UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
x JACK REYNOLDS, Individually and On Civil Action No. 1:06-cv-00733-RCC Behalf of All Others Similarly Situated, (Consolidated)
Plaintiff, CLASS ACTION
vs. Electronically Filed Document
REPSOL YPF, S.A., et al., JURY TRIAL DEMANDED
Defendants.
x
CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS
SCHIFFRIN & BARROWAY, LLP LERACH COUGHLIN STOIA GELLER Michael K. Yarnoff RUDMAN & ROBBINS LLP John A. Kehoe (JK-4589) Samuel H. Rudman (SR-7957) Robert W. Biela David A. Rosenfeld (DR-7564) 280 King of Prussia Road 58 South Service Road, Suite 200 Radnor, Pennsylvania 19087 Melville, New York 11747 Telephone : 610-667-7706 Telephone: 631-367-7100
Lead Counselfor Lead Plaintiffs and the Class Lead Plaintiffs Jack Reynolds, Charles A. Kubo and John L. Brooks, III (collectively, "Lead
Plaintiffs") bring this action individually and on behalf of all other persons and entities who
purchased Repsol YPF, S.A. ("Repsol" or the "Company") American Depository Shares ("ADSs")
listed on the New York Stock Exchange ("NYSE") during the period February 22, 2005 through
January 27, 2006, inclusive (the "Class Period")
Lead Plaintiffs' information and belief are based on, inter alia, an investigation made by and through their undersigned counsel, which included, among other things, a review of. (1) Repsol's public filings with the Securities and Exchange Commission ("SEC") and elsewhere; (2) SEC filings ofother oil and gas producers; (3) technical information about certain Bolivian and Argentine oil and
gas fields where Repsol restated its proved reserves; (4) information regarding an investigation by the Comision Nacional del Mercado de Valores, Spain's equivalent of the SEC, into the improper conduct that is alleged herein; (5) amendments to Bolivia's hydrocarbon laws; (6) analyst research reports; (7) transcripts of investor conference calls regarding Repsol's financial results and business operations; and (8) press releases and media reports related to Repsol and its subsidiaries.
Lead Plaintiffs' investigation into the factual allegations contained herein is continuing, as are investigations by enforcement authorities located in Bolivia and Spain, and therefore, it is possible that additional facts related to the allegations contained herein may be revealed during the course of these investigations.
NATURE OF THE ACTION
As detailed herein, Repsol and the Individual Defendants engaged in a fraudulent scheme during the Class Period that massively overstated Repsol's "proved" oil and gas reserves and the rate at which Repsol was replacing those reserves - two key metrics that investors and Wall
Street analysts consider when measuring the performance of an oil and gas company.
-1- 2. As a result of the scheme, defendants artificially made Repsol's operating results and future prospects appear promising when, in truth, Repsol's oil and gas production business was essentially in liquidation because the Company was failing to identify new "proved" oil and gas reserves at a rate sufficient to replace the oil and gas reserves that the Company was pumping from the ground. In other words, Company was depleting its oil and gas inventory at an alarming rate during and prior to the Class Period.
3. The truth that Repsol had erroneously overstated its proved reserves was finally revealed on January 26, 2006, when the Company announced that it would restate proved reserves downward by over 1.25 billion barrels of oil equivalent, amounting to an astounding 25% of
Repsol 's proved reserves at 2004 year-end. As a percentage of proved reserves, Repsol's restatement surpassed even Shell Oil's infamous restatement of 20% of its reserves in January 2004, in response to which Lynn Turner, former chief accountant for the SEC, said "A 20% restatement of proven reserves is a humongous error .. . to have missed its proven reserves by that much is not an oversight. It's an intentional misapplication of the SEC rules." (Emphasis added.)
4. On the same day of the bombshell disclosure, the Audit and Control Committee of
Repsol's Board ofDirectors announced that it had begun an "independent review" into the facts and circumstances surrounding the overstated reserves, and would be assisted in that review by attorneys from King & Spaulding LLP ("King & Spaulding"). The severity of the downgrade also caused the
Comision Nacional del Mercado de Valores, Spain's equivalent of the SEC, to commence an investigation into the illicit conduct.
5. The magnitude of the restatement, and the fact that the Company restated proved reserves back to 1999, is overshadowed only by the astonishing conclusions ofthe Audit and Control
Committee's internal investigation. The admissions include that:
-2- • "the process for determining reserves ... was flawed from 1999 to 2004 and Company personnel at times failed to apply properly U.S. Securities Exchange Commission ("SEC") criteria for reporting proved reserves";
• there was a "lack ofproper understanding ofand training on the requirements of the SECfor booking proved reserves";
• there existed "undue optimism regarding the technical performance of the fields and (for Bolivia) commercialization of the gas and focus on the Company's replacement ratio";
• an "absence ofa meaningful deliberativeprocessfor determining proved reserves, and resolving disputes" existed in the Company;
• an "unwillingness to acceptpersonal responsibilityfor reporting internally adverse facts regarding reserves and a corresponding tendency to view such issues as falling within another person's or department's jurisdiction"; and
• that "over time problems emerged and grew in the absence of delineation of responsibilities for booking proved reserves and in the absence of clear directives pre-2005." (Emphasis added.)
6. King & Spaulding issued its own summary of findings report that identified "systemic flaws" in the Company's internal control structures, including, among others, that: (1) "from 1999 to
2004, the reserves group was included within the E&P business division, and did not consider itself to have an auditing function"; (2) the Company "did not have a formal reserves manual or formal process before 2002 ... ;" (3) in 2002, the Company "adopted a formal reserves manual and instituted a triennial external audit review process. However, this manual was not disseminated to all personnel who needed to understand the SEC requirements for proved reserves"; and (4) that "the
2002 manual did not provide a dispute resolution procedure."
7. More shocking is that the overstatement was a repeat performance for Repsol and the
Individual Defendants. Just one year earlier, in February 2005, they revealed that the Company had overstated 2003 year-end proved reserves by 222 million barrels of oil equivalent or 4.1 %. As would be revealed much later, that downward revision was only a drop in the bucket compared to what lay ahead, but it did raise serious questions about the Company's internal control procedures -3- and the reserves control group tasked to estimate and report the Company's most prized asset - its oil and gas reserves.
