# In Re Royal Dutch/Shell Transport Securities Litigation

> District Court, D. New Jersey · August 9, 2005 · 380 F. Supp. 2d 509

URL: https://www.frixlaw.com/law-library/cases/2461418

## Case

- **Full name:** In Re ROYAL DUTCH/SHELL TRANSPORT SECURITIES LITIGATION
- **Court:** District Court, D. New Jersey
- **Decided:** August 9, 2005
- **Citations:** 380 F. Supp. 2d 509; 2005 U.S. Dist. LEXIS 16447; 2005 WL 1870030
- **Precedential status:** Published
- **Opinion:** Opinion by Bissell
- **Judges:** Bissell
- **Cited by:** 20 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/2461418

## How later opinions describe it (automated extraction)

- rejecting the plaintiffs’ theory that KPMG and PWC were single entities based on allegations that the firm was a unitary worldwide firm since they touted themselves as one firm with accountants in offices worldwide because member firms in an international accounting associatio…
- concluding that the court had specific personal jurisdiction over an employee who allegedly signed filings that contained materially false and misleading information
- holding those who purchased stock during class period but have yet to sell the securities have not alleged proximate causation and economic loss
- finding sufficient corroboration in specific notes, memoranda, emails and presentation materials

## Opinion text

OPINION
BISSELL, Chief Judge.
TABLE OF CONTENTS
Facts and Background.515
Overview.515
Parties .518
Structure of the Companies .524
Group Management.525
Oil & Gas Reserves.526
Overbooking of Proved Reserves.527
Defendants’ Alleged Knowledge of the Group’s Overbookings.530
Geographic Areas.534
Proffered False and Misleading Statements and Omissions.536
Truth about Reported Reserves.536
SEC Investigation and other Regulatory Actions.537
Claims for Relief.538
Discussion.539
I. Rule 12(b)(1) Motion to Dismiss for Lack of Subject Matter Jurisdiction.539
Standard of Law.539
Application.539
Conduct in the U.S.540
Shell Deepwater Services.542
Audits at SDS in Houston.544
Investor Relations .544
Alleged Inconsistent Statements .545
Res Judicata.546
*515
International Comity .
II.Defendant Watts’ Rule 12(b)(2) Motion to Dismiss.
Standard of Law.
General Jurisdiction.
Specific Jurisdiction.
Exercise of Specific Personal Jurisdiction.
III. RDS Defendants’ Rule 12(b)(6) Motions to Dismiss.
Standard of Law.
Section 10(b), 15 U.S.C. § 78j(b).
10(b) Claims against RDS.
10(b) Claims against Individual Defendants.
Section 14(a) Claims.
Section 20(a) Claims.
IV. Auditor Defendants’ Rule 12(b)(6) Motions to Dismiss.
Statute of Limitations.
KPMG NV & PwC UK Motions.
KPMG Int’l & PwC Int’l Motions.
zn
DO
This matter comes before the Court on various motions to dismiss, pursuant to Federal Rules of Procedure 12(b)(1), 12(b)(2) and 12(b)(6), by the Individual and Corporate Defendants of Royal Dutch/ Shell Transport and Defendants KPMG NV, KPMG International, PwC UK and PwC International. On July 13 and July 15, 2005, this Court heard oral arguments on the aforesaid motions.
1
This court has jurisdiction over this matter pursuant to Section 27 of the Exchange Act, 15 U.S.C. § 78aa.
FACTS & BACKGROUND
Overview
Lead Plaintiff, the Pennsylvania State Employees’ Retirement System and the Pennsylvania Public School Employees’ Retirement System (“Lead Plaintiff’), brings this action on behalf of itself and all persons who purchased the securities of N.V. Koninklijke Nederlandsche Petroleum Maatschappij, a/k/a the Royal Dutch Petroleum Company, (“Royal Dutch”) and The Shell Transport and Trading Company, PLC (“Shell Transport”) (together, Royal Dutch and Shell Transport will be referred to as either “RDS”, “The Shell Group” or the “Companies”), including the ordinary shares traded on overseas markets and the New York Stock Exchange (“NYSE”) and the American Depository Receipts (“ADRs”) trading on the NYSE between April 8, 1999 and March 18, 2004 (the “Class Period”). The Defendants include: RDS, several of RDS’s current and former senior executives, and RDS’s outside auditors, PricewaterhouseCoopers LLP (“PwC UK”) and KPMG Accountants N.V. (“KPMG NV”), as well as Pricewater-houseCoopers International and KPMG International. The Complaint seeks to recover damages caused by alleged violations of the federal securities laws.
The claims in the Complaint stem from the dissemination by RDS of what Plaintiff characterizes as “materially false and misleading statements” concerning RDS’s reported proved oil and natural gas reserves.
See
Consolidated Amended Class Action Complaint (“Complaint”), ¶ 3. The Complaint alleges that, during the Class Peri
*516
od, RDS issued false public reports, overstating: (a) their proved oil and natural gas reserves by billions of barrels of oil equivalent (“boe”), (b) their reserves replacement ratio (“RRR”), and (c) their future cash flows by over $100 billion.
Id.
Plaintiff claims that before and during the Class Period, the RDS Defendants repeatedly represented to the investing public that RDS was successfully identifying new proved oil and gas reserves and replacing existing proved reserves depleted by production. New and existing proved reserves are key performance indicators in the oil and gas industry.
Id.
¶ 4. Such representations were made in proposals to market analysts, press releases, Annual Reports, filings with the United States Securities and Exchange Commission (“SEC”) and through other public media.
Id.
RDS’s joint reports include Form 20-F, which the SEC, requires to be filed annually. The RDS Defendants represented the following on Form 20-F for the years 1998-2002:
1998
Reserves
During 1998 the Group’s total proved reserves for oil (including natural gas liquids) and natural gas increased from 19.4 to 20.5 billion barrels of oil equivalent. ... The net additions to proved reserves more than replaced the 1998 production, with replacement ratios of some 140% for oil (compared with 130% in 1997) and some 250% for gas (compared with 210% in 1997).
1999
Reserves
The overall 1999 replacement ratio of proved crude oil and natural gas reserves and oil sands stands at 101% (147% excluding 1999 divestments and acquisitions).... The three-year rolling average replacement ratio for total crude oil and natural gas proved reserves ... stands at 132%, reflecting the fact that oil and gas production over 1997-99 has been more than replaced by net additions over the same period.
2000
Reserves
The proved hydrocarbon reserves replacement ratio for 2000 was 105%.... Therefore production during the year of 1.4 billion barrels of oil equivalent was more than replaced.... The three-year rolling average proved hydrocarbon reserves replacement ratio ... stands at 117%.
2001
Reserves
The proved hydrocarbon reserves replacement ratio for 2001 is 74% ... [A]nd the three-year rolling average ... now stands at 101%. Proved reserves ■ are equivalent to more than 14 years of current production.
2002
Reserves
The proved hydrocarbon reserves replacement ratio for 2002 was 117% and the five year rolling average ... now stands at 109%.... Proved reserves are equivalent to more than 13 years of current production.
Id.
¶ 4.
Furthermore, the Complaint alleges that PwC UK and KPMG NV, individually and jointly, issued materially false, misleading and unqualified-' audit opinions that were included in the Class Period financial statements filed with the SEC by RDS.
Id.
¶ 5. In the reports, PwC UK and KPMG NV purportedly misrepresented that each had conducted their respective audits “in accordance with U.S. generally accepted auditing standards (“GAAS”).”
Id.
Furthermore, it is alleged that they falsely represented that the audited financial statements presented fairly both the financial position of the Shell Group, Shell
*517
Transport and Royal Dutch as of December 31,1998-2002 and the results of operations and cash flows for each of those years, in accordance with generally accepted accounting principles (“GAAP”), in the Netherlands and the United States.
Id.
On January 9, 2004, before the markets opened in Europe, RDS released a disclosure entitled “Proved Reserve Recategori-sation,” which announced that in order to comply with SEC regulations, it would be reducing previously reported proved reserves by 20%, or approximately 3.9 billion boe.
Id.
¶ 6. After that disclosure, the trading price of the ordinary shares of both Shell Transport and Royal Dutch and the ADRs of Shell Transport declined.
Id.
As a result of the disclosure, it is alleged that RDS lost $13.84 billion of market value.
Id.
After the initial announcement on January 9, 2004, RDS has further reduced its estimated proved oil and natural gas reserves three additional times — on March 18, April 19 and May 24, 2004 — for a total reclassification of 4.47 billion boe, or 23%.
Id.
¶ 8.
Since the reclassification, four civil investigations by regulatory authorities in the United States and Europe have been commenced and the United States Department of Justice has initiated a criminal investigation.
Id.
¶ 11. In a January 12, 2004 article in The Wall Street Journal, former SEC chief accountant Lynn Turner was quoted as follows: “A 20% restatement of proven reserves is a humongous error. For a company like Shell to have missed its proven reserves by that much is not an oversight. It’s an intentional misapplication of the SEC’s rules.”
Id.
¶ 11. (quoting The Wall Street Journal, “Shell Cuts Reserve Estimate 20% as SEC Scrutinizes Oil Industry,” January 12, 2004). The Complaint alleges that on February 3, 2004, RDS’s Group Audit Committee (the “GAC”) retained Davis Polk & Wardwell (“Davis Polk”) to lead a limited internal review into the circumstances resulting in the overbooking of reserves.
Id.
¶ 12. On April 19, 2004, RDS released the executive summary of the March 31, 2004 Report of Davis Polk to the GAC (the “GAC Report”) in which Davis Polk concluded that Shell Transport had been overbooking reserves as early as 1997, during Defendant Philip Watts’ and Defendant Walter van de Vijver’s respective tenures as head of RDS’s Exploration and Production (“EP”) unit.
Id.
¶ 13.
The GAC report stated that the aforementioned executives “were alert to the difference between the information concerning reserves that had been transmitted to the public ... and the information known to some members of management.”
Id.
¶ 13. The GAC report further stated that “EP managements’ plan was to ‘manage’ the totality of the reserve position over time, in hopes that problematic reserve bookings could be rendered immaterial by project maturation, license extensions, exploration successes and/or strategic activity;” however, Defendants’ “strategy ‘to play for time’ in the hope that intervening helpful developments would justify, or mitigate, the existing reserve exposures ... failed as business conditions either deteriorated or failed to improve sufficiently to justify historic bookings.”
Id.
¶ 14. The Complaint alleges that the GAC Report was accepted in full by the GAC on April 15, 2004, and by the members of the Supervisory Board of Royal Dutch and the non-executive Directors of Shell Transport on April 16, 2004.
Id.
¶ 15.
The Complaint further alleges that RDS’s acceptance of responsibility for the alleged conduct was also set forth in the Annual Reports disseminated by Shell Transport and Royal Dutch shortly before the Amended Complaint was filed.
Id.
*518
¶ 16. The following is an excerpt of one cited report: - .
In connection with the restatement of proved reserves volumes described elsewhere in this report, Royal Dutch and Shell Transport have determined, based largely upon the investigation and report to the GAC, that there were deficiencies and material weaknesses in the internal controls relating to proved reserves bookings and disclosure controls that allowed volumes of oil and gas to be improperly booked and maintained as proved reserves. The^ inappropriate booking of certain proved reserves had an effect on the Financial Statements, mainly understating depreciation, depletion and amortisation.
Id..
¶ 16.
The GAC Report also described that the overbooking of oil and natural gas reserves over such a lengthy period of time was possible only “because of certain deficiencies in the Company’s controls.” Plaintiff alleges that “[u]nder GAAS, PwC UK and KPMG NV were required to review and understand RDS’s internal control structure and . determine whether reliance thereon was justified, and if such controls were, not reliable, to expand the nature and scope of those controls to correct them.”
Id.
¶ 18. Lead Plaintiff concludes that PwC UK and KPMG NV failed to do so.
Id.
Parties
Defendant Royal Dutch is headquartered in The Hague, The Netherlands.
See
Compl., ¶ 45. Its common shares are registered with the SEC pursuant to Section 12(b) of the Exchange Act and trade on the New York Stock Exchange (“NYSE”).
Id.
The principal trading markets for Royal Dutch shares are the NYSE and the Euronext Exchange in Amsterdam. Royal Dutch is one of the parent companies in the Shell Group and in conjunction with Shell Transport, owns, directly or indirectly, investments in the numerous companies referred to collectively as the “Group Holding Companies.”
Id.
Defendant Shell Transport is headquartered in London, England.
Id.
¶ 46. Its ordinary shares, as well as shares of an aggregate nominal amount of £1.50 and evidenced by ADRs, are registered with the SEC pursuant to Section 12(b) of the Exchange Act.
Id.
The primary market for Shell Transport’s ordinary shares is the London Stock Exchange. The ADRs trade on the NYSE.
Id.
As the parent companies, Royal Dutch and Shell Transport do not directly engage in operational activities.
Id.
¶ 47. Each own the shares in the Group Holding Companies and neither is part of the Shell Group.
Id.
Royal Dutch and Shell Transport appoint Directors to the Boards of the Group Holding Companies, from which they receive income in the form of dividends.
Id.
Royal Dutch has a 60% interest in the Group and Shell Transport has a 40% interest.
Defendant Sir Philip Watts is a citizen of the United Kingdom.
Id.
