John C. Coffee, a Professor of Law at Columbia Law School has speculated that a U.S. global class action trial arising from the Royal Dutch Shell oil and gas reserves fraud in 2004, could put Shell in danger of insolvency.

The story is here.

In April 2007, Shell announced it would pay around $400 million, including legal costs, to settle a non-US investor lawsuit arising from a series of reserves restatements in 2004 that slashed its hydrocarbon reserves by almost a third. Shell’s shares fell by about 10 per cent after the scandal broke in 2004, but recovered as a result of high oil prices.

Shell had already paid $150 million in fines imposed by the financial regulatory authorities – the U.S. Securities and Exchange Commission and the UK Financial Services Authority - for securities fraud which involved “fooling the market”. The fraud led to the resignation of Shell’s three top executives including Group Chairman, Sir Philip Watts and the transformation of the Anglo-Dutch 100 year old two company structure into a Dutch owned company registered in the UK, but with its HQ in The Netherlands.

Shell has already settled class action claims brought by other parties, including a Shell employee’s retirement fund. Shell has also asked the SEC to distribute to Shell shareholders the $120m paid by the company as a “civil penalty settlement”.

The main consolidated class action was brought in the U.S. Federal courts. This was subsequently expanded into a historic global class action. The trial commences next week when lawyers for Shell will try to persuade U.S. District Chief Judge John Bissell to allow the $400 million settlement proposed by Shell to proceed. Shell has said that it intends to offer the same proportional settlement – around $80m, to U.S. investors.

New York law firm, Bernstein Liebhard & Lifshitz LLP, acting for the lead plaintiffs, Pennsylvania State Employees Retirement System & Pennsylvania Public School Employees Retirement System, and Mr Peter Wood, who is representing non-U.S. qualified Shell stockholders, will ask the Judge to reject the settlement proposed by Shell and allow the global class action to proceed.

It is this eventually which could result in the potential massive settlement that Professor Coffee has indicated could put Shell at risk of insolvency.

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