8. Rather than carry out a meaningful inquiry that would have revealed the myriad of glaring deficiencies uncovered just one year later, the Individual Defendants turned a blind eye, and on the first day ofthe Class Period, they disclosed the 4.1 % downward revision but assured investors that the reported proved reserves at year-end 2004 had been estimated in "strict compliance" with
SEC rules and Financial Accounting Standards Board principles on estimating and reporting proved reserves.
9. Less than a year later, the Company would reveal the staggering restatement, a disclosure that triggered a substantial decline in the trading price ofRepsol's ADSs, which fell $2.12 per share, or 7 percent, on January 26, 2006, to close at $27.99 per share, and continued to decline on
January 27, 2006, when it fell $1.34 per share, or 4.79 percent, to close at $26.65 per share, after reaching an intra-day low of $26.55 per share. Consequently, Lead Plaintiffs and the Class have suffered millions of dollars in damages , which they now seek to recover.
10. The conclusions ofthe Audit and Control Committee's internal investigation and the year-earlier restatement (in 2005) raise a glaring red flag over Repsol's reserves auditing process and provide strong circumstantial evidence of the Individual Defendants' scienter. Additionally, a plethora of others factors give rise to a strong inference of scienter. These factors include, among others: (1) the nature, sheer magnitude and time period covered by the Restatement; (2) personnel changes and "urgent" auditing reforms that occurred just after the Individual Defendants assured investors of "strict compliance" with SEC rules on reserve reporting; (3) the Company's historical lackluster performance in replacing its reserves; (4) revelation ofthe reserve overstatement only one day after Bolivian authorities threatened to register the reserves with the SEC (and thereby possibly
-4- reveal the overstatement), and (5) various other indicators of scienter as described more particularly below.
JURISDICTION AND VENUE
11. This Court has jurisdiction over the subject matter of this action pursuant to Section
27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §78aa. The claims arise under Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and the rules and regulations promulgated thereunder, including SEC Rule I Ob-5, 17 C.F.R. 240.1 Ob-5.
12. This Court also has jurisdiction over the subject matter of this action based on the
"effects test" for determining federal subject matter jurisdiction over claims arising under the federal securities laws. Accordingly, this Court has subject matter jurisdiction over the claims of domestic
Class members (defined below) and foreign Class members who purchased Repsol's ADSs listed and traded in the United States on the NYSE, including purchasers who are citizens or domiciled in foreign countries. The interest of all Repsol investors were affected adversely by defendants' misconduct as alleged herein, which artificially inflated the price ofRepsol's ADSs during the Class
Period and affected the integrity of the price of Repsol's ADSs traded on the NYSE.
13. Venue is proper in the District pursuant to Section 27 of the Exchange Act and 28
U. S.C. §§ 1391 (b) and (c). At all times relevant to this Complaint, Repsol's ADSs were registered and traded on the NYSE, located in this District, and many ofthe acts and transgressions constituting violations of the securities laws as alleged herein, including the offer and sale of securities and the dissemination of materially false and misleading statements to the investing public, occurred, in part, in this District. Repsol has maintained an office in this District, at 410 Park Avenue, Suite 440, in
New York, New York, and The Bank ofNew York, located in this District with its principal offices at One Wall Street in New York, New York, is Repsol's depositary issuing ADSs under a deposit
-5- agreement dated May 15, 1989, as amended in February 22, 1993, July 6, 1999 and as further amended and restated as of July 7, 2002.
14. In connection with the wrongful acts and conduct alleged herein, the defendants, directly and indirectly, used the means and instrumentalities of interstate commerce, including the
United States mail and the facilities of a national securities market.
THE PARTIES
Plaintiffs
15. Jack Reynolds ("Reynolds") is an individual who purchased Repsol securities during the Class Period, as demonstrated by the certification that Reynolds previously filed with the Court.
Reynolds suffered damages as a result of the violations of the federal securities laws alleged herein when the truth about Repsol's overstated oil and gas reserves was revealed at the end of the Class
Period and the price of Repsol ADSs declined.
16. Charles A. Kubo ("Kubo") is an individual who purchased Repsol securities during the Class Period, as demonstrated by the certification that Kubo previously filed with the Court.
Kubo suffered damages as a result ofthe violations ofthe federal securities laws alleged herein when the truth about Repsol's overstated oil and gas reserves was revealed at the end of the Class Period and the price of Repsol ADSs declined.
17. John L. Brooks, III ("Brooks") is an individual who purchased Repsol securities during the Class Period, as demonstrated by the certification that Brooks previously filed with the
Court. Brooks suffered damages as a result of the violations of the federal securities laws alleged herein when the truth about Repsol's overstated oil and gas reserves was revealed at the end of the
Class Period and the price of his ADSs decreased.
-6- 18. By Order of the Court entered June 13, 2006, Reynolds, Kubo and Brooks were
appointed Lead Plaintiffs in this action in accordance with Section 21D(a)(3)(B) of the Exchange
Act, 15 U.S.C. § 78u-4(a)(3)(b).
19. Reynolds, Kubo and Brooks are hereinafter collectively referred to as "Lead
Plaintiffs."
Defendants
The Company - Repsol YPF, S.A.
20. Repsol is a limited liability company that was duly organized on November 12, 1986
and exists under the laws of the Kingdom of Spain. Repsol's principal executive offices are located
at Pasco de la Castellana 278, 28046 Madrid, Spain. According to investor presentations during the
Class Period, Repsol also maintained an office at 410 Park Avenue, Suite 440, New York, New
York.
21. Since on or around May 11, 1989, Repsol's ADSs have been listed and traded on the
NYSE under the symbol "REP." During the Class Period, the Company was governed by the federal securities laws, and by the NYSE Regulation, Inc., a not-for-profit corporation dedicated to strengthening market integrity and investor protection, and filed its 2005 Annual Report on Forms
20-F and quarterly and periodic reports on Forms 6-K with the SEC.
22. Repsol's ordinary shares are also listed and traded on the Spanish Stock Exchanges
(Madrid, Barcelona, Bilbao and Valencia) and the Buenos Aires Stock Exchange (in the form of
Argentine certificates of deposit) under the symbol "REP."
