Financial Times: Sir Philip drops a fightback bombshell: “Topping the roster of misdemeanours was the assertion that Shell had "announced false or misleading proved reserves and reserves replacement ratios to the market throughout the period 1998 to 2003 inclusive". (ShellNews.net)

Published: September 17 2004

"My lawyers have advised me that it would be inappropriate for me to discuss publicly the issues that are the subject of this application."

So wrote Sir Philip Watts, former chairman of Royal Dutch/Shell, yesterday, in a bombshell letter outlining his fightback against the Financial Services Authority.

But there was little need for public discussion. Sir Philip's missive was posted alongside a devastating 18-page critique, framed by his City of London lawyers Herbert Smith, which contained a detailed rebuttal of the FSA's Final Notice of 24 August.

The UK watchdog's final notice, issued in conjunction with a statement from the US Securities and Exchange Commission, included news of arecord £17m fine on Shell Transport and Trading, the oil group's UK arm.

Shell, the FSA said, had committed "particularly serious" market abuse and had breached the listing rules.

Topping the roster of misdemeanours was the assertion that Shell had "announced false or misleading proved reserves and reserves replacement ratios to the market throughout the period 1998 to 2003 inclusive".

The notice ended with the warning that "investigations into other aspects of this matter are ongoing". These are understood to include Sir Philip's personal role throughout the saga.

Sir Philip is fighting the FSA's notice on several fronts and has instructed that his case be "referred" to the Financial Services and Markets Tribunal, an arena which will allow him to challenge its findings. There is no legal basis to contest the SEC findings.

Herbert Smith says the FSA probe lacked "fairness" because of the "haste" in which it conducted its four-month investigation.

One of Sir Philip's main grievances is that the FSA's final notice readily "identifies" and repeatedly "prejudices" him, despite not mentioning him by name. The filing lists several examples to back the claim.

Herbert Smith says: "Corporate entities act and can engage in market abuse only through individuals. Therefore, the FSA's final notice identifies and prejudices the applicant to the extent that it attributes to Shell facts and activities publicly known to have been associated with the applicant. The FSA cannot evade the fairness protections afforded to the applicant under section 393 of the Financial Services and Markets Act simply by avoiding the explicit naming of the applicant in the final notice."

Section 393 of the 2000 act deals with third-party rights in respect of FSA notices.

Herbert Smith says it "requires that the FSA gives a third party the opportunity to make representations if . . .the FSA's action relates to a matter which identifies the third party". It also "affords the third party access to the evidence on which the FSA relies".

The law firm says it approached the FSA on three occasions in July and early August for copies of any notice but the FSA "refused to disclose" any information prior to the final notice. Hence Sir Philip's belief that the FSA had "breached" the act.

Sir Philip says if he had been "given the opportunity to make representations, the opinions expressed by the FSA that relate to him would have been shown to be fundamentally flawed, due in part to the fact that they are based on an investigation that the FSA has yet to complete".

Sir Philip claims that, contrary to the assertions in the final notice, the rules regarding the definition of proven reserves require "inherently subjective judgments by oil and gas producers".

The filing also states: "By its own admission, the FSA . . . has failed to take account of the reasonableness of Shell's reliance on the review of reserves information performed by the external auditors [PwC and KPMG]. The FSA's findings are inconsistent with the applicant having reasonably relied on the work of the external auditors."

It adds: "Contrary to the conclusions in the FSA's notice, at no time prior to November 2003 was the applicant informed by Shell's experts in oil and gas reserves estimation . . . that Shell's statements of proved reserves were false or misleading or that there was a need for significant debookings." Sir Philip "contests" the FSA's opinion that Shell and its executives "failed to establish and maintain adequate internal controls". Sir Philip is evidently angry that he has been denied access to the full report of the investigation conducted by US law firm Davis Polk on behalf of Shell, which precipitated his departure.

He notes, acidly, that the full report "has been provided to the FSA".

He "remains confident that a full and fair examination of the evidence in these proceedings, or any other proceedings the FSA may bring against him, will find that he acted properly and in good faith".

If the tribunal, likely to be held next year, decides that a breach has been committed, Sir Philip's case will be heard afresh, in public.

He has not seen the last of his lawyers just yet.