¶ 48. Watts served as a Director and as a Managing Director of Shell Transport beginning in 1997, as Shell Transport’s Chairman and as Chairman of the Committee of Managing Directors (“CMD”) beginning in 2001, and as a Group Managing Director beginning in 1997.
Id.
Watts was terminated on March 19, 2004.
Id.
Defendant Watts who joined the Shell Group as a seismologist in 1969 held positions in Asia Pacific and Europe, leading to positions as Exploration Director Shell-U.K. from 1983 to 1985, head of various exploration and production functions in The Hague from 1985 to 1991, Chairman and Managing Director in Nigeria from 1991 to 1994, ■ Regional Coordinator Europe from 1994 to 1995, Director Planning Environment and External Affairs, Shell International from 1996 to 1997, and CEO of the EP unit
*519
from 1997 to 2001.
Id.
Watts signed the Annual Reports on Form 20-F filed with the SEC for 2001-2002 and allegedly falsely certified the 2002 Form 20-F, including the financial statements and reports, of Shell Transport and the Shell Group, pursuant to the Sarbanes-Oxley Act of 2002. The Complaint alleges that despite the Shell Group’s poor performance, Watts’ salary more than doubled between 1999 and 2002, due in large part to reserve replacement credits on his compensation scorecard.
Id.
It is alleged that in 2003 Watts received a 55% pay raise, increasing his base salary to £1.8 million (approximately $3.2 million).
Id.
Upon termination, Watts allegedly received a severance package that included three months’ salary for 2003 (£450,000).
Id.
Defendant Walter van de Vijver, a citizen of the Netherlands, served as a Director of Royal Dutch, the CEO of the EP unit, a Managing Director of Royal Dutch, a Group Managing Director, and a member of the CMD from 2001 until his termination on March 19, 2004.
Id.
¶ 49. Defendant van de Vijver joined RDS in 1979 as a petroleum engineer and worked in exploration and production in Qatar, Oman, the United States, the United Kingdom and The Netherlands.
Id.
Van de Vijver signed the 2002 Form 20-F and allegedly reviewed and authorized the filing of the 2001 annual report on Form 20-F.
Id.
Lead Plaintiff alleges that van de Vijver’s salary tripled between 2001 and 2002, due in large part to reserve replacement credits on his compensation scorecard.
Id.
Defendant Malcolm Brinded is a citizen of the United Kingdom.
Id.
¶ 50. Defendant Brinded has been a Director of Royal Dutch and has served as the CEO of RDS’s Gas & Power unit since 2002, CEO of the EP unit since 2004, a member of the Royal Dutch Board of Management and a member of the CMD since 2002, and Vice-Chairman of the CMD in March 2004.
Id.
Brinded joined RDS in 1974 and has held various positions in the Company around the world, including Brunei, The Netherlands, Oman and the United Kingdom.
Id.
Lead Plaintiff alleges that Defendant Brinded reviewed and authorized the' filing of the 2002 annual report on Form 20-F.
Id.
Defendant Jeroen van der Veer is a citizen of The Netherlands. Van der Veer, at all relevant times a Director of the Royal Dutch Board of Management, has served as a Group Managing Director since 1997.
Id.
¶ 51. Van der Veer has served as President of Royal Dutch since 2000 and was promoted to Chairman of the CMD in March 2004.
Id.
He joined RDS in 1971 and held a number of senior management positions around the world. Van der Veer served as the Vice-Chairman of the CMD from 1997-2003 and signed the allegedly false and misleading Annual Reports on Form 20-F under the Sarbanes-Oxley Act.
2
It is also alleged that he reviewed and authorized the filing of the 1998 and 1999 Annual Reports on Form 20-F.
Id.
Defendant Judith Boynton is a citizen of the United States. Boynton served as RDS’s Chief Financial Officer (“CFO”) beginning in 2001 and as a Shell Transport Director and a Group Managing Director beginning in 2003.
Id.
¶ 52. Defendant Boynton served as a member of the CMD from 2003 until her removal from all her executive and directorial positions on April 19, 2004.
Id.
Boynton’s responsibilities in-
*520
eluded preparing RDS’s financial statements which were filed with the SEC and disseminated to the investing public and shareholders of RDS.
Id.
Defendant Boyn-ton was also responsible for overseeing RDS’s internal disclosure and financial controls to ensure that they were adequate and complied with the federal securities laws.
Id.
Lead Plaintiff alleges that Defendant Boynton falsely certified. RDS’s annual report on Form 20-F for the year 2002 pursuant to the Sarbanes-Oxley Act.
Id.
Defendant Paul Skinner is a citizen of the United Kingdom.
Id.
¶ 53. He served as a Director and as a Managing Director of Shell Transport beginning in 2000, as chief executive officer of Shell Oil Products beginning in 1999, and as a Group Managing Director and a member of the CMD beginning on January 1, 2000, until his retirement in September 2003. Defendant Skinner allegedly reviewed and authorized the filing of RDS’s 2000 through 2002 Annual Reports on Form 20-F.
Id.
Defendant Maarten van den Bergh is a citizen of The Netherlands.
Id.
¶ 54. He has served as a Director of Royal Dutch since 2000, a Managing Director of Royal Dutch from 1992 to 2000, and as President of Royal Dutch from 1998 to 2000.
Id.
From 1998 to 2000, van den Bergh served as Vice Chairman of the CMD. Defendant van den Bergh allegedly reviewed and authorized the filing of RDS’s Annual Reports on Form 20-F for the years 2000 through 2002.
Id.
Defendant Mark Moody-Stuart is a citizen of the United Kingdom. Id. ¶ 55. He has served as a Director of Shell Transport and as the Chairman of Shell Transport from 1997 to 2001.
Id.
From 1991 through July 2001, he served as a Group Managing Director and member of the CMD. It is alleged that Defendant Moody-Stuart reviewed and authorized the filing of RDS’s Annual Reports on Form 20-F for the years 2000 through 2002.
Id.
Defendant Aad Jacobs is a citizen of The Netherlands.
Id.
¶ 56. Throughout the Class Period, Jacobs served as a Director of Royal Dutch, and since 2002 as Chairman of the Royal Dutch Supervisory Board and Chairman of the GAC.
Id.
It is alleged that Defendant Jacobs reviewed and authorized the filing of RDS’s Annual Reports on Form 20-F for the years 2000 through 2002.
Id.
Defendant Harry Roels is also a citizen of The Netherlands.
Id.
¶ 57. Defendant Roels served as a Managing Director at Royal Dutch and a member of the Board of Management of RDS beginning in July 1999.
Id.
He joined RDS in 1971 as a petroleum engineer, working in exploration and production in Malaysia, Brunei, the United Kingdom, Turkey, Norway and The Netherlands.
Id.
Defendant Roels relinquished his positions with RDS in June 2002. It is alleged that Defendant Roels reviewed and authorized the filing of RDS’s Annual Reports on Form 20-F for the years 1999 through 2002.
Id.
Defendant Steven L. Miller is a citizen of the United States.
Id.
¶ 58. Defendant Miller served as a Group Managing Director beginning in 1996 and as a Director of Shell Transport’s Board of Directors beginning in 1998.
3
He also served as the Chairman, President and Chief Executive Officer of Shell Oil Company.
Id.
During Defendant- Miller’s tenure, he worked with the CMD in the formation of RDS’s strate
*521
gy and in the development and deployment of RDS’s senior executives.
Id.
It is alleged that Defendant Miller reviewed and authorized the filing of RDS’s Annual Reports on Form 20-F for the year 2001.
Id.
Lead Plaintiff alleges that the Individual Defendants (Watts, van de Vijver, Brinded, van der Veer, Boynton, Skinner, van den Bergh, Moody-Stuart, Jacobs, Roels and Miller), as officers and/or directors of Royal Dutch or Shell Transport, were privy to confidential and proprietary information concerning RDS, its operations, reported reserves and business prospects.
Id.
¶ 73. Furthermore, Plaintiff proffers that the Individual Defendants “had access to internal documents, reports, and other information, including, among other things, the material, adverse, non-public, information concerning the Companies’ and the Shell Group’s classification of proved oil and gas reserves.”
Id.
As a result, Plaintiff alleges, the Individual Defendants were responsible for the truthfulness and accuracy of the Shell Group’s and the Companies’ public statements.
Id.
Plaintiff also characterizes the Individual Defendants as “controlling persons” of the Companies within the meaning of Section 20 of the Exchange Act.
Id.
¶ 74. The Complaint alleges that “[b]y reason of their positions with Royal Dutch and Shell Transport, they were able to and did, directly or indirectly, in whole or in material part, control the content of public statements issued by or on behalf of the Shell Group, including statements to securities analysts and financial reporters.”
Id.
Accordingly, Plaintiff contends that the Individual Defendants are liable for the allegedly false' statements, because the statements were “group-published” information, the result of the collective action of the Individual Defendants.
Id.
Plaintiff alleges that PwC and KPMG provided unqualified Independent Auditors’ Reports for the Shell Group’s annual reports for the years ended 1998 .through 2002. Compl., ¶ 515. It is alleged that these “unqualified audit opinions and reports violated GAAS and greatly enhanced and facilitated the fraud.... ”
Id.
Defendant PwC International, a membership-based company organized in the United Kingdom' with its U.S. héadquarters in New York, New York, is a professional services organization with member firms around the world.
Id.
¶ 60. PwC International provides industry-focused assurance, tax and advisory services for public and private clients primarily in four areas: corporate accountability, risk management, structuring and mergers and acquisitions, and performance and process improvement.
Id.
The Complaint alleges that PwC International represents itself as a “truly global organization” that “build[s] networks of highly skilled professionals around clients and provide[s] them with the benefit of PwC’s collective knowledge and resources.”
Id.
¶ 62. The PwC International website states that “[o]n joining the PwC global network and becoming members of PwC International, member firms have the right to use the PwC name and to gain access to common resources, methodologies, knowledge and expertise! In return, they are bound to abide by certain common policies and to maintain the standards of the global network as formulated by the CEO of Pricewaterhou-seCoopers International Limited and approved by its Global' Board.”
Id.
¶ 62.
Defendant PwC UK is a limited liability partnership registered in the United Kingdom.
Id.
¶ 63. PwC, a member of the PwC global network, audits almost one-half of the FTSE 100, the 100 largest companies in the United Kingdom.
Id.
PwC UK provides industry-focused assurance, tax and advisory services for public and private clients and for companies requiring an audit for statutory or .regulatory reasons connected with the filing of
*522
their annual and periodic financial information; PwC UK provides an assurance service to shareholders and management on the truth and fairness of the information, and specifically addresses any other regulatory reporting requirements, such as those under the Sarbanes-Oxley Act of 2002.
Id.
With the exception of the descriptions given above, the Complaint refers to PwC International and Pwc UK collectively as “PwC
PwC was hired by the Shell Group and Shell Transport to provide independent auditing and/or consulting services, including the preparation, examination and/or review of Shell Transport’s and the Shell Group’s consolidated financial statements for the years 1998 through 2002, which were then disseminated to investors in the United States.
Id.
¶ 65. The financial statements were presented to, reviewed and relied upon by securities purchasers, governmental agencies, the investing public and members of the financial community.
Id.
The Complaint alleges that by virtue of its position, PwC, at all relevant times, had access to RDS’s key personnel, accounting books and records, and documents concerning proved reserves.
Id.
PwC personnel, who were frequently present at the Companies’ respective corporate headquarters and major offices throughout the Class Period, had access to the confidential corporate financial and business information, including Shell and Royal Dutch’s true financial condition, financial statements and reserve reporting problems, which Lead Plaintiff alleges PwC was aware of and/or recklessly disregarded.
Id.
Furthermore, it is alleged that PwC had the opportunity both to “observe and review the Companies’ and the Shell Group’s business and reporting practices, and to test the Company’s and the Shell Group’s internal and publicly reported financial statements, as well as the Shell Group’s and the Company’s internal controls.”
Id.
PwC was involved in the preparation and dissemination of the Shell Group’s and Shell Transport’s quarterly and year-end financial results throughout the Class Period.
Id.
¶ 66. The Complaint further alleges that PwC examined and opined on the Shell Group’s and Shell Transport’s financial statements for the years 1998 through 2002.
Id.
It is alleged that PwC falsely represented that its audits had been conducted in accordance with GAAS, and wrongfully issued “clean” or unqualified audit reports in which it allegedly misrepresented that those financial statements fairly presented the financial condition and results of operations in conformity with GAAP.
Id.
Defendant KPMG International is a Swiss cooperative of which it is alleged that all KPMG firms are members.
Id.
¶ 67. KPMG International has a U.S. headquarters in New York, New York, and provides assurance, tax and legal, and financial advisory services to customers worldwide. It is alleged that like PwC International, KPMG International markets itself as a single global organization.
Id.
Defendant KPMG NV’s headquarters is located in Amstelveen, The Netherlands, and it is part of the professional services organization of KPMG International.
Id.
¶ 68. KPMG NV’s core activities in The Netherlands include assurance services, financial advisory services, and tax and legal services.
Id.
The Complaint alleges that KPMG NV’s website states that KPMG NV purports to have knowledge of a client’s business and organization, such that it can act “as a business partner” of that client.
Id.
With the exception of the above descriptions, the Complaint refers to KPMG International and KPMG NV collectively as “KPMG.”