23. Repsol is an integrated oil and gas company that is engaged in all aspects of the petroleum business, including exploration, development and production ofcrude oil and natural gas
(referred to as the "upstream" business), and transportation of petroleum products, petroleum refining, petrochemical production and marketing ofpetroleum products and petroleum derivatives -7- (referred to as the "downstream" business). During the Class Period, Repsol operated in 32
countries, including the United States, where it engaged in oil and gas exploration and production.
24. Repsol began operations in 1987 as part of a reorganization of the oil and gas
businesses then owned by Instituto Nacional de Hidrocarburos, a Spanish government agency that
acted as a holding company of government-owned oil and gas businesses. In April 1997, the
Spanish government sold its entire interest in Repsol in a global public offering. In 1999, as part of
Repsol's international growth strategy, the Company acquired, through a $13.4 billion cash tender
offer, the outstanding shares of YPF S.A. ("YPF"), a leading Argentine petroleum conglomerate and
the former state owned oil and gas monopoly in Argentina. As of December 31, 2002, Repsol
owned 99.04% of YPF's outstanding shares.
25. Through various wholly owned subsidiaries, Repsol had substantial oil and gas exploration and production operations in Argentina, Bolivia, Venezuela, and Trinidad and Tobago, and elsewhere, and reported its financial results on a consolidated basis throughout the Class Period.
The Individual Defendants
26. Antonio Brufau Niubo . On October 27, 2004, Antonio Brufau Niubo ("Brufau") replaced Alfonso Cortina de Alcocer ("Cortina") as Repsol's CEO and Chairman of the Board of
Directors, and he remains in both positions through the present.
27. Brufau joined Repsol's Board of Directors in 1996, and prior to advancing to
Chairman and CEO, served as a member of the Board's Audit and Control Committee, reportedly responsible for, among other things, conducting periodic inspections ofthe preparation of financial and economic information, and supervision of the Company's internal financial control systems.
28. After graduating from the University of Barcelona with a degree in engineering,
Brufau began his professional career with the auditing firm Arthur Andersen, where he advanced to the level of Partner and Director ofAuditing. In 1988, he joined "la Caixa" one of Spain's largest -8- savings banks, and from 1991 to 1999 served as its Executive Deputy Director General. In January
1999 he was elevated to Director General for Grupo "la Caixa" and held that position until 2004 when he became Repsol's CEO and Chairman of the Board.
29. At times relevant to this action, Brufau held directorship positions at various organizations, including chairman of Gas Natural Group, an energy services multinational whose activities focus on the supply, distribution and commercialization of natural gas in Spain, Latin
America and Italy. In July 2002 he was named chairman of Barcelona's Circulo de Economia, and since March 2003 he is the only Spanish member of the Executive Committee of the International
Commerce Committee (ICC).
30. During the Class Period, as CEO and Chairman of the Board, and prior to the Class
Period as a member of the Board's Audit and Control Committee, Brufau was responsible for reviewing Repsol's annual, quarterly and periodic reports filed with the SEC, and he signed the
Company's 2004 Annual Report filed with the SEC on Form 20-F on June 30, 2005 ("2004 20-F"), and certified that he had reviewed the filing and that as CEO he had "designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
[his] supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, [was] made known to [him] by others within those entities, particularly during the period in which [the] report [was] being prepared."
31. As described with more particularity below, during the Class Period, Brufau knowingly or with reckless disregard for the truth made materially false and misleading statements in analyst conference calls, press releases and SEC filings regarding Repsol's proved oil and gas reserves and the rate at which the Company was able to replace those reserves. Brufau also issued materially false and misleading statements and made omissions of material fact regarding Repsol's
-9- supposed "strict compliance" with SEC rules and FASB accounting standards on classifying and reporting "proved" oil and gas reserves.
32. Luis Maras Anton . Throughout the Class Period, Luis Maras Anton ("Maras") was
Repsol's Chief Corporate Director of Finance, which Repsol used interchangeably with the title
Chief Financial Officer ("CFO"), until he was replaced by Fernando Ramirez Mazarredo in February
2006 after Repsol revealed that it was restating its proved oil and gas reserves downward by 1.25 billion barrels of oil equivalent, or 25%, and the Company's Board had retained King & Spaulding to commence an internal investigation into the facts and circumstances surrounding the write-down.
33. Maras received an M.A. and Ph.D in Economics from the University of Chicago in
1983 and 1986, respectively, and he also graduated from the Universidad Autonoma de Madrid where he studied law and economics. Before joining Repsol in 1987, Maras worked at the
International Monetary Fund, the World Bank, the Cabinet of the Secretary of the Treasury, and as a professor in several academic institutions, including the University of Chicago.
34. Maras joined Repsol in 1987 as the Head of the Financial Markets, and was appointed Director of Financial Affairs for the Chairman's Office in 1990. Maras served as Deputy
Chief Financial Officer from 1996 to 2000, and then became the Corporate Director for Planning and
Control in 2000, holding that position until being elevated to CFO in July 2003.
35. During the Class Period, in addition to having served as CFO, Maras was the
Chairman of Repsol's "Disclosure Committee." In that capacity, Maras was reportedly responsible for establishing and maintaining procedures for the preparation of accounting and financial information released to the investing public and for maintaining adequate and efficient internal control systems to ensure that Repsol's financial statements were accurate, reliable and clear, and for
-10- identifying risks to Repsol's businesses and activities that are significant and which may affect the accounting and financial information to be approved and filed."
36. Throughout the Class Period, Manas was responsible for reviewing Repsol's annual, quarterly and periodic reports filed with the SEC, and he signed the Company's 2003 Form 20-F and
2004 Form 20-F, and certified that he had reviewed both filings and they did not contain any untrue material statement with respect to the period covered by the reports, and that as CFO he had
"designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under [his] supervision, to ensure that material information relating to the
Company, including its consolidated subsidiaries, [was] made known to [him] by others within those entities, particularly during the period in which [the] report [was] being prepared."
