Criminal charges loom over Shell

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The Independent Online

Criminal charges against Shell and its former chairman Sir Philip Watts were looking increasingly likely yesterday as the full enormity of the deception perpetrated on the financial markets by the company's senior executives continued to sink in.

There is also the possibility of Sir Philip and Shell's former head of exploration and production, Walter van de Vijver, being sued by the company itself over the way in which the board and investors were misled over the booking of oil and gas reserves.

The US Justice Department and Securities and Exchange Commission are both investigating the scandal and observers believe that enforcement action is now a strong possibility. Shell is already facing class action lawsuits from US shareholders who are suing the company under civil law for deliberately misleading investors.

The full extent of the deception practised on the markets by Shell over a period of at least two years was laid bare on Monday in a devastating report from a firm of US lawyers hired by the Anglo-Dutch oil giant's audit committee.

The report details the increasingly frantic attempts by Shell executives to cover up the massive hole in reserves and the acrimony this provoked among board members, until the dam finally broke in January this year and the company was forced to admit it had overbooked reserves by 3.9 billion barrels or 25 per cent over a six-year period up to the end of 2002.

Shell sources said the reason that only a short summary of the 467-page report was published was to avoid prejudicing any action which US authorities might take. "They did not want the whole report put on the public record because that might allow people they want to prosecute to bone up on their answers before the Department of Justice comes calling," one source said.

One motivation for the company taking legal action against its former chairman would be as mitigation should Shell find itself facing possible criminal charges arising out of the debacle. A spokesman declined to comment on the prospect of legal action against either the company or former directors but stressed: "Shell's overriding concern is to co-operate with the authorities to resolve this matter as expeditiously as possible."

Sir Philip has maintained an absolute vow of silence on the affair since he was ousted from the Shell board in March, unlike Mr van de Vijver, who issued a statement last week through his legal advisers. Sir Philip could still not be contacted at his Berkshire mansion yesterday.

One of the issues Shell will have to examine is whether Sir Philip ought to repay any of the executive bonuses he has received since he became Shell's chief executive of exploration and production in 1997. During most of the period when Shell was overbooking reserves, Sir Philip was directly responsible for E&P. Since 1997, he has earned £2.9m alone in performance-related pay and realised share option gains from the company's stock option plans. This includes a £874,000 performance payment awarded for 2002, the last year for which figures were available.

Shell has said that the booking of proven reserves is only a small element in its bonus scheme. However, the company's apparent success in replenishing its reserves will have had a wider impact on its share price, which in turn drives total shareholder return on which a bigger proportion of the company's incentive scheme was based.

In immediate jeopardy are performance payments awarded to Sir Philip in 2001 and 2002 under a deferred bonus plan. This plan allows executives to defer up to a third of their annual bonus into shares. Provided they stay with the company for three years they receive one additional share for every two shares accumulated under the deferred scheme. According to Shell's annual reports, the value of these additional shares are worth £228,000 for 2001 and 2002. His early departure means these additional shares will be lost.

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