UK: Letter from Sir Philiip Watts to the FSA

Last Updated: 16 September 2004
Article by Philip Watts
This article is part of a series: Click Statement by Sir Philip Watts on FSA Investigation into Shell for the previous article.

Exchange House
Primrose Street
London EC2A 2HS
Telephone +44 (0)20 7374 8000
Facsimile +44 (0)20 7374 0888
DX 28
Your Ref:
Our Ref: 6664/2337
Date 16 September 2004

The Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS

Dear Sirs

Sir Philip Watts

We enclose by way of service a Reference Notice which has been filed with the Financial Services and Markets Tribunal (the "Tribunal") today in relation to the Final Notice issued to Shell on 24 August 2004.

FSA’s breach of its statutory obligations to ensure a fair process

In issuing the Final Notice, the FSA has breached its obligations under Section 393 of the Financial Services and Markets Act 2000 ("FSMA") by making findings which both identify and prejudice our client, Sir Philip Watts, and by unfairly denying him his right to make representations and review the evidence in respect of the FSA’s findings prior to their publication.

In doing so, the FSA has also unfairly pre-judged matters that remain in issue in its ongoing investigation in relation to Sir Philip.

Section 393 fsma deals with third party rights in respect of FSA notices. The purpose of section 393 is to ensure fairness where there is some wrong-doing alleged on the part of a third party who is not himself the subject of action by the FSA. Among other things, section 393:

  • Requires that the FSA gives a third party the opportunity to make representations if any of the reasons for the FSA’s action relates to a matter which (i) identifies the third party and (ii) in the opinion of the FSA, is prejudicial to the third party; and
  • Affords the third party access to the evidence on which the FSA relies.

We contacted the FSA on three separate occasions prior to publication of the Final Notice to seek assurances that the FSA would comply with its statutory duties. Nonetheless, in its haste to resolve its investigation into Shell, the FSA has flouted those obligations, leaving our client no option but to seek redress by way of Reference to the Tribunal.

While the FSA has recently publicly committed to increasing the speed with which it concludes enforcement actions, on this occasion, early publication has been achieved at the expense of proper investigation and fairness to our client.

The FSA’s findings are flawed

The FSA’s failure to afford our client his statutory rights is particularly egregious given the limited investigation that was undertaken by the FSA prior to publication of the Final Notice in relation to matters on which they make findings in that Notice. Had the FSA completed its investigation and/or afforded our client his right to make representations before issuing its decision against Shell, the FSA’s findings would have been shown to be fundamentally flawed.

By way of example:

1. Contrary to the FSA’s Final Notice, none of the "indications" or "warnings" stated that Shell’s proved reserves were false or misleading or that Shell should de-book proved reserves.

  • On the contrary, each year, Shell’s resource base was the subject of extensive business assurance processes that included reviews by internal and external auditors and reports to our client, the Committee of Managing Directors ("CMD"), and the Group Audit Committee that Shell’s reserves were estimated in accordance with SEC requirements.
  • Notes and memoranda to CMD cited by the FSA contained information relating to potential future issues relating to reserves which were the subject of ongoing work by Shell’s Exploration and Production ("EP") business and EP represented that no de-bookings were necessary.
  • Furthermore, these notes and memoranda were met with requests by our client for formal and fully transparent follow up by EP to CMD, and, in 2003, to the Group Audit Committee.

2. The FSA’s Final Notice fails to acknowledge that Sir Philip relied on the reviews by Shell’s experts in oil and gas reserves estimation and Shell’s external auditors to ensure the accuracy of reserves information.

  • Our client believed that bookings were made in accordance with Shell guidelines in effect at the time and were reviewed by Shell’s internal and external auditors.
  • The FSA dismisses KPMG’s review by stating that it "did not constitute an audit of Shell’s proved reserves" and "formed no view as to the reasonableness of any reliance placed on that review"
  • However, Statement of Auditing Standards No. 52 ("SAS 52") requires auditors to determine that the methods for estimating proved oil and gas reserves comply with Generally Accepted Accounting Principles ("GAAP"). This included enquiring as to whether those responsible for estimating reserves had appropriate qualifications, whether the internal Shell guidelines complied with SEC rules and whether Shell’s methods and bases for estimating proved reserves were documented and current.
  • SAS 52 requires that, if the external auditors believe that proved reserves do not comply with GAAP, they are to make further enquiries. If they are unable to evaluate the responses they receive or still doubt that the proved reserves comply with GAAP, they are to document their concerns in their report on the entity’s financial statements filed with the SEC.

3.The FSA’s assessment of the Group Reserves Auditor is totally at odds with that of Shell’s external auditors who reported that he was competent and independent.

  • The FSA has singled out the Group Reserves Auditor as ineffective. This ignores the fact that KPMG, one of Shell’s external auditors, confirmed his competence and independence in a three-page opinion in December 2002.
  • We note that the FSA has not addressed this letter in its Final Notice (just as Davis Polk did not address the issue, or the role of the external auditors generally, in the Executive Summary of their report to the Group Audit Committee).
  • Assurance as to the thoroughness of the Group Reserves Auditor had earlier been provided to our client by the external auditors in their report to CMD and the Group Audit Committee in March 2002.

4. The FSA’s Final Notice does not acknowledge that estimation of proved oil and gas reserves is recognised across the oil sector as being a complex task that requires subjective judgments on which experts may reasonably differ.

  • The SEC rule that defines proved reserves in terms of volumes "reasonably certain" to be extracted was enacted in 1978
  • The revisions of Shell’s 1998 guidelines criticised by the FSA ignored the fact that the changes were carefully implemented with the involvement and support of Group Audit and External Auditors.
  • The SEC "guidance" of March 2001, relied upon by the FSA in describing Rule 4-10’s requirements, is non-binding staff guidance for which the SEC expressly " disclaims responsibility".
  • Shell routinely modified its internal guidelines. The revised guidelines were reviewed by Shell’s external auditors as our client was aware when, in 2002 and 2003, they reported on the revisions to CMD and to the Group Audit Committee.

5. The FSA’s Final Notice ignores completely the period before our client was in charge of Shell’s EP business when a substantial part of the reserves subsequently de-booked were originally booked.

  • Shell debooked approximately 4.5 billion barrels of oil equivalent ("boe") of reserves. A substantial part had been booked by 1996, before our client began his tenure at EP and other reserves were booked after his tenure ended.
  • Reserves debooked had originally been booked as early as 1986 (Brunei) and as late as 2002 (Kashagan).

6. The FSA’s Final Notice fails to acknowledge that Sir Philip requested rigorous and immediate review of proved reserves after report of two unsatisfactory audits.

  • Once CMD was alerted, on 18 November 2003, to unsatisfactory audits in respect of Nigeria SPDC and Oman, our client took steps to establish a thorough review of Shell’s reported reserves. It was this review which led to the announcement by Shell on 9 January 2004 of the recategorisation of significant volumes of reserves.

Sir Philip has, to date, refrained from making any substantive public comment during the currency of the FSA’s investigation. However, in the light of the FSA’s premature publication of its findings in breach of its statutory obligations, he feels compelled to begin to correct the record by making this Reference to the Tribunal. Accordingly, Sir Philip is referring to the Tribunal the FSA’s failure to afford him his third party rights as well as challenging the reasons on which the Final Notice is based.

Sir Philip 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.

Yours faithfully

The content of this article does not constitute legal or investment advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

This article is part of a series: Click Statement by Sir Philip Watts on FSA Investigation into Shell for the previous article.
This article is part of a series: Click Statement of Grounds for Reference to the Tribunal for the next article.
Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.