37. As described with more particularity below, during the Class Period, Manas knowingly or with reckless disregard for the truth made materially false and misleading statements in analyst conference calls, press releases and SEC filings regarding Repsol's proved oil and gas reserves and the rate at which the Company was able to replace those reserves. Maras also issued materially false and misleading statements and made omissions of material fact regarding Repsol's supposed "strict compliance" with SEC rules and FASB accounting standards on classifying and reporting "proved" oil and gas reserves.
38. Defendants Brufau and Maras are at times referred to herein as the "Individual
Defendants."
39. Because ofthe Individual Defendants' positions within the Company, they had access to the adverse, undisclosed information about the Company's internal and external procedures utilized to audit Repsol's proven oil and gas reserves, including access to reports from Repsol's internal and external independent auditors regarding those procedures, conversations and
-11- connections with other corporate officers and employees, attendance at management and Board of
Directors meetings and committees thereof, and through reports and other information provided to
them in connection with their day-to-day corporate responsibilities.
40. It is appropriate to treat the Individual Defendants as a group for pleading purposes
and to presume that the false, misleading and incomplete information conveyed in the Company's public filings, press releases and other publications as alleged herein are the collective action ofthe narrowly defined group of Individual Defendants. Each of the Individual Defendants, by virtue of his high-level position within Repsol, directly participated in the management ofthe Company at the highest levels and was privy to confidential proprietary information concerning Repsol and its business operations, as alleged herein. The Individual Defendants were involved in drafting, producing, reviewing and/or disseminating the false and misleading statements, and approved and ratified these statements, in violation of the federal securities laws.
CLASS ACTION ALLEGATIONS
41. Lead Plaintiffs bring this action on their own behalf and as a class action pursuant to
Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure on behalf of all persons or entities
(the "Class") who purchased or acquired Repsol's ADSs on the open market during the Class Period.
Excluded from the Class are: (i) the defendants; (ii) members of the family of each Individual
Defendant; (iii) any officer or director of Repsol; (iv) any firm, trust, corporation, officer, or other entity in which any defendant has a controlling interest; and (v) the legal representatives, agents, affiliates, heirs, successors -in-interest or assigns of any such excluded party.
42. The Class is so numerous that joinder of all Class members is impracticable.
Throughout the Class Period, Repsol's ADSs were actively traded on the NYSE, an efficient market.
While the exact number of Class members can only be ascertained through appropriate discovery,
Lead Plaintiffs believe that the Class members number in the hundreds, ifnot thousands. As ofJuly -12- 1, 2006, there were over 1,220,863,463 ordinary shares of Repsol stock issued in book-entry form, and each ADS represents one ordinary share. Based on the volume oftrading ofRepsol ADSs during the Class Period, it is believed that hundreds, if not thousands, of investors purchased Repsol's
ADSs during the Class Period, rendering joinder of all such purchasers impracticable.
43. Lead Plaintiffs' claims are typical of the claims of the members of the Class. Lead
Plaintiffs and all Class members sustained damages as a result of the wrongful conduct complained of herein.
44. Lead Plaintiffs will fairly and adequately protect the interests of the Class members and have retained counsel competent and experienced in class action and securities litigation. Lead
Plaintiffs have no interests that are contrary to or in conflict with those of the Class members that they seek to represent.
45. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. Because the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it virtually impossible for the Class members individually to seek redress for the wrongful conduct alleged herein.
46. Common questions of law and fact exist as to all Class members and predominate over any questions solely affecting individual Class members. Among the questions of law and fact common to the Class are:
(a) whether the federal securities laws were violated by defendants' acts as alleged herein;
(b) whether documents that Repsol filed with the SEC, press releases and public statements made by defendants during the Class Period contained misstatements of material fact or
-13- omitted to state material facts necessary in order to make the statements made, in light of the
circumstances in which they were made, not misleading;
(c) whether the defendants acted with the requisite state of mind in omitting
and/or misrepresenting material facts in the documents filed with the SEC, press releases and public
statements;
(d) whether the market prices of Repsol ordinary shares and ADSs were
artificially inflated during the Class Period due to the material misrepresentations complained of herein; and
(e) whether the Class members have sustained damages and, if so, the appropriate measure thereof.
47. Lead Plaintiffs know of no difficulty that will be encountered in the management of this litigation that would preclude its maintenance as a class action.
48. The names and addresses of the record owners of Repsol ADSs purchased during the
Class Period in the open market are obtainable from information in the possession ofthe Company's transfer agents. Notice can be provided to the record owners of Repsol ADSs via first class mail using techniques and a form of notice similar to those customarily used in securities class actions.
SUBSTANTIVE ALLEGATIONS
Background
49. Until 1999, Repsol was primarily a local oil and gas refiner and marketer that had a small oil and gas exploration and production ("E&P") business. For example, when Repsol announced its 1998 year-end results on February 15, 1999, the Company reported that E&P operating income was just 15,404 million pesetas (Spain's currency at the time), or just 5% of the
Company's 275,844 million pesetas operating income, compared to the refining and marketing
-14- business that had operating income of 155,186 million pesetas, or roughly 56% of the Company's total operating income in 1998.
50. When the Company expanded its E&P operations in Argentina in 1999, and then later in Bolivia in 2001, the importance of Repsol's E&P business to the Company's financial results increased significantly. By fiscal 2003, the E&P business brought in €2.35 billion or roughly 60% of Repsol's total €3.86 billion operating income, as Repsol reported in a press release dated February
24, 2004.
Argentina
51. Repsol's rapid expansion of the E&P business began in 1999 when Repsol acquired
YPF, then Argentina's leading oil and gas producer. On January 20, 1999, Repsol reported that it had acquired a 14.99% stake in YPF through an Argentine government auction, and on April 29,
1999, announced an unsolicited $13.4 billion cash tender offer for the remaining shares of YPF. On
June 24, 1999, Repsol reported that it had obtained control over YPF by virtue of having acquired
98.2% of its outstanding shares in the tender offer.
52. Repsol's 1999 Annual Report filed with the SEC on Form 20-F on May 30, 2000
("1999 20-F") declared that the YPF acquisition had transformed Repsol, virtually overnight, from a local oil and gas refiner and marketer into "one of the world's ten largest oil companies on the basis of market capitalization and proved reserves."