KPMG was hired by the Shell Group and Royal Dutch to provide independent auditing and/or consulting services, includ
*523
ing the preparation, examination and/or review of Royal Dutch’s and the Shell Group’s consolidated financial statements for the years 1998 through 2002.
Id.
¶ 70. Those financial statements were then disseminated to investors in the United States and were presented to, reviewed and relied upon by securities purchasers, governmental agencies, the investing public and members of the financial community.
Id.
KPMG personnel, who were frequently present at the Shell Group’s and Royal Dutch’s respective corporate headquarters and major offices between 1998 and 2002, had access to confidential corporate financial and business information, including the Shell Group’s and Royal Dutch’s true financial condition, financial statements and reserve reporting problems, which Lead Plaintiff alleges KPMG was aware of and/or recklessly disregarded.
Id.
Furthermore, it is alleged that KPMG had the opportunity to “observe and review the Royal Dutch’s and the Shell Group’s business and reserves reporting practices, and to test the Companies’ and the Shell Group’s internal and publicly reported financial statements, as well as the Shell Group’s.and the Companies’ internal controls.”
Id.
KPMG was involved in the preparation and dissemination of the Shell Group’s and Royal Dutch’s quarterly, as well as year-end, financial results throughout the Class Period.
Id.
¶ 72. The Complaint further alleges that KPMG examined and opined on the Shell Group’s and Royal Dutch’s 1998 through 2002 financial statements.
Id.
It is alleged that KPMG falsely represented that its audits had been conducted in accordance with GAAS, and wrongfully issued “clean” or unqualified audit reports in which it allegedly misrepresented that those financial statements fairly presented the financial condition and results of operations in conformity with GAAP.
Id.
In addition to providing Independent Auditors’ Reports to the Shell Group, the Complaint alleges that both PwC and KPMG also conducted reviews of the Group’s quarterly financial statements which were attached as exhibits to Forms 6-K. It is alleged that this review was conducted before the Form was filed with the SEC. Compl., ¶ 516. Citing the GAC Report, the Complaint states that the Shell Group has admitted that the overbooking of the Group’s oil and gas reserves was made possible “because of certain deficiencies in the Company’s controls.”
Id.
¶ 517. It is alleged that PwC and KPMG, as the Companies’ independent auditors, were required to assess the Group’s internal disclosure, financial and accounting controls, to determine whether such controls had been placed in operation, were effective and complied with all applicable laws, and to provide assurance about the safeguarding of assets, financial reporting, operations and compliance with regulations.
Id.
Plaintiff submits that part of PwC and KPMG’s responsibility was to “evaluate whether poor controls might lead to or contribute to the risk that fraud might not be detected.”
Id.
Throughout the Class Period, PwC and KPMG allegedly received memoranda, conducted meetings and engaged in other communication with senior executives, board members, and the Companies’ Group Reserves Auditor (“GRA”) about issues such as deficiencies in the Group’s internal controls, reporting standards and corporate governance, and how they related to the reserve reclassification.
Id.
¶ 518. The Complaint refers to two mem-oranda from GRA Barendregt providing early warning of potentially serious systemic problems with Shell Transport’s reserves reporting.
Id.
Despite this, PwC and KPMG issued “false clean audit opinions indicating they had no unresolved doubt about the Shell Group’s reserve in
*524
formation and its compliance with GAAP.”
Id.
¶ 521.
Furthermore, PwC and KPMG are alleged to have consistently represented that each performed its audits in a manner consistent with GAAS. Compl., ¶ 522. Lead Plaintiff submits that such representations were materially false, misleading and without reasonable basis.
Id.
It is alleged that PwC’s and KPMG’s GAAS violations stem from a “failure to qualify, modify, or abstain from issuing their respective audit opinions on the Shell Group’s Class Period financial statements, when each knew or recklessly disregarded [ ] numerous adverse facts and ‘red flags’ ”.
Id.
¶ 525.
Structure of the Companies
Royal Dutch and Shell Transport are the parent companies of over 1,700 ventures operating in over 145 countries worldwide.
Id.
¶ 92. Royal Dutch and Shell Transport share in the aggregate net assets and in the aggregate dividends and interest received from Group companies in proportion to their ownerships (60:40).
Id.
Shell Petroleum N.V. in The Netherlands and The Shell Petroleum Company Limited in the United Kingdom are the two Group Holding Companies.
Id.
¶ 94. The Group Holding Companies between them hold all of the shares in the Service Companies and, directly or indirectly, all Group interests in the Operating Companies. Prior to the reclassification, the Shell Group Companies claimed to have one of the largest reserves of both liquid and natural gas of the major integrated public oil companies.
Id.
¶ 98. Most are joint ventures, which the Shell Group companies partner with a wide range of governments and both national and international oil companies.
Id.
The Companies have major oil production in the United States, Nigeria, Oman, the United Kingdom, Syria, Gabon, Brunei, and Malaysia. They also have major gas operations in the United States, The Netherlands, Australia, Brunei, Malaysia and the United Kingdom. Additionally, the Companies have oil production interests in Norway, Abu Dhabi, and Denmark, and gas production interests in Denmark, Norway and Germany.
Id.
The Shell Group is organized into five main business units:
1. SEPCo, which explores, develops and produces oil and gas in the United States, with principal operations in Texas and the Gulf of Mexico.
Id.
¶¶ 95-96.
2. Shell Gas & Power, which operates “downstream” to process and transport natural gas, develop power plants, and market gas and electricity to customers around the world, including governments, industrial and commercial businesses, and residential customers. It operates closely with the EP unit, which operates “upstream” in the production of gas reserves.
Id.
97.
4
3. Shell Oil Products, which makes a wide range of high quality fuels, lubricants and specialty products, which it sells through its global network of 46,-000 retail outlets.
Id.
¶ 99. The Complaint alleges that it also has an interest in over 50 refineries engaged in the manufacture of a range of crude oil and petroleum products. The Companies within this group include Shell Aviation, Shell LPG, Shell Lubricants and Shell Marine Products.
Id.
4. Shell Chemicals
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5. Shell Renewables
&
Other Activities
See
Compl., ¶ 95. ;
Group Management
Shell Transport has a board of directors that is comprised of non-executive directors, at least two Managing Directors of the Company who are also Group Managing Directors, and a Chairman who is also one of the Managing Directors.
Id.
¶ 101 (quoting Shell Transport Annual Reports) (internal citations omitted). Royal Dutch is managed by a Supervisory Board and Board of Management.
Id.
¶ 102. The Supervisory Board is appointed by the General Meeting of Shareholders from the persons nominated by the meeting of holders of priority shares.
Id.
The Royal Dutch Board of Management which consists of at least two Managing Directors is under the supervision of the Supervisory Board.
Id.
103. Managing Directors are appointed by Royal Dutch shareholders and by the Supervisory Board; the Managing Director appointed by the Supervisory Board serves as President of the Board of Management.
Id.
¶ 103. The responsibilities of the Supervisory Board include supervising the policies of the Board of Management and the general course of business of Royal Dutch and the Shell Group, and advising the Board of Management.
Id.
¶ 104.
The Boards of both Royal Dutch and Shell Transport delegate management of the Shell Group to the Committee of Managing Directors, a committee comprised of senior executives from each of the two public companies.
Id.
¶ 105. The members of the CMD are identified as Group Managing Directors.
Id.
The CMD, which has no formal executive authority, is tasked with considering and developing the Shell Group’s business plans and objectives.
Id.
In 2002, the members of the CMD were as follows: • ,
1. Defendant Watts — Chairman of the CMD (2001-2004);
2. Defendant van der Veer (now Chief Executive of Shell) — Vice-Chairman of the'CMD;
3. Defendant, Skinner (resigned from Shell in 2003);
4. Defendant van de Vijver — responsible for exploration and production, contracting and procurement;
5. Defendant Roels (resigned in June 2002); and
6. Defendant Brinded — joined the CMD following Defendant Roels’ resignation in July 2002.
Id.
¶ 106. The Complaint alleges that Defendant Boynton joined the CMD in 2003.
Id.
Members of the CMD report to a group called the “Conference,” which is comprised of all of the members of the Supervisory Board and the Board of Management of Royal Dutch and the Directors of Shell Transport.
Id.
¶ 107. The Conference, which acts without shareholder accountability, holds meetings regularly during the year.
Id.
¶¶ 107-108. The alleged purpose of the Conference is to receive information from Group Managing Directors about major developments within the Shell Group and to review and discuss the business and plans of the Shell Group.
Id.
¶ 108. The Shell Group’s Annual Reports on Form 20-F define the Conference’s responsibilities as follows:
The Conference reviews and discusses: the strategic direction of the businesses and of the Royal Dutch/Shell Group of Companies; the business plans of both the individual businesses and, of the Royal Dutch/Shell Group of Companies as a whole; major or strategic projects and significant capital items; the quarterly and annual financial results of the Royal Dutch/Shell Group of Companies; reports of the Group Audit Committee;
*526
appraisals both of the individual businesses and of the Royal Dutch/Shell Group of Companies as a whole; annual or periodic reviews of Group companies’ activities within significant countries or regions; governance, business risks and internal control of the Royal Dutch/Shell Group of Companies; a regular program of insights and briefings on specific aspects of the Royal Dutch/Shell Group of Companies; and other significant or unusual items on which the Group Managing Directors wish to seek advice.
Id.
¶ 108.
Decisions made by the Conference are not legally binding on either Royal Dutch or Shell Transport.
Id.
¶ 109. Senior executives of the Shell Group companies attend Conference meetings and officers of each parent company must hold separate meetings during which they can make the decisions at which they arrived jointly in the Conference binding.
Id.
Additionally, Royal Dutch and Shell have established three joint committees to assist with the Shell Group’s governance responsibilities; one of the committees relevant to the instant litigation is the GAC.
Id.
¶ 110. The GAC “regularly considers the effectiveness of risk management processes and internal controls within the Group and reviews the financial accounts and reports of the Royal Dutch/Shell Group of Companies. The Committee also considers both internal and external audit reports (including the results of the examination of the Group Financial Statements) and assesses the performance of internal and external audit.”
Id.
¶ 111 (quoting the Shell Group’s Forms 20-F).
Oil and Gas Reserves
The term “reserves” generally describes the total volume of future oil production that can be expected to be commercially recovered from a reservoir, assuming that certain physical and economic conditions exist and continue to prevail for however long is required to obtain the production.
Id.
¶ 113. Reserves can be divided into sub-categories such as proved and unproved; unproved reserves can further be divided into probable and possible.
Id.
¶ 114. The classifications are based on the relative risk of recovery of the reserves in each category. The risk is defined as the likelihood that the expectations for future production and economic conditions will be met.
Id.
It is accounted for by assigning the anticipated future volume of oil production to a certain category of reserve based upon that risk.
Id.
In Rule 4-10, the SEC uses the term “reasonable certainty” to express a high degree of confidence that the estimated quantities will be recovered.
Id.
Rule 4-10(a) provides the definition of proved reserves for reporting purposes:
(2) Proved oil and gas reserves. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions.
(3) Proved developed oil and gas reserves. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as “proved developed reserves” only after testing by a pilot project or after the operation of an in
*527
stalled program has confirmed through production response that increased recovery will be achieved.
(4) Proved undeveloped reserves. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other und-rilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.
Id.
¶ 117. (quoting 17 C.F.R. § 210.4-10 ).
It is alleged that the Shell Group’s publicly stated definition of “proved reserves” and “developed proved reserves,” as stated in the Annual Reports filed with the SEC on Form 20-F, is in all material respects, identical to the SEC’s definitions.
Id.
¶ 118 . While reserve reporting is a crucial indicator of how well a company is performing, other metrics are used by analysts and investors to assess the strength and future prospects of an energy company.
Id.
¶¶ 119-120 (citing The Wall Street Journal, January 12, 2004). Other important metrics include: (a) Reserve Life, which compares barrels of proved reserves to annual actual production to answer, in terms of years, how long a company’s proved reserves will last given the current production level; (b) Reserve Replacement Ratio, which compares additions to proved reserves to production (a RRR of 100% indicates that a company’s proved reserves are being replenished at exactly the rate that the company is extracting/producing oil; a ratio of more than 100% indicates that a company is finding more hydrocarbons than it produces, thereby adding to its asset base; a ratio of less than 100% indicates that a company is depleting its proved reserves); and (c) Finding and Development Costs/Barrel, which are the costs of the process that results in the booking of proved reserves and then the extraction and sale of oil or natural gas.
Id.
¶ 120 .
Overbooking of Proved Reserves
In an article which appeared in the Wall Street Journal on March 12, 2004, it was reported that at the end of the first half of the 1990s, new discoveries were becoming harder to find, “as Middle Eastern countries expelled foreign oil companies and fields in the West matured.”
Id.
¶ 122 . BPAmoco and ExxonMobil responded by buying up their rivals and selling off poor-performing fields; however the Shell Group primarily relied on organic growth through searching for big discoveries, and relied on drilling exploration wells in too many countries and in places where the size of any oil find would not be large enough to make a material difference.
Id.
¶ 122 . Between 1996 and 2000, the Shell Group allegedly spent $6 billion per year on finding new reserves. Analysts opined that the figure should have been much higher, closer to $9 billion.
Id.
