counsel.

Mr. Ferrara put about two dozen attorneys to work on the case, alongside a team of about five in-house Shell attorneys working full time on the reserves issue.

A few weeks after the January disclosure, Mr. Hess and Mr. Ferrara flew to Fort Worth, Texas, to give a three-hour presentation to SEC enforcement staff there, explaining the overstatements. Shell also started shipping boxes of documents to U.S. investigators.

Meanwhile, Shell's audit committee, made up of independent directors from Shell's twin boards, commissioned its own investigation. The committee hired a separate law team from New York-based law firm Davis Polk & Wardwell. The group drafted a report blaming the reserves debacle on former Chairman Philip Watts and Walter van de Vijver, former head of Shell's exploration and production unit. Both men were ousted by Shell's boards in March. In a letter through his attorney, Mr. van de Vijver has defended his work; Sir Philip hasn't made public comments since his ouster.

Shell attorneys decided early on in the scandal to volunteer to fly its staff to the U.S. for interviews. In at least one other case, U.S. investigators have traveled abroad and interviewed executives at a U.S. consulate to help a cash-strapped company save costs, but Shell's legal advisers decided they wouldn't risk the ire of investigators -- who travel on tight government budgets -- regardless of how high the costs went.

Shell also has arranged with U.S. authorities to grant Dutch and British employees special diplomatic safe passage to and from American shores -- a privilege nicknamed "Queen for a Day" by Shell insiders. The agreement provides assurances that Shell employees won't be held in the U.S. after their interview sessions.

Shell's lawyers spent days with Dutch and British employees ahead of the overseas interview sessions, according to people familiar with the situation. U.S. lawyers advised them to think carefully before they answer and to speak slowly, according to participants. They were told not to make jokes and advised to give brief answers.

It seemed unreal to some of Shell's European executives, who generally have had little exposure to U.S. legal matters, except for American television dramas, like "Law & Order," which are popular in Europe. "During a few sessions, I really wanted to say, 'Objection, your honor,' " said one employee who went through the interview process.

--Mark Long contributed to this article.

Write to Almar Latour at almar.latour@wsj.com

and Chip Cummins at chip.cummins@wsj.com