53. The YPF acquisition provided Repsol with immediate access to YPF's proved oil and gas reservoirs in Argentina, and was largely responsible for having increased Repsol's reported proved reserves from 977 million barrels of oil equivalent ("BOE") at December 31, 1998, to over
4.5 billion BOE by December 31, 1999, as Repsol reported on the 1999 20-F. (The term BOE refers to a unit of measure used by oil and gas companies in their financial statements as a way of combining oil and natural gas reserves and production into a single measure.) -15- 54. The 1999 20-F also claimed that Repsol's 1999 year-end proven reserves had been estimated "in accordance with guidelines established by the Securities and Exchange Commission and the Financial Accounting Standards Board." Repsol would later admit that the 1999 year-end proved reserves had not been estimated in accordance with SEC rules, and were, in reality, overstated by 188 million BOE at 1999 year-end, as particularized in more detail below.
Bolivia
55. In 2001, Repsol significantly increased its presence in Bolivia when it acquired a 50% interest in Empresa Petrolera Andina S.A. ("Andina"), a partner in a consortium that had obtained oil and gas production rights in the San Alberto and San Antonio gas fields located in South Bolivia.
According to Repsol's 2001 Annual Report filed with the SEC on Form 20-F on March 28, 2002
("2001 20-F"), Repsol's net proved reserves in Bolivia at December 31, 2001 were 1.1 billion BOE, compared to 273 million BOE at December 31, 2000, as reported on its Annual Report filed with the
SEC on Form 20-F. Repsol would later admit that the proved reserves had been overstated by 333 million BOE at 2001 year-end.
56. According to a Company press release dated February 5, 2001, Repsol, through its interest in Andina, began producing gas at the San Alberto field in January 2001. The press release indicated that the San Alberto field would produce 12 million cubic meters per day when fully developed and that the gas would be transmitted to the Brazilian market via a Bolivia-Brazil gas pipeline where it would be sold to Petroleo Brasileiro S.A ("Petrobras"), a Brazilian gas company, under a take or pay agreement for a period of 20 years.
Dependence on Argentine and Bolivian Oil and Gas
57. Prior to and throughout the Class Period, Repsol was dependent on oil and gas fields in Argentina and Bolivia to support the Company's oil and gas production business.
-16- 58. For example, Repsol's 2003 Annual Report filed with the SEC on Form 20-F on July
1, 2004 ("2003 20-F") reported that Repsol's total oil and gas production was 413.3 million BOE in
2003, and that Argentina and Bolivia accounted for 277.4 million BOE and 26.7 million BOE ofthis production, respectively, or roughly 73% of Repsol's total production in 2003.
59. Repsol's 2004 Annual Report filed with the SEC on Form 20-F on June 30, 2005
("2004 20-F") reported that Repsol's total oil and gas production was 426.6 million BOE in 2004, and that Argentina and Bolivia accounted for 276.2 million BOE and 39.3 million BOE of this production, respectively, or roughly 74% of Repsol's total production in 2004.
60. Repsol's 2005 Annual Report filed with the SEC on Form 20-F on July 14, 2006
("2005 Form 20-F") reported that Repsol's total oil and gas production was 415.8 million BOE in
2005, and that Argentina and Bolivia accounted for 257.6 million BOE and 46.3 million BOE ofthis production , respectively, or roughly 73% of Repsol's total production in 2005.
[The remainder of this page is intentionally left blank.]
-17- 61. The following graph, based on data collected from John S. Herold, Inc., an
independent research firm that specializes in the analysis of companies, transactions, and trends in
the global energy industry, depicts the rapid growth ofRepsol's oil and gas production between 1995
and 2005, and the regions where that growth occurred:
REPSOL'S WORLDWIDE OIL AND GAS PRODUCTION 1995-2005 Daily Oil Production by Country
,0a
Tr4mi ::.^d and Tsbaeo roh..r _^... of tt-caL -
300
30y
Pe-.t - L_,cin --a- 1.
_.____ 139' 1^`_$ 1999 2000 2099 2002 2001 2004 .2-.001 Note: Other Includes Ecuador, Algeria , and Colombia
Daily Comas Production by Country
4.200
3.600
^'cnezuds Rest of Liu o: _: - North mug ..a 9Ed ii
1.200
600
0 19,13 1996 1997 1999 2000 2001 2002 2003 2004 ZOOS
Sourer John S. Herold E&P Databo ,e Note : Graph excludes U . S. production of 7 MMcf/d total from 2002 - 05 and Indonesia (2 MMcf/d from 2002- 05).
62. In addition to its dependence on Argentina and Bolivia for its oil and gas production,
Repsol was dependent upon Argentina and Bolivia for its reported proved oil and gas reserves throughout the Class Period.
63. The 2003 20-F reported that Repsol's total proved oil and gas reserves (prior to giving effect to the Restatement) was 5,433 million BOE as of December 31, 2003, and that
-18- Argentina and Bolivia accounted for 3,290 million BOE and 1,262 million BOE of this amount, or
roughly 83% of Repsol's total proved reserves as of 2003 year-end.
64. The 2004 20-F reported that Repsol's total proved oil and gas reserves (prior to
giving effect to the Restatement) was 5,261 million BOE as of December 31, 2004. Argentina and
Bolivia accounted for 3,079 million BOE and 1,309 million BOE of this amount, or roughly 83% of
Repsol's total proved reserves as of 2004 year-end.
65. The 2005 20-F reported that Repsol's total proved oil and gas reserves (after giving
effect to the Restatement) was 3,328 million BOE as of December 31, 2005. Argentina and Bolivia
accounted for 1,624 million BOE and 604 million of this amount, or roughly 66% of Repsol's total
proved reserves as of 2005 year-end.
Economic Crisis and Political Upheaval
66. An economic crisis in Argentina in 2002 and political turmoil in Bolivia in 2005 had
significant negative consequences on Repsol's operations and financial results, and the Bolivian
turmoil, resulting in the nationalization of Bolivia's oil fields in 2006, continues to threaten the
Company's future operations in Bolivia.