Consequently, the Companies were replacing reserves at a much lower rate than originally represented, and the Companies’ costs were significantly higher.
Id.
Rather than creating value through mergers and acquisitions
5
, Shell sought to create value
*528
through cost-cutting, a strategy first implemented in 1998 by Defendant Moody-Stuart.
Id.
¶ 123 . The Complaint alleges that analysts complained that focusing on cost-cutting diverted the Shell Group’s commitment to fund exploration and production when the price of oil began to recover, which ultimately cost the Shell Group the opportunity to find millions of barrels of hydrocarbon discoveries.
Id.
¶ 123 . This difficulty in finding new reserves allegedly translated into higher costs; thus it is estimated that between 1997 and 2002 the Shell Group’s cost of finding and developing oil was $4.27 per barrel; higher than ExxonMobil’s $3.93 and BPAmoco’s $3.73.
Id.
¶ 124 .
In response to this failure to invest in finding new reserves, senior management, including the Individual Defendants, allegedly chose to manage the Shell Group’s reserve figures much the way non-energy companies manage their earnings: to satisfy investors.
Id.
¶ 126 . Plaintiff alleges that this course of conduct was “directly contrary to the corporate transparency publicly advocated by Defendant Watts.”
Id.
¶ 126 (citing a Defendant Watts Speech,
A Business Approach to Earning Trust in Society,
KPMG Global Energy Conference, May 2003 (“It is not surprising trust in business has declined in the wake of a rash of corporate scandals.... I think there is every justification for people to question a business climate that allowed those things to happen.... We need to be transparent.”)). It is alleged that in 1997 senior executives of the Shell Group instructed the leadership and performance group, “LEAP”, to “create value through entrepreneurial management of hydrocarbon resource volumes.” Id. ¶ 127 (quoting The New York Times, March 12, 2004). LEAP sought ways to change the Companies’ guidelines with respect to classifying reserves. Id. ¶ 128 . LEAP proposed that the Shell Group relax the accounting guidelines it used to book reserves. Id. ¶ 129 (citing London Times, March 28, 2004). The Group allegedly implemented the revised guidelines in four countries for the year ended December 31, 1997, and as a result the Group added 145.5 million boe in proved reserves for that year. Id. ¶ 130 .
The following year, in 1998, the Group created five Value Creation Teams (“VCTs”) to improve EP’s profitability. Id. ¶ 131 . The Complaint alleges that in a paper dated May 1998, Group Managers recommended,
inter alia,
that the Companies loosen their reserves guidelines.
Id.
¶ 131 (citing
Creating Value through Entrepreneurial Management of Hydrocarbon Resource
Values). On September 16, 1998, the Companies revised their reserves guidelines, and issued that revised guidance to their operating units.
Id.
This was confirmed by a former Group executive in an interview which appeared in The Wall Street Journal on March 18, 2004. The executive explained that the Group loosened the rules to allow gas reserve bookings with only a “reasonable expectation” of an available market.
Id.
¶ 132 . The SEC allegedly reported the following in a Cease and Desist Order,
Shell instead revised its guidelines in 1998 to adopt a system under which it maintained its existing probabilistic methods for estimating proved reserves in “immature” fields, but applied more deterministic methods in “mature” fields, directing us to increase proved reserves in such fields to equal “expectation” volumes.
Id.
¶ 133 .
It is alleged that the Companies used the term “expectation reserves” to mean “the most likely estimate of hydrocarbon volumes remaining to be recovered from a project that is technically and commercially mature, or from a producing asset.”
Id.
¶ 135 . This practice deviated from the
*529
Shell Group’s early 1990s practice, which permitted executives to book proved reserves only if the Shell Group had signed a sales contract for the oil or gas.
Id.
¶ 136 . The Complaint alleges that, as revealed in the news media, the GAC Report, the Notice to Take Action
6
and the Cease and Desist Order, the new guidelines significantly inflated the Shell Group’s reserves by enabling executives to book proved reserves well before making significant investments to get the oil and gas out of the ground:
Id.
¶ 137 . For the two years leading up to December 31, 1999, the Shell Group’s revised guidelines resulted in an overstatement of the Group’s proved reserves of 940 million boe.
Id.
¶ 137 . It is alleged that for the period 1998 through 2001, the SEC found that the change in guidelines caused the Shell Group to add more than 1.2 billion boe to reported proved reserves.
Id.
The Complaint alleges that the new guidelines were contrary to the SEC definition of proved reserves, which requires,
inter alia,
data indicating there is a “reasonable certainty” that oil or natural gas can be recovered through existing wells and equipment, and/or a plan of development has been approved.
Id.
¶ 137 .
The Complaint details numerous statements of former employees who allegedly had first-hand knowledge of these issues while employed by the Companies.
Id.
¶ 138 . Said employees contend that the Companies made no effort to apprise employees in the field of the SEC’s requirements for classifying reserves as proved.
Id.
It is alleged that “[o]nly with the 2003 guideline revisions did the Companies require, for the first time, certainty of an existing market and a ‘Final Investment Decision’ on significant projects before reserves associated with the project could be classified as proved.”
Id.
¶ 139 .
The guideline changes recommended by LEAP allegedly allowed the Group to increase its oil and gas reserves not by discovering major new sources, but by changing its accounting to add reserves it was uncertain could ever be produced.
Id.
¶ 141 . (citing a confidential internal review code-named Project Rockford). The London Times reported on March 22, 2004 that Defendant Watts, the then senior executive in charge of the EP unit, was able to tell 600 Group executives in June 1998 of the success of a special management program which had addressed a fundamental problem at the Companies, and that the Companies were producing oil and gas faster than they were finding new reserves.
Id.
¶ 142 . The Complaint alleges that Defendant Watts did not disclose the Companies’ alleged relaxation of the reporting guidelines.
Id.
In 2001, the SEC issued stricter guidelines for the calculation of reserves. ■
Id.
¶ 144 . Quoting from the GAC Report, the Complaint alleges that “[beginning in 2001, recognition of the strictures of SEC rules, in place since 1978, increased within the Company, in part due to the publication on the SEC website of SEC guidance regarding the importance of investment commitments and other indicia of ‘reasonable certainty,’ with a growing recognition that the Company’s reserve numbers were not in full compliance with these rules.”
Id.
¶ 145 . In 2002, Shell Group Executives developed a Potential Reserves Exposure Catalogue, which listed the major concerns of the current inventory.
Id.
¶ 147 . The Complaint alleges that in this Catalogue, “modest reductions in the volume of booked reserves were made, but most booked reserves were retained.”
Id.
¶ 147 . It is alleged that according to a later report (the December 8th Report), “the view was taken that the exposures should in
*530
deed be highlighted and addressed as a matter of priority, but that no corrective action was warranted in the meantime in relation to external disclosures.”
Id.
The Complaint alleges that this did not comport with SEC rules as the Companies’ guidelines did not require the Group to de-book the reserves that no longer qualified as proved under the SEC rules.
Id.
147 .
Defendants’ Alleged Knowledge of the Group’s Overbookings
The GAC Report states that as the Shell Group reported inflated proved reserves, senior Shell Group executives, including Watts and van de Vijver, communicated, via e-mail and meetings, about how to manage reserves to conceal the evidence.
Id.
¶ 153 . Citing the GAC Report, the Complaint alleges that “other executives and employees had, over time, varying degrees of exposure to the debate [between Van de Vijver and Watts] and, in various strata of management at Shell’s Central Offices and in the field, involvement in the operations that were the subject of the bookings.”
Id.
In a March 22, 2004, van de Vijver wrote the following:
Soon after coming to office as head of EP in June 2001, I observed that the health of the EP business was not as robust as the Company-determined performance targets set under the former EP CEO. In fact, EP was in a far worse state in mid 2001 than was ever portrayed by my predecessor to senior management or the Conference.
Id.
¶ 154 .
The Complaint, citing a confidential witness, alleges that prior to van de Vijver becoming the CEO of EP in 2001, he traveled to Houston, Texas and attended high level meetings with senior officers and directors of SEPCo and the Companies, including Defendant Miller.
Id.
¶ 154a. It is alleged that at meetings in 2000 and 2001, van de Vijver “discussed many of the problems that should have precluded the Companies from booking proved reserves in Nigeria.”
Id.
The GAC Report further informed that Defendant van de Vijver “consistently pressed the position that reserves booked during Sir Philip’s term were aggressive or premature, non-compliant with Shell Guidelines for booking and, implicitly, SEC rules.”
Id.
155 .
Lead Plaintiff also claims that others, in addition to Defendant van de Vijver, had direct knowledge of the overstatements. The Wall Street Journal Europe reported on July 15, 2004, that Anton Barendregt (the Group Reserves Auditor during the Class Period) warned in a January 2002 memorandum, marked “confidential,” that a portion of the 2001 mature reserves was at risk of being overstated.
Id.
¶ 157 . Allegedly, he also raised questions about the integrity of Shell’s overall reserves-reporting system and warned that the Shell Group’s guidelines for booking reserves were not in compliance with SEC guidelines in all cases.
Id.
¶ 157 . It was further reported that Barendregt circulated this memorandum to senior executives in the EP unit and to KPMG and PwC.
Id.
The article states that “three people familiar with the situation” confirmed that KPMG and PwC received the memorandum.
Id.
A Note of Information, which summarized the Shell Group’s reserves position as of December 31, 2001, was forwarded by van de Vijver to the CMD on February 11, 2002.
Id.
¶ 158 . In it, van de Vijver reportedly warned that proved reserve exposures were as high as 2.3 billion boe because of non-compliance with SEC guidelines.
Id.
The Note stated the following:
Exposures
Securities and Exchange Commission (SEC) Alignment
*531
Recently the SEC issued clarifications that make it apparent that the Group guidelines for booking Proved Reserves are no longer fully aligned with the SEC rules. This may expose some 1,000 min boe of legacy reserves bookings (e.g. Gorgon, Ormen Lange, Angola and Waddenzee) where potential environmental, political or commercial showstoppers exist.
End of License
In Oman PDO, Abu Dhabi and Nigeria SPDC (18% of EP’s current production) no further proved reserves can be booked since it is no longer reasonably certain that the proved reserves will be produced within license. The overall exposure should the OU business plans not transpire is 1,300 min boe. Work has begun to address this important issue.
Id.
¶ 158 .
The Complaint, citing the GAC Report, states that “[t]he Note raised issues of sufficient concern to [Watts] that he required ... a further presentation be made to [the] CMD.”
Id.
¶ 159 . The EP managers circulated the EP Business Appraisal for 2001 on February 20, 2002. According to the Financial Services Authority (Britain’s regulator of publicly traded companies) (“FSA”), “[b]oth the ‘Main Issues’ section and the main body of the Appraisal stated that the SEC’s guidance made it clear that the approach advocated by Shell guidelines was, in may cases, too aggressive and would be likely to affect future bookings in new fields such as Nigeria and possible existing bookings representing some 1,000 million boe.”
Id.
¶ 160 . The Complaint alleges that the “FSA also noted that the [ajppraisal also referred to reserves which could no longer be booked because of license expiry issues and production limitations amounting to an additional 1,000 million boe.”.
Id.
On May 28, 2002 an e-mail was sent to van de Vijver by Defendant Watts. It stated:
You will be bringing the issue to.CMD shortly. I do hope that this review will include consideration of all ways and means of achieving more than 100% in 2002 — to mix metaphors ... considering the whole spectrum of possibilities and leaving no stone unturned.
Id.
¶ 161 .
On July 22, 2002, a second presentation was made to the CMD in a Note for Discussion submitted by van de Vijver.
Id.
¶ 163 . The Note allegedly identified oil and gas reserves that were “aggressively]” booked.
Id.
It is alleged that the Note observed that without these bookings,, in Gorgon and Nigeria, “total proved RRR over the past 10 years would be reduced from 102% to 88%.”
Id.
¶ 163 . The GAC Report concluded:
it is an example of a series of documents which.,'Suggest that EP management’s plan was to ‘manage’ the totality of the reserve position over time, in hopes that problematic reserve bookings could be rendered immaterial by project maturation, license extensions, exploration successes and/or strategic activity. Simply put, it is illustrative of a strategy ‘to play for time’ in' the’ hope that intervening helpful developments would justify, or mitigate, the existing reserve exposures.
Id.
¶ 164 .
The minutes of the July 2002 CMD meeting allegedly recognize the delay in de-booking could not continue indefinitely:'
It is considered unlikely that potential overbookings would need to be de-booked in the short-term, but reserves that are exposed to project risk or li-cence expiry cannot remain on the books indefinitely if little progress is made to
*532
convert them to production in a timely manner.
Id.
¶ 165 .
On September 2, 2002, van de Vijver submitted a note to the CMD. The note, a copy of which was sent to Defendant Boyn-ton, stated the following:
Given the external visibility of our issues (lean organic development portfolio funnel, RRR low, F
&
D unit costs rising), the market can only be ‘fooled’ if 1) credibility of the company is high, 2) medium and long-term portfolio refreshment is real and/or 3) positive trends can be shown on key indicators. Unfortunately ...:
—We are struggling on all key criteria (“caught in the box”)....
The immediate risk that we are facing is on the “negative spiral” of our boxed situation:
—-RRR remains below 100% mainly due to aggressive booking in 1997-2000.
Id.
¶ 166 .