67. Soon after the YPF acquisition, Argentina experienced severe political instability and an economic meltdown. A bitter four-year recession led to increasing popular protests against the government of President Fernando de la Rua, who was forced to step down in December 2001, half- way through his four-year presidential term.
68. In December 2001, the International Monetary Fund shut off a crucial $1.3 billion bailout when Argentina failed to meet budget-cutting targets prompting Argentina to announce days later that it was suspending payments on its $141 billion foreign debt. Then-President Fernando de la Rua, in order to halt a run on the Argentine banking system, which was largely dominated by foreign financial institutions, imposed strict bank withdrawal limits. Besides nearly freezing -19- economic activity, this action provoked street protests around the country and over a dozen people
died in confrontations with riot police or other demonstrators. The economic impact was severe and
caused a period of record unemployment and poverty in Argentina in 2002.
69. The Argentine economic crisis hit Repsol particularly hard because, as Repsol
reported in its 2002 Annual Report filed on Form 20-F with the SEC on June 20, 2003 ("2002 20-
F"), approximately 40.6% of its assets and 47.3% of its operating income derived from its Argentine
operations. The 2002 20-F also reported that:
By the end of 2001, Argentina suffered a deep social and economic deterioration accompanied by high political and economic instability. The restrictions on bank deposits withdrawals, the imposition of exchange controls, the suspension of payment of Argentina's external debt and the abrogation of the peso convertibility (and the consequent depreciation of the peso against the dollar) resulted in a deep negative shock to the Argentine economic system....
Repsol YPF's business and results of operations have been, and may continue to be, materially and adversely affected by economic, political and regulatory developments in Argentina. In particular, the energy sector and Repsol YPF have been affected by lower sale volumes, restrictions on transferring money out of Argentina, difficulties in transferring the impact of prices of crude oil and derived products quoted in dollars to domestic prices fixed in pesos and the creation of a tax specifically targeted at the export of hydrocarbons.
70. Repsol's financial performance suffered as a result of the crisis. As Repsol reported
in the 2002 20-F, operating revenue dropped from €45.7 billion in fiscal 2000 to €36.4 billion in
fiscal 2002, and its operating income fell from €6.2 billion to just €3.3 billion during that same
period.
71. On the heels ofthe Argentine economic crisis, Bolivia endured political uprisings that
had a significant negative impact on Repsol's business and, to this day, threatens its future Bolivian
operations.
72. In response to violent street protests that sought greater government control over the
country's oil and gas reservoirs, in May 2005 the Bolivian Congress voted to impose an additional
-20- 32% tax on oil and gas production in Bolivia pursuant to a new hydrocarbon law (the "Hydrocarbon
Law"). The street protests continued, however, and the protestors began to demand, among other things, the nationalization of Bolivia's natural gas industry.
73. In December 2005, Bolivia held national elections and Evo Morales ("Morales"), the leader of the Movement to Socialism party, was elected president. During his campaign, Morales repeatedly advocated the need for the Bolivian State to have greater involvement in the oil and gas industry.
74. Soon after the elections, Morales was threatening to take greater governmental control over Bolivia's oil and gas reserves. An article published on January 12, 2006 in the oil and gas trade journal "Gas Matters Today" quoted Morales stating "the state will exercise its right of ownership and that means it will decide on the use of those resources." Morales added that foreign companies "will be partners, not owners.... There is a sentence in some contracts that says the multinationals acquire rights at the mouth of the extraction. That clause is not going to be there any more."
75. On January 24, 2006, The Calgary Herald reported that Bolivia's newly appointed
Energy Minister, Andres Soliz Rada ("Soliz"), told reporters that his first task "will be to restart state oil company YPFB and register Bolivia's natural gas reserves, South America's largest, as state property." The following day, on January 25, 2006, The Financial Times published an article titled
"Repsol YPF Bolivian Plans Threaten a Quarter of Stated Reserves," which reported that "the government [of Bolivia] has announced that its major goal is to register the reserves in the name of the state with the US market regulator, the SEC."
76. The next day Repsol announced its massive oil and gas proven reserve restatement that revised its oil and gas proven reserves downward by 1.25 billion BOE, or 25% of reported
-21- proven reserves as of December 31, 2004, and that over 1.16 billion BOE (or more than 90% of the revision) involved Repsol's proved reserves in Argentina and Bolivia.
The Truth Begins to Emerge: Repsol Discloses Its Anticipated Restatement
77. On January 26, 2006, Repsol issued a press release (the "1/26/06 Press Release") revealing that, as part of its 2005 year-end financial results, the Company expected to restate its proved oil and gas reserves downward by over 1.25 billion BOE, amounting to 25 percent of
Repsol's reported proved reserves at year-end 2004.
78. As a percentage ofpreviously booked proven oil and gas reserves, the restatement of proven oil and gas reserves would be among the largest in history, even larger than the 20 percent restatement ofproven reserves that Shell Oil announced in January 2004, in response to which Lynn
Turner, a former SEC chief accountant, stated "a 20 percent restatement ofproven reserves is a
humungous error, " and added that "... to have missed its proven reserves by that much is not an
oversight. It's an intentional misapplication of the SEC's rules." [Emphasis added.]
79. The 1/26/06 Press Release stated that most of the downward restatement related to
proved oil and gas reserves in Bolivia and Argentina, which amounted to 658.6 million and 509.3
million BOE, respectively, or more than 93% of the total restatement . The press release also
included the following chart that disclosed the specific fields and corresponding reserve quantities
that the Company expected to restate downward:
Revision Percent of in million boe total rev.
Sabalo 273.3 21.8°/x
San Alberto 253.4 20.2% Yapacani. Vibora y Sirari 75.1 5.9%
Rio Grande 61.1 4.9% i Other Bolivia Total Bolivia (*) 658.6 52.5%
-22- Revision Percent of in million boe total rev.
Loma la Lata 251.81 20.2%
Chihuido Sierra Negra 73.5
Ramos 36.51 2.9% Aguada Toledo 22.7 1.8%
Other Argentina 1 24.7 9.9% Total Argentina 509.3 40.6%
Total Venezuela 58.6 4.7%
Tin I ouve "I abankort 17.7 1.4%1
Other Rest of World i 10.0 0.S111o "Total Rest of World 27.7 = 2.2% 1,254 1 100%
(*) Includes 333 million BOE relating to the minority shareholders of Empresa Petrolera Andina, S.A.