In September 2002, van de Vijver wrote a confidential personal Note to File which stated the following:
During the last 1.5 years the technical competence and overall integrity of the EP business within .Shell has been questioned both internally and externally, most prominently through lowering of the production growth target in August/September 2001 and due to a deteriorating proved reserves replacement ratio. Providing credible explanations for these issues proved near impossible given the disconnects between external promises/expectations and the reality of the state of the business.
Bottomline was that both reserves replacement and production growth were inflated:
—Aggressive/premature reserves bookings provided impression of higher growth rate than realistically possible.
The Concerns around the “caught in the box” dilemma and stretch in the EP business plans have been flagged at the highest level in the company, but obviously “transmitted” in a careful fashion as not to compromise/undermine the previous leadership. The severity and magnitude of the EP legacy issues may therefore not have been fully appreciated.
Id.
¶ 167 .
The Complaint, citing the FSA, alleges that in September 2002 the Shell Group “created and implemented a reserves exposure catalogue to ensure a system of awareness and control of the proved reserves inventory.”
Id.
¶ 168 (internal citations omitted). The notes to the catalogue indicated that the reserves in some operating units would be at risk if production rate increases did not materialize.
Id.
Furthermore, the notes identified that certain bookings were threatened by clarifications to the SEC’s rules by the Commission, requiring conservatism in the classification of proved reserves.
Id.
Shortly thereafter, on October 22,2002, Defendant van de Vijver wrote to Defendant Watts and stated the following:
I must admit that' I become sick and tired about arguing about the hard facts and also cannot perform miracles given where we are today.
If I was interpreting the disclosure requirement literally (Sorbanes [sic]-Oxley Act etc) we would have a real problem.
Id.
¶ 169 .
Defendant van de Vijver circulated a brief on November 15, 2002 which outlined
*533
business plan issues to members of his EP staff:
We finalized our plan submission and could easily leave the impression that everything is fine.
The reality is however that we would not have submitted this plan if we
1) were not trying to protect the Group reputation externally (promises made) and
2) could have been honest about past failures (business focus w.r.t. aspired portfolio, disconnects with reality, poor performance management, reserves manipulation).
Id.
¶ 170 .
On January 31, 2003, Barendregt wrote another “confidential” memorandum that he circulated to senior Shell Group executives in the EP unit, as well as to KPMG and PwC.
Id.
¶ 171 . The memorandum reviewed the prior year’s reserves estimates and warned,
inter alia,
that the guidelines for booking reserves did not comport with SEC guidelines in all instances and raised questions about the integrity of the Companies’ overall reserves-reporting system'.
Id.
Furthermore, on February 28, 2003, van de Vijver sent Defendant Watts a copy of a February 23, 2003 e-mail in which van dé Vijver stated to his EP staff:
We know we have been walking a fine line recently on external Messages.... Promising that future reserves additions are expected in 2003 ... whilst we know that there is some real uncertainty around this.... [W]e know our ongoing exposures on Oman/Nigeria reserves and on early bookings, notably Gorgon and Ormen Lange.
Id.
¶ 173 .
On August 25, 2003, van de Vijver directed a draft of his Mid-year 2003 Review Summary to Watts, allegedly complaining that “The single largest issue facing EP is the shrinking opportunity portfolio exacerbated by too aggressive reserves bookings in the past....”
Id.
¶ 175 . The Complaint alleges that on the following day, the GAC received a memorandum that addressed possible areas of non-compliance with Rule 4-10.
Id.
¶ 176 . The Complaint, citing the FSA, stated “[t]he GAC..was advised that much, if not all, of the potential exposure arising from interpretation of the factors ... is offset by Shell’s practice of not disclosing reserves in relation to gas production that is consumed on site as fuel or (incidental) flaring and venting.”
Id.
'(internal citations omitted).
The Complaint alleges that on November 9, 2003, after receiving what he considered an unfairly critical performance review from Defendant Watts, Defendant van de Vijver e-mailed Watts and stated that he was “becoming sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive/optimistic bookings.”
Id.
¶ 178 . One day prior, on November 8, 2003, van de Vijver wrote an e-mail to a colleague about the Group’s aggressive reserves bookings which stated, the following:
As you. know 2003 RRR is the most important share'price influencer also as expectations are high and they do not know that we are still paying for aggressive reserves bookings [including thos[e] that have not reached FID yet!!] in the past!
Id.
¶ 179 .
According to the GAC Report, in December 2002 and November 2003, Defendant van de Vijver considered the idea of a comprehensive de-booking of all known exposed reserves.
Id.
¶ 182 . It is alleged that in late November 2003, van de Vijver stated in a message to the Group Reserves Coordinator, “I would prefer to restate our 1/1/03 reserves and de-book all remaining
*534
legacies to allow for a clean start.”
Id.
The Complaint alleges that at the same time, however, van de Vijver delivered the following message to all senior EP executives in which he warned “[o]ne final word on 2003. It would be an enormous blow to the Group’s credibility with the Market if we do not deliver on RRR this year.”
Id.
On December 2, 2003 a memorandum was prepared by the EP staff. This memorandum, titled “Script for Walter [van de Vijver] on the proved reserves position,” assumed that approximately 2.3 billion boe of proved reserves were non-compliant and that this was material to the market.
Id.
¶ 183 . The script stated:
If and from the time onwards that it is accepted or acknowledged by the management of the issuers (Royal Dutch and STT), that, when applying the SEC rules, the 2002 proved reserves as reported in the Form 20-F are materially wrong, the issuers are under a legal obligation to disclose that information to all investors at the same time and without delay. Not to disclose it would constitute a violation of U.S. securities law and the multiple listing requirements. It would also increase any potential exposure to liability within and outside the US. Note that the reserves information also appears in the non 20-F Annual Reports.
Disclosure cannot await the next Form 20-F appearing in April, 2004.
Id.
¶ 183 .
The Complaint alleges that on the same day the script was provided to van de Vijver, he e-mailed one of its authors, the EP unit’s head of finance, Frank Coopman, and demanded that the e-mail be destroyed. “This is absolute dynamite, not at all what I expected and needs to be destroyed.”
Id.
¶ 184 .
Geographic Areas
Australia
As of December 31, 1997, when Watts was head of EP, the Companies booked as proved approximately 557 million boe of natural gas relating to the Gorgon fields.
Id.
¶ 187 . The Gorgon fields are undeveloped frontier gas fields located 70 miles off the northwestern coast of Western Australia.
Id.
It is alleged that the amount booked from the Gorgon fields represents more than 12% of the Companies’ total overbooked reserves.
Id.
The Complaint alleges that in order to “disguise the improper booking, the Companies recorded the reserves not as ‘new discoveries,’ which garner more attention from auditors and investors and could have been challenged more easily internally, but instead as ‘revisions’.”
Id.
¶ 188 . Ordinarily, however, “revisions” are intended for “subsequent adjustments to previously reported reserves, not for reserves that have yet to be recorded as proved.”
Id.
It is alleged that Defendant van de Vijver later publicly portrayed the misclassification as a mistake and an embarrassment.
Id.
The Complaint further describes the Gorgon Venture and its relation to the overbooking.
See
Compl., 189-203. It is alleged that in 1999, the Companies revisited the status of the Gorgon booking at several points.
Id.
¶ 204 .
Nigeria
The Complaint alleges that since the late 1970s, the oil and gas industry has been the backbone of the Nigerian economy, accounting for over 90% of total foreign exchange earnings.
Id.
¶ 208 . In the 1990s, the Nigerian deep and ultra-deep-water areas became the focus of major exploration by foreign oil companies and the first success came in 1993 with the discovery of the Bonga oil and gas field.
Id.
¶ 209 . The Bonga field is the first deepwater project for the Shell Petroleum
*535
Development Company of Nigeria, Ltd. (“SPDC”) and for Nigeria.
Id.
¶ 210 . It is alleged that the SPDC operates the field on behalf of the Nigerian National Petroleum Corporation under a production-sharing contract, in partnership with Esso (ExxonMobil) (20%), Nigeria Agip (12.5%), and Elf Petroleum Nigeria Limited (12.5%).
Id.
¶ 210 . The Bonga project was beset with problems, which made proved reserves classification improper and allegedly in violation of SEC guidelines.
Id.
¶ 216 . The Complaint alleges that by 1999, “the SPDC had booked reserves based upon the Shell Group’s 1998 revised guidelines and forecasts that, as the SEC noted, ‘gave the appearance that the proved portion of the reserves could be produced within the remaining license period’.”
Id.
¶ 217 . However, the SEC found “none of these assumptions was reasonable, particularly in light of the fact that SPDC’s operations performed well below the projected levels throughout the period.”
Id.
It is also alleged that management decided to conceal the reserves problem from the investing public.
Id.
¶224 . The Complaint points to certain regional factors, such as poor infrastructure, a lack of government financing, and political and ethical strife in the Niger Delta region, which contributed to the Companies’ inability to manage reserves.
Id.
¶¶ 225-232 .
It is alleged that internal documents show that the Shell Group concluded that more than 1.5 billion barrels, or 60% of its Nigerian reserves, did not meet SEC standards for proved reserves.
Id.
¶ 235 . Furthermore, Lead Plaintiff alleges that “at the end of 2002, the Shell Group recorded 2.524 billion barrels of proved reserves in Nigeria, but as the December 8th Report found, only 990 million barrels ‘fully eomplie[d]’ with SEC guidelines. Internal documents show that senior managers were told in December 2002 that 720 million barrels in Nigeria were ‘noncompliant’ with guidelines established by the SEC, and that a further 814 million barrels were ‘potentially noncompliant’.”
Id.
¶ 242 .
Oman
The Shell Group has been involved in developing Oman’s natural resources since oil was first discovered there in the 1930s.
Id.
¶248 . It is alleged that the Group owns 34% of Petroleum Development Oman (“PDO”), Oman’s dominant oil and gas exploration company.
Id.
The other partners are the Omani government (60%), Total (4%) and Partex (2%).
Id.
Since 1997, oil production in Oman has declined.
Id.
¶ 250 . Horizontal drilling, which can extract a higher percentage of oil from certain' fields and recover oil more efficiently than traditional vertical drilling, was not effective in Oman and resulted in large amounts of water being produced with oil, in contrast to the original expectation that less water would be produced with the oil.
Id.
¶¶ 251-253 .
Lead Plaintiff alleges that “by the end of 2000, despite the production decline in Oman, the Group and PDO determined to increase PD.O’s proved reserves estimates.”
Id.
¶ 261 . “Based on the 1998 revisions to the Shell Group’s guidelines, the Companies revised PDO’s proved reserves upward ‘by assuming that, for fields of certain maturity, both proved developed and proved undeveloped reserves would be increased to equal the expectation [for] developed and undeveloped volumes’.”
Id.
It is alleged that the increase added 251 million boe to the Shell Group’s reported proved reserves as of December 31, 2000, a 40% overstatement.
Id.
Furthermore, citing the GAC Report, the Complaint states that “the reserve overstatement stemmed from insufficient technical work that was done to support the increase in reserves.” .
Id.
¶ 264 . The serious production declines which were suffered thereafter and the increased reserves were main
*536
tained based upon “aspirational production targets.”
Id.
It is further alleged that the Shell Group’s interest in increasing shareholder value in the short-term played a part in the overvaluation of the reserves: because its license expired in 2012, it emphasized producing more oil sooner.
Id.
¶ 265 .
Norway (Ormen Lange)
The Ormen Lange field is located approximately 140km west of Kristiansund, Norway.
Id.
¶ 269 . The field, which is the second-largest gas discovery on the Norwegian continental shelf, was well drilled in 1997.
Id.
Licenses for the development and production of the field are held by: Norske Shell (“Shell Norway”)(16%), Norske Hydro Produksjon (“Norske Hydro”) (14.78%), Statoil (8.87%), State’s Direct Financial Interest (“SDFI”) (45%), BPAmoco Norge (“BP”) (9.44%) and Esso Norge (“ExxonMo-bil”)(5.91%).
Id.
¶ 270 . Since 1997, the project partners have encountered technical challenges involving harsh deep-water conditions, bitter weather conditions, freezing water temperatures, and an uneven seabed.
Id.
¶ 272 . Because of such problems, in June 2001 the project partners decided to modify the time frame for developing the field.
Id.
¶ 279 . The Complaint alleges that “[e]ven as late as 2003, the project’s partners were still struggling to determine whether European markets could absorb the supply of natural gas from the field. Consequently, the project partners extended the schedule for delivery of the plan for development and operation [] to the Norwegian authorities until the fall 2003.”
Id.
¶ 279 . The production is presently projected to commence in the fall of 2007.
Id.
¶ 280 .
The Complaint alleges that unlike its project partners, the Companies began booking reserves from the Ormen Lange field years before the Shell Group and its partners were able to overcome the hurdles of the project.
Id.
¶ 281 . To that end, in 1999, the Companies started booking gas reserves before an appraisal well was drilled or before either a feasibility or a safety study was conducted.
Id.
Proffered False and Misleading Statements and Omissions
The Complaint alleges numerous allegedly false and misleading statements and omissions proffered by Defendants between 1999 and 2003.
See
Compl., ¶¶ 300-462. This Court incorporates said allegations by reference.
Truth about Reported Reserves
On January 9, 2004, the Shell Group stated that it would reduce its reserves holdings by 20%.
Id.
¶ 463 . The reduction contemplated the reclassification of 3.9 billion barrels of oil and gas, one-fifth of the Companies’ proved reserves.
Id.
On January 9th, Shell Transport’s ADRs fell by 6.96% and Royal Dutch’s ordinary shares (in the U.S.) fell by 7.87%.
Id.
¶ 464 . On March 3, 2004, Defendant Watts and Defendant van de Vijver were forced to resign from their positions.
Id.
¶ 466 . On March 18, 2004, a stock exchange release was filed with the SEC and the Shell Group announced further downward restatements of proved reserves for oil and natural gas.
Id.
¶ 469 . The Companies stated that the equivalent of 250 million barrels of oil were being reclassified because they did not comply with SEC regulations and another 220 million boe, which as recently as February 2004 were expected to be booked as proved for the year ended 2003, would not be included.
Id.
¶ 469 .
On April 19, 2004, the Shell Group cut reserves for a third time, by an additional 300 million barrels.
Id.
¶ 474 . In an interview that same day, Defendant Brinded explained the following:
*537
[Essentially back in early March we established that we had a problem with the Ormen Lange booking and when we looked into it, it caused us some concerns that there might be wider-spread issues to deal with. So we set in train immediately in early March an exercise involving external experts from Ryder Scott together with our own teams to look at those reserves which we felt might be most at risk. After just a few days of that exercise we had covered 40 per cent of the reserves base and we realised that we had a material reduction to book, or to de-book, and we announced that on the 18th March — a reduction of 470 million barrels. At that point, I said that we were going to go on and complete the exercise on the worldwide reserves base.
In the last four weeks that’s what we’ve done, 300 fields have been reviewed. In fact, reductions have been made now in total to almost 100 fields and we’ve covered 90 per cent of our fields. That’s all but the very small fields essentially. So we’ve now completed that exercise, as a result of this latest phase, with a further reduction of some 300 million barrels for the pre-2003 reserve base and a reduction of some 200 million barrels in what we would otherwise have been booking in 2003.
But what is clear is that our competitive position in reserves, our recent reserves replacement ratio, and the current lifetime of our reserves doesn’t leave us that well placed competitively ...
[T]he change is really ... a result of this third tranche.... [Essentially we’re looking at a different type of field ..., one-third of them are in proved developed reserves category. In the past we’ve been stressing that 90-95 per cent of the reductions were in the underdeveloped category and only a very small proportion in the developed category. This time about a third are in the proved developed category.
The distinguishing feature being that proved developed means it is on stream, it’s producing. You’ve built the platform, you’ve drilled the wells, it’s producing oil. That means you’re starting to depreciate the asset and you depreciate it based on a proportion of the production in that year divided by the total proven reserves base. So if you shrink your proven reserves base, then you should be depreciating more in that year. So when we have to make revisions to proved developed reserves, we have to go back and make a change to the depreciation calculation and that change is your net income and that’s why there is a material financial impact. ... [I]n terms of materiality though I just want to stress it averages something like $100 million a year over the last four years.
Id.
¶¶ 474^77.
On May 24, 2004, for the fourth time that year, the Companies downgraded the size of their proven oil and gas reserves.
Id.
¶ 480 . The Companies stated that the reduction, which involved an additional 103 million barrels, reflected “an adjustment with respect to royalties paid in cash in Canada.”
Id.
That same day, the Shell Group announced that as a result of its shift toward using stricter American accounting rules for all its accounts, rather than a combination of Dutch and American rules, it would restate certain of its financial results for 2001, 2002 and 2003.
Id.
¶ 481 .
SEC Investigation and Other Regulatory Actions
On August 24, 2004, the SEC issued a Cease and Desist Order in which it concluded:
*538
a. The Companies violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. . The Companies knowingly or recklessly reported proved reserves that were non-compliant with Rule 4-10, and failed (i) to ensure that the Companies’ internal proved reserves estimation and reporting guidelines complied with Rule 4-10, and (ii) to take timely and appropriate action to ensure that their reported proved reserves were not overstated in their filings with the SEC and other public statements.
b. The Companies violated Section 18(a) of the Exchange Act and Rules 13a-l and 12b-20 thereunder. The Companies’ failures to ensure that they estimated and reported proved reserves accurately in compliance with Rule 4-10 caused them to file Annual Reports on Form 20-F for the years 1997 through 2002 that were materially inaccurate, in that they overstated the Companies’ reported reserves and accompanying supplemental information, including the standardized measure of future cash flows.
c. The Companies violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. The Companies failed to create and maintain accurate estimates of their proved reserves in compliance with Rule 4-10, and failed to ensure that they implemented and maintained adequate controls with respect to their reserves processes, sufficient to provide assurance that the reserves were estimated and reported accurately in accordance with Rule 4-10.
HI 296..
A separate civil action was filed simultaneously with the proceeding that was the subject of the Cease and Desist Order.
Id.
¶ 298 . In that action,
SEC v. Royal Dutch Petroleum Co. and the “Shell” Transport and Trading Company, p.lc.,
No. H-04-3359, 2004 WL 2195811 (S.D.Tex. Aug.24, 2004), Royal Dutch and Shell Transport consented to the entry of a judgment by the U.S. District Court for the Southern District of Texas, Houston Division, pursuant to Section 21(d) of the Exchange Act, ordering the Companies, together, to pay a $1 disgorgement and a $120 million civil penalty.
Id.
The FSA also issued a Final Notice to Shell Transport and Royal Dutch to Take Action, in which the FSA imposed a penalty of £17 million for “market abuse” and breaches of the FSA’s Listing Rules.
Id.
¶ 299 .
Claims for Relief
Lead Plaintiff brings this action as a class action pursuant to Federal Rules of Civil Procedure 23(a) and (b)(3).
Id.
¶ 499 . The putative Class consists of all persons who purchased Royal Dutch ordinary shares and Shell Transport ordinary shares and ADRs on the open market during the Class Period.
Id.
Plaintiff claims that the potential members of the Class are so numerous that joinder of all members is infeasible because, during the Class Period, there were more than two billion outstanding shares of Royal Dutch common stock trading in Amsterdam, more than 520 million outstanding shares of Royal Dutch common stock trading on the NYSE, more than 9.6 billion outstanding shares of Shell Transport common stock trading in London, and more than 48 million outstanding Shell Transport ADRs trading on the NYSE.
Id.
¶ 500 . The Complaint contains five claims for relief which are summarized below.
Id.
¶¶ 505-593 .
Count I is asserted against, both the Individual and Company Royal Dutch/ Shell Transport Defendants under Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b). Compl., ¶¶ 506-511. - Count II alleges the same claim against Defendants PwC and KPMG.
Id.
¶.¶ 512-535. Count
*539
III is brought against the Individual Defendants who allegedly acted as controlling persons of the Companies within the meaning of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Compl., HK536-539. Finally, Counts IV, seeking damages, and V, seeking equitable relief, are brought pursuant to Section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a) against Royal Dutch and Shell Transport. Compl., ¶¶ 540-593.
DISCUSSION
I.
Rule 12(b)(1) Motion to Dismiss for Lack of Subject Matter Jurisdiction
A. Standard of Law Applied to Motions to Dismiss Pursuant to Fed.R.Civ.P. 12(b)(1)
Challenges to subject matter jurisdiction through a Fed.R.Civ.P. 12(b)(1) motion to dismiss come in two different forms — facial and factual attacks. A facial attack questions the sufficiency of the pleading. In reviewing a facial attack, a trial court accepts the allegations in the complaint as true. When a court reviews a complaint under a factual attack, however, the allegations have no presumptive truthfulness, and the court that must weigh the evidence has discretion to allow affidavits, documents, and even a limited evidentiary hearing to resolve disputed jurisdictional facts. 2 Moore’s Federal Practice, § 12.30[4](Matthew Bender, 3d ed.). In the instant case, Defendants are not attacking the existence of subject matter jurisdiction on the face of Plaintiffs complaint, but rather are making a factual attack. Accordingly, this Court is not confined to the allegations in Plaintiffs Complaint, but may consider the affidavits, certifications, exhibits and deposition testimony submitted to this Court to resolve the factual issues bearing on jurisdiction. The Court must be careful, however, not to allow its consideration of jurisdiction to spill over into a determination of the merits of the case, and thus must tread lightly in its consideration of the facts concerning jurisdiction.
Dugan v. Coastal Indus., Inc.,
96 F.Supp.2d 481, 483 (E.D.Pa.2000).
The party invoking jurisdiction, in this case the Lead Plaintiff, bears the burden of establishing that such jurisdiction exists.
McNutt v. General Motors Acceptance Corp.,
298 U.S. 178, 182 , 56 S.Ct. 780 , 80 L.Ed. 1135 (1936);
Kehr Packages, Inc. v. Fidelcor, Inc.,
926 F.2d 1406, 1409 (3d Cir.),
cert. denied,
501 U.S. 1222 , 111 S.Ct. 2839 , 115 L.Ed.2d 1007 (1991). However, the burden is light; dismissal for lack of jurisdiction is only appropriate where the right claimed “is so insubstantial, implausible, foreclosed by prior decisions of this Court, or otherwise completely devoid of merit as to not involve a federal controversy.”
Dugan ,
at 483 (citing
Growth Horizons, Inc. v. Delaware County,
983 F.2d 1277, 1280-81 (3d Cir.1995)).
B. Application
The RDS Defendants, the Individual Defendants, KPMG NV, KPMG International, PwC UK and PwC International move to dismiss Lead Plaintiffs claims that are asserted on behalf of putative class members who are foreign nationals and who purchased their shares on foreign exchanges. Defendants argue that the United States was not the location of “substantial and material” conduct by the Companies because the Companies are European companies with a largely European shareholder base that run their most vital operations from their respective European headquarters. Defendants contend that of the 11.7 billion combined Royal Dutch and Shell Transport shares held worldwide, roughly 92 percent are traded outside the United States.
See
RDS Br. in Support of Motion to Dismiss for Lack of SMJ, at 7. For the reasons which follow, Defendants’
*540
motion to dismiss for lack of subject matter jurisdiction is denied.
Conduct in the United States
Federal courts employ two judicially created tests to determine the existence of subject matter jurisdiction over foreign transactions: the effects test, which considers whether conduct outside the United States has had a substantial adverse effect on United States investors or United States securities markets, and the conduct test, which questions whether conduct within the United States is alleged to have played some part in the perpetration of a securities fraud on investors outside of this country.
Tri Star Farms Ltd. v. Marconi, PLC,
225 F.Supp.2d 567, 572-73 (W.D.Pa.2002)(citing
Robinson v. TCI/US W. Communications Inc.,
117 F.3d 900 , 905 (5th Cir.1997)). Jurisdiction is established by satisfaction of either test.
Id.
In the present motions, Defendants do not challenge this Court’s subject matter jurisdiction over the claims of domestic investors who purchased on domestic or foreign exchanges, nor do they contest this Court’s jurisdiction over the claims of foreign investors who bought ordinary shares or ADRs on the NYSE. Rather, Defendants challenge this Court’s jurisdiction over the claims of the putative foreign class members who purchased their securities on foreign exchanges. Such investors did not suffer the effects of Defendants’ alleged misconduct in the United States, and therefore this Court will proceed under the conduct test.
When analyzing subject matter jurisdiction in the context of transnational securities fraud, the Third Circuit has held that the federal securities laws grant jurisdiction where at least some activity designed to further a fraudulent scheme occurs within this country.
SEC v. Kasser,
548 F.2d 109, 114 (3d Cir.1977). The Court, relying on the prior pronouncements by the Second Circuit in
IIT v. Vencap, Ltd.,
519 F.2d 1001 (1975) and
Bersch v. Drexel Firestone, Inc.,
519 F.2d 974 (2d Cir.1975), concluded that its ruling was “limited to the perpetration of fraudulent acts themselves and does not extend to mere preparatory activities or the failure to prevent fraudulent acts where the bulk of the activities were performed in foreign countries .... ”
SEC v. Kasser,
at 114 (quoting
IIT ,
at 1018). In
Kasser ,
the Third Circuit concluded that the conduct of the defendants in the United States, which included various negotiations, the execution of a contract at issue, incorporation of some of the defendant companies and maintenance of pertinent records, could not be deemed to be “mere[ly] preparatory” to fraudulent acts committed outside the country.
Kasser ,
at 115.
The Third Circuit also set forth three policy justifications for its decision.
Id.
at 116 . First, the Court stated that “to deny such jurisdiction may embolden those who wish to defraud foreign securities purchasers or sellers to use the United States as a base of operations.”
Id.
The Court added that it was “reluctant to conclude that Congress intended to allow the United States to become a ‘Barbary Coast,’ as it were, harboring international securities ‘pirates’.”
Id.
Second, the
Kasser
Court announced its concern “that a holding of no jurisdiction might induce reciprocal responses
on.
the part of other nations,” which would in turn “enable defrauders beyond the reach of our courts to escape with impunity.”
Id.
Finally, the Court opined that the antifraud provisions of the 1933 and 1934 Acts were “designed to insure high standards of conduct in securhties transactions within this country in addition to protecting domestic markets and investors from the effects of fraud.”
Id.
The Court reasoned that finding jurisdiction would enhance the ability of the SEC to “police vigorously the conduct of securi
*541
ties dealings within the United States.”