80. The 1/26/06 Press Release disclosed a myriad of technical problems known to the
Company during (and prior to) the Class Period, which should have caused the Company to reclassify a portion of those reserves from "proved" to "unproved" under SEC rules. For example, with regard to the expected downward revision of 251.8 million BOE related to the Loma la Lata proved reserves, the press release acknowledged "a decline in pressure observed in 2004 and 2005" which indicated that "a portion of the initial gas in place could not be recoverable with reasonable certainty under present technical, economic and operation conditions." The press release also disclosed that the Loma la Lata field had a "lack of balance between the pressures detected in the various layers and zones of the field indicated a limited interconnection between these layers and zones." The press release added that:
Commercial exploitation of those gas volumes without a connection to the producing zones of the [Loma la Lata] field will require the implementation of non- conventional recovery methods, which would require pilot testing in order to support the classification of the volumes as proved reserves.
-23- 81. Importantly, the "limited interconnection" between the producing zones ofthe Loma
la Lata field is not a phenomenon that occurs overnight. To the contrary, the lack of balance
between pressures in various producing and non-producing reservoirs of the field is a result of the
complex geology of the Loma la Lata field and would be observed over the productive life of the
well. This is a mature field that, upon information and belief, has been extensively mapped by
Repsol geologists who monitored production pressures for many years, which would have indicated
that the field was geologically complex and that many of the reservoirs were discreet and separated
from other reservoirs by impermeable natural seals. This information and belief is based on, inter
alia, technical data that is known about the field and a technical assessment of the field, including
mapping data, that Repsol provided analysts in 2003.
82. Because of the natural compartmentalization of the Loma la Lata field, and lack of pressure communication between individual reservoirs , proved reserves , as defined by the SEC,
cannot be attributable to each foot of apparent net effective reservoir in thick gross sand intervals in
a producing well where only one or two of the multiple vertically stacked reservoirs are perforated in
a zone completion; nor can they be assigned to non-producing reservoirs behind pipe without testing;
or to undeveloped wellsite locations more than one well-spacing unit from producing wells. Loma la
Lata field appears to be an example of the culture within Repsol, as reported by King & Spaulding,
whereby engineers were too optimistic in reporting reserves, and failed to take responsibility when
the geological mapping and pressure data indicated there was a problem with the proved reserve
estimates prior to the year-end 2005 reserve write-down, as detailed with more particularity below.
83. Similarly, performance problems with the Chihuido de la Sierra Negra field
accounted for 38.5 million BOE of the expected proven reserve downward revision. Specifically, the 1/26/06 Press Release announced that:
-24- Production performance of this field has been adversely affected by multiple factors, including the effect of interrupted production in late 2004 and problems with injector equipment, which has caused a downward deviation in short- and medium-term production estimates.
84. The 1/26/06 Press Release also disclosed performance problems with the Ramos field, which accounted for 36.5 million BOE or 2.9% of the total expected reserve restatement.
Specifically, with regard to the Ramos field, the press release revealed that:
Balance of materials analysis incorporating the latest static pressures observed for the field indicated a reduction in the IGIP [initial gas in place], which in turn resulted in a downward revision ofprevious estimates of proved reserves of 36.5 million BOE.
85. Likewise, the 1/26/06 Press Release revealed performance problems with the Aguada
Toledo and Sierra Barrosa fields which resulted in a downward revision of 22.7 million BOE or
1.8% of the total expected reserve restatement. Specifically, the press release stated:
This area has been used for underground gas storage during the summer months. A reevaluation of the gas cap of the affected reservoirs has led to downward revision in proved gas reserves of 22.7 million BOE.
86. In addition to performance problems with the Argentine fields that led to Repsol's announcement of an impending reserve restatement, the press release disclosed technical problems in several ofthe Company's Bolivian fields, which also contributed to the expected downward revision.
87. For example, the announcement revealed that the Company expected to make a downward revision of 526 million BOE in connection with the San Alberto and Sabalo fields, in part due to the introduction ofthe Hydrocarbon Law creating legal and commercial uncertainty, but also because of various technical problems, including a reduction of estimates of the initial gas in place
"due to the evolution of well head pressure," and that "although these fields have a short production history, the decline in pressure in 2004 and 2005, together with new volumetric calculations, has led to a reduction in the estimated hydrocarbons in place for the purpose of estimating proved reserves."
-25- 88. Finally, the announcement disclosed technical problems at the Rio Grande field in
Bolivia "and other fields in the region," and attributed an expected downward revision of 61 million
BOE in those fields due to "production performance following workovers that was significantly lower than expected ...."
89. Despite the enormity of the technical problems that plagued many fields that led to a reclassification of reserves from "proved" to "unproved," the 1/26/06 Press Release made no mention of the Company's failure to properly classify reserves in accordance with SEC rules or that the period covered by the forthcoming restatement would date back to at least 1999, a fact that the
Company and Individual Defendants must have known at the time of the 1/26/06 Press Release given the very specific quantities of proved reserves - broken out by field - that were identified in the press release.
90. In addition, despite the admitted technical problems, the 1/26/06 Press Release cited to the Hydrocarbon Law passed in May 2005 and claimed that the downward revisions in Bolivia, which amounted to over half of the restated reserves, "were mainly driven by changes in the applicable legal framework in Bolivia, due to the new Hydrocarbon Law and greater knowledge of certain fields in that country and Argentina." The press release added that:
The largest part of these revisions (52%), 659 million BOE, corresponds to adjustments made for Bolivia, which has been especially affected by uncertainties generated regarding the application of the country's new Hydrocarbon Law; 509 million BOE (41 %) as a result of revisions in Argentina; and 86 million of BOE for the rest of the world.
91. Under the heading "Bolivia" the 1/26/06 Press Release added:
The new Hydrocarbon Law, enacted in May 2005, dramatically alters the applicable tax regime and the commercial and operating environment for the oil and gas industry in Bolivia. The main changes introduced by the law are:
• An increase in royalties from 18% to 50%
-26- • Existing contracts with the government must be made consistent with the terms of the new law but implementing regulations, which would specify the nature and extent of required changes, including key economic terms, have not been issued.