Id.
In the case at bar, Defendants suggest that the facts do not establish the “significant and material” conduct within the United States that is necessary to establish subject matter jurisdiction; instead, Defendants argue that the “focal point” of the alleged fraudulent activity was the United Kingdom and The Netherlands.
See
RDS Br. in Support of Motion to Dismiss for Lack of SMJ, at 18. To support this argument, RDS submits the declarations of (1) John Darley, the Director of EP Technology with Shell International Exploration and Production, N.Y., (2) Roger Parkins, Senior Legal Counsel with Shell International B.V. (“SIBV’), and (3) Bart van der Steenstraten, Group Finance Representative, The Hague, Netherlands and Investor Relations Manager Continental Europe of Shell International, B.V.
In 2003, Darley was asked to lead a team which reviewed Shell’s “proved” reserves.
See
Darley Deck, ¶ 3, Attached to RDS Br. in Support of Motion to Dismiss for Lack of SMJ. This project, which became known as “Project Rockford,” eventually led to the Companies’ recate-gorization.
Id.
According to Darley, the Companies report “proved” reserves to investors as supplemental information to the financial statements contained in the Annual Reports and the Form 20-F filings with the SEC.
Id.
¶ 4. This data is compiled in an annual process known as the Annual Review of Petroleum Resources (“ARPR”).
Id.
¶ 5. The reporting of hydrocarbon resources (including oil, gas and natural gas liquids) in the ARPR process involves the collection of data on existing hydrocarbon resources from Royal Dutch’s and Shell Transport’s Operating Units around the world.
Id.
The manner in which the Companies’ Operating Units are instructed to report their hydrocarbon resources, including “proved” reserves, is consistent with internal guidelines that are prepared and published each year by the Group Reserves Coordinator (“GRC”) in The Netherlands.
Id.
¶ 6.
The GRC is also responsible for compiling and consolidating the Group’s final proved reserves figures, including the annual RRR, for inclusion in the Companies’ Annual Reports and the 20-F filings.
Id.
Defendants contend that throughout the Class Period, the ARPR process was reviewed by a Group Reserves Auditor, a part-time consultant to Shell who performed his reviews in The Netherlands.
Id.
¶ 7. Defendants admit that during the year, the Group Reserves Auditor traveled worldwide to audit the petroleum resources recorded by Operating Units in various countries; however, it is argued that the Auditor performed only two audits of any Operating Unit based in the United States during the Class Period, and that one of those audits was a joint venture involving Shell and ExxonMobil.
Id.
¶8.
During the course of the ARPR process a Netherlands-based affiliate of KPMG monitored the reports of hydrocarbon resources.
Id.
¶ 9. At the conclusion of the ARPR process and after receiving the report from the Auditor, the KPMG affiliate issued a statement outlining the results.
Id.
Defendants note that all work was performed by the KPMG affiliate in The Netherlands and the statements of results were delivered to Royal Dutch in The Netherlands and Shell Transport in the United Kingdom.
Id.
Furthermore, Darley proposes that although some of the reserves recategoriza-tions the Companies have announced are located in the United States, none of the proved reserves that Royal Dutch and Shell Transport have restated in prior years was located in the United States.
Id.
¶ 10. He explains that as part of the
*542
reserves recategorization, Royal Dutch and Shell Transport said they had recorded a downward revision of 172 million boe of proved reserves due to the SEC’s clarification of the requirements for determining the “lowest known hydrocarbon” in an oil or gas field.
Id.
The total, roughly 59 million boe of revisions as of the end of 2003, did not form part of the restatement of prior years.
Id.
In his declaration, Dar-ley highlights the fact that relevant conduct occurred in The Netherlands; however, this does not detract from his clear submissions that other relevant conduct occurred within the United States. This includes 59 million boe of revisions and the audit of two operating bases in the U.S.
Plaintiff submits that the conduct in the United States falls into three categories, each of which are fully discussed below: (1) the calculation and determination of proved reserves by SDS in Houston, Texas for Group Operating Companies; (2) reserves audits undertaken by Barendregt at SDS in Houston; and (3) presentations made to analysts and investors throughout the United States.
(1) Shell Deepwater Services in Houston, Texas
SDS, which was formed in 1999 and fragmented in mid-2003, was responsible for dealing with the deep water activities of the Shell Group.
See
Darley Dep., 22:3-23:9, Attached to Decl. of Mark T. Millkey in Support of Lead PI. Br. in Opp’n to Defendants’ Motion to Dismiss in Part for Lack of SMJ (“Millkey Deck”), Ex. 1. Darley explained that SDS evaluates deepwater hydrocarbon accumulations and has the geological and geophysical expertise to map the size of the accumulation and define the aerial extent of the accumulation.
Id.
23:14-24:2. SDS also defines the development plan
for
the recovery of the hydrocarbon resources in the accumulation, which consists of defining “how many wells are required, at what depth should the wells be drilled, at what rate should the wells be produced,” as well as “what kind of facilities and infrastructure will be needed to recover the hydrocarbons.”
Id.
24:3-24:12. Darley testified that “all that work, whenever it was related to deepwater accumulations, because deepwater accumulations require specialists expertise and specialist knowledge, ... was executed by Shell Deepwater Services.”
Id.
24:21-24:25. Darley added that Shell Deepwater Services was involved in all aspects of resource definition, including the estimation and calculation of reserves.
Id.
25:2-27:2.
Darley’s deposition testimony also highlighted the role played by SDS in the calculation of the fields in Nigeria and Angola. Darley explained the procedure the Companies employed in gathering and reporting its proved oil and gas reserves during the Class Period. The process begins with a request from the hydrocarbon resources coordinator and reserves coordinator, which is then sent to all of the operating units instructing them to prepare the year-end reserve submissions.
See
Darley Dep., 51:8-52:16. Once the request is sent, the operating units prepare their reserves and resource definition for their areas of responsibility.
Id.
52:20-53:3. Darley explained that it is the operating units responsibility to define their reserves and resources, and if they are well defined and understood, they would not need any involvement from SDS. However, if SDS is requested to do so, it may provide technical support in the form of information or clarity from the consultant or from the contractor who is performing the technical work on the field development, to the operating unit.
Id.
53:3-54:25. To that end, Darley testified that “SDS provided technical support to both Angola, Shell Development Angola, who [were] preparing their own submission of the year-end reserves, and also to the deep
*543
water company in Nigeria, SNEPCO ..., when they were also preparing their -year-end submission reserves.”
Id.
55:10-17.
Plaintiff submits that SDS was deeply involved in the calculation and- evaluation of proved reserves in the Bonga, Erha, and Abu fields of Nigeria, all of which were being developed by Shell Nigeria Exploration and Production Company (“SNEPCO”).
See
Lead PI. Br. in Opp’n to RDS Motion to Dismiss for Lack of SMJ, at 6. In its opposition brief, Lead Plaintiff also makes reference to numerous articles and e-mails which support the position that SDS was actively working on reserves calculations for this area.
See
Lead PI. Br. in Opp’n to RDS Motion to Dismiss for Lack of SMJ, at 6-7.
Lead Plaintiff also cites numerous emails and documents in support of the position that SDS was actively working on reserves calculations in Angola.
See
Lead PI. Br. in Opp’n to RDS Motion to Dismiss for Lack of SMJ, at 8-10. One such reference is a November 2000 e-mail authored by then head of SDS, Matthias M. Bichsel. Mr. Bichsel wrote the following to Heinz Rothermund, the Group’s regional director for South America and Africa:
I am responding to your e-mail from 29th October regarding reserves booking in Angola. I attach a note that addresses the issue in the wider context of West Africa, since we are' also working on identifying additional volumes in Bonga.
As you will have heard already, the earlier quoted figures of some 300 MMB of proved reserves to be booked in 2000 were incorrect and represent volumes of entire structures rather than what can be booked with confidence in 2000, and in accordance to SEC rules and Shell guidelines.
I can assure you that I am personally pushing and cajoling my staff to get the most out of what is possible. Contrary to what you have heard, we are not “covering our back side” and are “overly conservative” but are exploring every avenue to trying [sic] to increase reserves.bookings.
The current total reserves booking potential is, on a P50 basis, 195 to 315 MMB and on a P85 (proved) basis 130-190 MMB. I have asked for another set of eyes of reservoir engineering expertise from SepTAR and SEPCo to ensure that we are not missing anything and literally leave no stone unturned at our next peer review session.
See
SMJ00017266,' Attached to Millkey Deck, Ex. 3.
Defendants’ reply brief provides additional information about the context of the aforesaid e-mail; however, rather than supporting Defendants’ position, it only serves to reinforce the fact that portions of the reserves calculated by the SDS were in fact overstated and recategorized.
See
RDS Br. in Support of Motion to Dismiss for Lack of SMJ, at 12-14;
see also
Supplemental Decl. of John Darley.
- Defendants submit Roger Parkins’ declaration to support the conclusion that senior-level oversight of the reserves setting and reporting processes occurred in the United Kingdom and The Netherlands, and not in the United States. However, the Third Circuit’s test for determining subject matter jurisdiction in transnational securities cases does not require a finding of no jurisdiction if material, substantial conduct occurs
outside the United States.
Rather, the test is whether material, substantial conduct occurred
in the United States
in pursuit of the fraudulent scheme. If Plaintiff pleads and supports sufficient allegations to sustain this burden, it will defeat Defendants’ motion to dismiss, regardless of the quantity and quality of activity which occurred in The Netherlands and the U.K.
*544
(2) Audits at SDS in Houston
Lead Plaintiff refers to a portion of Dar-ley’s declaration stating that during the Class Period, Anton Barendregt performed two audits of the United States’ Operating Units. While Lead Plaintiff does not facially attack the veracity of this statement, it cites numerous documents, produced by Defendants, which demonstrate that Barendregt made repeated trips to Houston, TX during the Class Period either to audit operating units located outside the United States, or to contribute in the booking of reserves.
See
Lead PL Br. in Opp’n to RDS Motion to Dismiss for Lack of SMJ, at 10-12.
(3) Investor Relations in the United States
The Companies had three main investor markets worldwide — Europe, the United Kingdom and North America. The Companies had Investor Relations offices in London, The Hague and New York.
See
Lead PI. Br. in Opp’n to RDS Motion to Dismiss for Lack of SMJ, at 12. Darley testified that it was the function of the Investor Relations Office “to promote the company strategies and the company performance among the investor analyst community.” Darley Dep., 145:17-21.
The source for much of Lead Plaintiffs information regarding investor relations is Mr. Simon Henry who, beginning in March 2001, was “responsible for all of the communications to investors worldwide, across the three main investor markets, Europe, the Ú.K. and North America.”
See
October 19, 2004 Deposition of Simon Henry before the SEC, 16:16-22, Attached to Millkey Decl., Ex. 43. Henry explained that he was responsible for the communications strategy including quarterly results reporting and the reporting of any significant events.
Id.
16:23-17:3. The New York Office of Investor Relations was headed by David Sexton who, in September 2003, was replaced by Harold Hatchett.
Id.
18:15-17. Henry testified that the Investor Relations Group conducted between 200 and 300 in-person meetings per year with executives in 2002 and 2003.
Id.
21:14-17. Henry added that the top 50 investors in each market were the priority, and each would have the opportunity, at least once a year, to meet with the senior executives (a managing director or the director of finance).
Id.
21:21-22:4.
In addition to the small group meetings, Investor Relations group executives would travel to cities in the U.S. including Boston, New York, Los Angeles, San Francisco, San Diego, Denver and Philadelphia.
Id.
24:13-20. Henry testified that the Group would try to visit New York “two or three times a year,” and the other cities “once a year or once every two years.”
Id.
Henry added that in 2002 and 2003, because of poor reviews, the Investor Relations group tried to limit Mr. van de Vijver’s contact with outside investors in the U.K. and the U.S. Relatedly, he testified that the U.S. market was by and large reserved for Philip Watts and Judy Boynton, and on occasion, the president of Royal Dutch.
Id.
138:23-139:24. Lead Plaintiff also makes reference to numerous documents which demonstrate that representatives of the Companies addressed reserves and/or RRR at the United States meetings and presentations.
See
Lead PI. Br. in Opp’n to RDS Motion to Dismiss for Lack of SMJ, at 13-14;
see also
Millkey Deck, Exs. 44-61.
Defendants argue that the inclusion of allegedly misleading statements created abroad in SEC filings and. other public statements in the United States cannot establish subject matter jurisdiction under the conduct test.
See
RDS Br. in Support of Motion to Dismiss for Lack of SMJ, 27-28. To support their position, Defendants cite a host of cases, one of which is
Tri
*545
Star Farms, Ltd. v. Marconi, PLC,
225 F.Supp.2d 567 (W.D.Pa.2002). In
Marconi
the court noted that the “only fraudulent conduct alleged to have taken place in the United States is the inclusion of some of the purported fraudulent misrepresentations and omissions in forms Marconi filed with the SEC and the dissemination of the statements published in the British press in the United States.”
Id.
at 577 . The
Marconi
Court determined such acts to be insubstantial in comparison to the conduct which occurred in the United Kingdom and decided that it “could not have played a significant role in furtherance of any fraud perpetrated against the foreign investors.”
Id.
at 578 . (“Simply making fraudulent statements about what is happening in the United States does not make those statements ‘United States conduct’ for purposes of the conduct test.”) The court also observed that the defendants did not use the United States as a base of operations for perpetrating fraud, nor was it a case “involving defendants who have unleashed from this country a pervasive scheme to defraud the foreign plaintiffs.”
Id.
at 578 (quoting
SEC v. Kasser,
548 F.2d 109, 114 (3d Cir.1977)) (internal quotations omitted).
Marconi
is factually distinguishable from the case at bar. In the instant case, the United States conduct involved more than alleged misrepresentations on SEC filings. As detailed above, the representatives of the Companies gave numerous presentations to analysts and investors and issued press releases and other allegedly misleading information in the U.S. to the financial and business community. Defendants argue that this information was only pertinent to United States investors; however, this characterization of Plaintiffs arguments is oversimplified.
See
RDS Br. in Support of Motion to Dismiss for Lack of SMJ, at 17-20. Just as foreign stock exchange data and information is pertinent to United States investors, the reverse is also true. Moreover, the alleged fraudulent activity which occurred in the United States was in no way confined to the United States market, which, because of the SEC’s stringent guidelines and regulations, has become an example for foreign investors and exchanges. The Companies’ alleged fraudulent conduct which took place in the United States would, therefore, affect foreign as well as domestic investors.
In support of this motion, Defendants also rely on the declaration of Bart van der Steenstraten. Mr. Steenstraten states that Shell communicates market-sensitive information to financial markets at the same time throughout the world and that the focal point of all communications activity, including the preparation of communications and their dissemination, is in The Hague and London. Steenstraten Decl., ¶ 10, Attached to RDS Br. in Support of Motion to Dismiss for Lack of SMJ.
Alleged Inconsistent Statements Proffered by Lead Plaintiff
Defendants allege that Plaintiff, in its Memorandum of Law in further support of the Pennsylvania State Employees’ Retirement System (“SERS”) and the Pennsylvania Public School Employees’ Retirement System (“PSERS”) motion for appointment as Lead Plaintiff, stated that “subject matter jurisdiction in a transnational securities case will exist only when the defendants’ acts in the United States ... are significant and material” to the alleged fraud.
See
RDS Br. in Support of Motion to Dismiss for Lack of SMJ, at 14. Defendants submit that Plaintiffs brief went on to state that the most significant material conduct occurred outside the U.S.
Id.; see also
RDS Br. in Support of Motion to Dismiss for Lack of SMJ, at 22. In response to this argument, Plaintiff posits that Defendants misrepresent Lead
*546
Plaintiffs position in the Lead Plaintiff application process and disregard the significant investigative effort Lead Plaintiff has undertaken and the discovery it has received since that time.
See
Lead PI. Br. in Opp’n to RDS Motion to Dismiss for Lack of SMJ, at 26. For the reasons which follow, this Court does not agree with Defendants’ representation of Plaintiffs statements.
The following is an excerpt of the SERS and PSERS brief in support of the application for Lead Plaintiff:
To establish subject matter jurisdiction, therefore, KBC AM must satisfy the requirements of the conduct test. Numerous cases in the Third Circuit have recognized that subject matter jurisdiction in a transnational securities case will exist only when the defendants’ acts in the United States are not merely preparatory to fraudulent acts committed abroad, but instead are significant and material.
The issue presently before the Court is not, however, whether defendants’ subject matter jurisdiction defense would succeed against KBC AM. Rather, it is whether that defense can be asserted and, if so asserted, whether it will be a material distraction.
It is clear
from
the foregoing that Plaintiff has proffered sufficient information to sustain its burden.
The facts and circumstances set forth in the constituent complaints and found in the news media confirm the difficulties the Court will encounter in addressing the inevitable challenge to the Court’s exercise of subject matter jurisdiction over KBC AM’s claims. None of the corporate defendants are incorporated in the United States, and all of the individual defendants (with the exception of S.L. Miller) resided abroad during the Class Period. Because Royal Dutch has its principal executive offices in The Hague, and Shell has its principal executive offices in London, all major decision making occurred not in the United States, but in Europe. KBC AM’s lead plaintiff papers point to no significant or material acts occurring in the United States. Indeed, the oil reserves at issue are off the coast of Australia and in Nigeria.
Application for Lead Plaintiff Br., at 24, Attached to Millkey Deck, at 24.
The aforesaid statements cannot be interpreted, as Defendants suggest, to stand for the proposition that Lead Plaintiff endorsed the position that the most significant and material conduct occurred outside the U.S. Rather, Lead Plaintiff argued what it knew to be true at the time, that KBC AM’s papers pointed to no “significant or material acts occurring in the United States.” See Application for Lead Plaintiff Br., at 24. This Court will not penalize Lead Plaintiff for arguments made more than one year ago — at the very early stages of this litigation and before any discovery was received. As'is clearly detañed above, Lead Plaintiff has conducted extensive research and has proffered sufficient facts and information which meet the requirements of the conduct test: that significant and material acts (applicable to all investors) relating to the alleged fraud did, in fact, occur in the United States.
Bes
Judicata
and the Enforceability of a Judgment by this Court
Defendants also conclude that the lack of enforceability of any judgment rendered by this Court over securities purchased abroad by foreign nationals makes the exercise of subject matter jurisdiction futile and improper.
See
RDS Br. in Support of Motion to Dismiss for Lack of SMJ, at 32-39. To sustain this argument, Defendants have retained eight “expert ju
*547
rists or legal scholars,” one for each European country in which the Companies’ securities trade, who have “raised serious concerns about whether their courts would recognize or enforce an ‘opt out’ class action judgment in this case with respect to claims by foreign nationals who purchased shares on foreign exchanges.”
7
Id.
at 33. Each expert was asked to opine on (1) whether a court in their country would enforce a U.S. class action judgment in favor of Plaintiffs, and (2) whether that court would enforce a U.S. judgment in favor of Defendants.
Judge Friendly wrote the following in
Bersch v. Drexel Firestone Inc.,
519 F.2d 974, 996 (2d Cir.1975):
[W]hile an American court need not abstain from entering judgment simply because of a possibility that a foreign court may not recognize or enforce it, the case stands differently when this is a near certainty. This point must be considered not simply in the halcyon context of a large recovery which plaintiff visualizes but in those of a judgment for the defendants or a plaintiffs judgment or a settlement deemed to be inadequate.
Defendants’ experts opine that any judgment could
probably not
be used by RDS to forestall new lawsuits against it in foreign jurisdictions, (emphasis added). Defendants’ experts do not conclude that there is a “near certainty” that foreign courts will not enforce a U.S. judgment. Rather, in Defendants’ brief summarizing their experts’ opinions, Defendants state that the concerns raised are “not merely hypothetical,” but are “very real.”
See
RDS Br. in Support of Motion to Dismiss for Lack of SMJ, at 33.
Lead Plaintiff has also submitted expert declarations. Not surprisingly, Lead Plaintiffs experts opine that there is no consensus about whether the European courts in question would recognize a judgment rendered by this Court. Plaintiff proffers that “although [the experts] generally believe that the courts about which they write are more likely to enforce a judgment in favor of a Foreign Class Member than a judgment in favor of Defendants, all of them identify credible arguments in favor of enforcement on behalf of both class members and Defendants. None of them believes there is a near certainty that the courts in question would refuse to enforce a judgment of this Court in this case, regardless of the outcome.”
See
Lead PI. Br. in Opp’n to RDS Motion to Dismiss for Lack of SMJ, at 31.
Defendants’
res judicata
arguments are unpersuasive. The probability alleged by Defendants of foreign courts failing to enforce a judgment of this Court is not a near certainty. In addition to submitting the declarations, the experts have submitted “supplemental” declarations in response to the declarations submitted by Plaintiffs experts. It is clear to the Court that those declarations were submitted in an effort to convince this Court of the certainty that a judgment will not be enforced; however, the arguments raised by both Defendants and Plaintiff are speculative. Furthermore, this Court will not engage in a “what if’ analysis to determine the enforceability, or lack thereof, of any judgment which may be rendered.
8
*548
International Comity
Defendants also assert that considerations of international comity warrant the dismissal of the claims by foreign nationals who purchased shares on foreign exchanges.
See
RDS Br. in Support of Motion to Dismiss for Lack of SMJ, at 37-40. Defendants, relying on the Supreme Court’s decision in
F. Hoffmann-La Roche Ltd. v. Empagran S.A.,
542 U.S. 155 , 124 S.Ct. 2359 , 159 L.Ed.2d 226 (2004), argue that the governments of The Netherlands and the United Kingdom have “made conscious choices' concerning the appropriate mix of private and public action in the face of allegations of fraudulent securities transactions, [and] have actively pursued remedies pursuant to those choices in the precise context of plaintiffs’ claims.”
See
RDS Br. in Support of Motion to Dismiss for Lack of SMJ, at 38-39. Defendants admit that while the remedies of both nations are “procedurally and substantively more limited than those available under United States securities laws,” the remedies still deserve this Court’s respect.
Id.
at 39-40. Otherwise, Defendants contend that this ease would pose a “serious risk of interference with a foreign nation’s ability independently to regulate its own commercial affairs.”
Id.
at 40.
Hoffmann-La Roche
is legally and factually distinguishable from the case at bar. There, the Supreme Court analyzed,
inter alia,
the ability of a foreign purchaser to bring a Sherman Act antitrust claim based on a foreign harm. As the District Court for the District of Maryland stated in a recent opinion, although “the securities laws are silent as to extraterritoriality, in the antitrust arena Congress has explicitly stated when the Sherman Act reaches foreign activity.”
In re Royal Ahold N.V. Sec. & ERISA Litig.,
351 F.Supp.2d 334 , 356 n. 10 (D.Md.2004). The
Royal Ahold
court determined that the merit of the legal arguments raised by the parties in that case, “should be scrutinized according to the standards developed for securities claims, not those based on wholly distinct antitrust laws.”
Id.
(citing
Europe and Overseas Commodity Traders, S.A. v. Banque Paribas London,
147 F.3d 118, 123 (2d Cir.1998)). This Court agrees with the aforesaid analysis and conclusion of the
Royal Ahold
court.
Lead Plaintiff bears the burden of establishing that subject matter jurisdiction exists.
McNutt v. General Motors Acceptance Corp.,
298 U.S. 178, 182 , 56 S.Ct. 780 , 80 L.Ed. 1135 (1936);
Kehr Packages, Inc. v. Fidelcor, Inc.,
926 F.2d 1406, 1409 (3d Cir.),
cert. denied,
501 U.S. 1222 , 111 S.Ct. 2839 , 115 L.Ed.2d 1007 (1991). As stated at the outset of this analysis, however, Plaintiffs burden is light; dismissal for lack of jurisdiction is only appropriate where the right claimed “is so insubstantial, implausible, foreclosed by prior decisions of this Court, or otherwise completely devoid of merit as to not involve a federal controversy.”
Dugan v. Coastal Indus., Inc.,
96 F.Supp.2d 481, 483 (E.D.Pa.2000) (citing
Growth Horizons, Inc. v. Delaware County,
983 F.2d 1277, 1280-81 (3d Cir.1995)). Lead Plaintiff has adequately pled that Defendants have engaged in material and substantial fraudulent conduct in the United States. Furthermore, in response to the present motion, Lead Plaintiff has supplied adequate financial support for that position. Accordingly, this Court has a sufficient interest in the claims of the foreign investors; therefore, it will invoke its jurisdiction and deny Defendants’ Rule 12(b)(1) motion.
II.
Defendant Watts’ Rule 12(b)(2) Motion to Dismiss
A.
Standard of Law Applied to Motion to Dismiss Pursuant to Fed.R.Civ.P. 12(b)(2)
Where a defendant challenges a court’s exercise of personal jurisdiction, the bur
*549
den is on the plaintiff to make a
prima facie
showing of jurisdiction.
See Mellon Bank (East) PSFS Nat. Ass’n v. Farino,
960 F.2d 1217, 1223 (3d Cir.1992);
Time Share Vacation v. Atlantic Resorts, Ltd.,
735 F.2d 61, 63 (3d Cir.1984). To meet this burden, the plaintiff must establish “with reasonable particularity, sufficient contacts between the defendant and the forum state.”
Id.
(citing
Provident Nat’l Bank v. California Fed. Sav. and Loan Assoc.,
819 F.2d 434 (3d Cir.1987)). When deciding whether to dismiss a case for lack of personal jurisdiction, the Court must accept as true the allegations in the complaint and resolve disputed issues of fact in favor of the plaintiff.
See Carteret Savs. Bank v. Shushan,
954 F.2d 141 , 142 n. 1 (3d Cir.1992)
cert. denied,
506 U.S. 817 , 113 S.Ct. 61 , 121 L.Ed.2d 29 (1992). When considering the personal jurisdiction arguments of the foreign individual defendants, “the question becomes whether the party has sufficient contacts with the United States, not any particular state.”
In re Royal Ahold N.V. Sec. & ERISA Litig.,
351 F.Supp.2d 334, 350 (D.Md.2004)(quoting
United Liberty Life Ins. Co. v. Ryan,
985 F.2d 1320, 1330 (6th Cir.1993)).
What constitutes minimum contacts varies with the “quality and nature of the defendant’s activity.”
Burke v. Quartey,
969 F.Supp. 921, 924 (D.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2461418. Public record. Not legal advice.