Tightening restrictions on the ability to sell hydrocarbon production.
These changes have had a significant impact on the anticipated economics of new developments, affected the commercial viability ofmany marginal fields, reduced the expected profitability ofexisting production and introduced commercial uncertainties that could affect the ability to fulfill existing supply contracts in the future.
92. With regard to the Sabalo and San Alberto fields that accountedfor almost 90% of the write-down in Bolivia and more than 40% of the total write down, the 1/26/06 Press Release attributed a portion of the write-down to the Hydrocarbon Law. Specifically, that:
At the present time, there is inadequate legal certainly to support a commitment to new investment in these fields. Implementing regulations under the new Hydrocarbon Law have not been published. These regulations will impact the profitability of the new investments necessary to develop future facilities.
93. Brufau also attributed a large portion of the 1.25 billion BOE revisions to the
Hydrocarbon Law, rather than admitting that technical problems had plagued Repsol's largest fields and that the Company had failed to properly reclassify those reserves in light ofthe problems and in accordance with SEC rules.
94. Specifically, on that same day, January 26, 2006, Brufau participated in a web-cast conference call with research analysts and investors. During the call, a UBS research analyst, lain
Reed, asked about the percent of the expected reserve write-down that was due to technical factors, and the percent that was due to Bolivia's Hydrocarbon Law. Reed asked:
First of all it is obvious that a fairly large portion of the write-down is due to technical factors due to pressure decline in Argentina and in your Bolivian fields. Can you say of the total of the 1.2 billion you have written down, what portion is due to technical reasons, rather than the Bolivian tax rule?
95. And Brufau responded:
Well, I said that in Argentina with the exception of the expansion of the concessions we did something like 69 million barrels. All the rest is technical. In Bolivia, I
-27- would say most belongs to the law, although the law may have been the reason for having a technical problem too. Because since we have stopped investing in Bolivia, now we have to take de-book some reserve[s] that were in our books because of that lack of investment in developing the fields. Therefore, I would say in Bolivia, most is because of the hydrocarbon law. In Argentina, most is because of technical aspects or performance of the fields.... I would say that if I have to say a rough number, it would be a 50/50 basis or something like that. [Emphasis added.]
96. As would be revealed in the Restatement (discussed below) months later, the
Hydrocarbon Law actually accounted for less than 108 million BOE, or less than 10% of the restatement. The vast majority had to do with technical problems and the failure to classify reserves in accordance with SEC rules on reporting reserves. Moreover, the Hydrocarbon Law had nothing to do with the massive write down in the San Alberto and Sabalo fields, contrary to the representation made in the January 26, 2006 disclosure of the forthcoming restatement.
97. Indeed, an oil and gas industry research analyst with Deutsche Bank issued a research report on January 27, 2006, stating that "Repsol's attractiveness has been tarnished by its reserves write-down," adding that the write-down "included a nasty surprise that 40% ofthe revision relates to technical performance of its assets, most notably in Argentina." The Deutsche Bank analyst also commented:
That the announcement of the 2005 Hydrocarbon Law has forced Repsol to downgrade its (gross) Bolivian reserves by 659 million BOE was neither a major surprise nor of significant value by our estimation. But the 509 million BOE downgrade in Argentina, of which all but 67 million BOE are due to technical, reservoir management issues, is of far greater consequence.
98. On the news of the anticipated restatement of proved oil and gas reserves, Repsol
ADSs fell $2.12 per ADS, or 7 percent, on January 26, 2006, to close at $27.99 per ADS. The
Company's ADSs continued to decline on January 27, 2006, when they fell $1.34 per ADS, or 4.79 percent, to close at $26.65 per ADS, before reaching an intra-day low of $26.55 per share. The decline in the price of Repsol's ADSs at the end of the Class Period was a direct result of the nature and extent of defendants' fraud finally being revealed to investors and the market. The timing and -28- magnitude of Repsol's ADSs price decline negates any inference that the loss suffered by Lead
Plaintiffs and other Class members was caused by changed market conditions, macroeconomic or industry factors or Company-specific facts unrelated to the defendants' fraudulent conduct.
99. On February 8, 2006, the World Markets Analysis reported that the Comision
Nacional del Mercado de Valores, Spain's equivalent ofthe SEC, announced that it had commenced an investigation into Repsol's overstatement of its proved reserves.
The Restatement
100. On July 14, 2006, Repsol finally announced the net effect of the restatement of its previously reported proven reserves when it filed its 2005 Annual Report on Form 20-F filed with the SEC (the "Restatement"). By restating its proved reserves, the Company admitted that its financial statements for each of the restated periods were not prepared in conformity with SEC criteria for reporting proved reserves and that they materially misrepresented the Company's financial condition and results of operations.
101. In summary, the Restatement made a downward revision ofRepsol's proved reserves at year-end 2005 by approximately 1.254 billion BOE, representing 25% of the Company's total reported proved reserves at December 31, 2004.
102. Specifically, the Restatement revealed that on February 22, 2005, when Repsol originally stated it had 4.926 billion BOE ofproved reserves at 2004 year-end, the amount had been overstated by 790 million BOE or 16%, and in truth Repsol's proved reserves at 2004 year-end was really 4.136 billion BOE. In addition to the 790 million BOE overstated at year-end 2004, Repsol revised its 2005 proved reserves downward by an additional 464 million BOE.
103. The Restatement reported that the amount ofthe overstated reserves at year-end 2004 was an aggregated number, and that, in truth, Repsol had overstated its reserves dating back to 1999.
-29- 1999-2002
104. The Restatement provided a summary of the estimated effects on years prior to 2003, all ofwhich related to the Company's operations in Bolivia. Specifically, the Restatement stated that proved reserves in Bolivia, mainly the Sabalo and San Alberto fields, for years prior to 2005, were restated for the following reason:
With respect to the revision of proved oil and gas reserves in Bolivia, the proved reserves reported in "Supplementary Information on Oil and Gas Exploration and Production Activities (Unaudited information)" in the Consolidated Financial Statements relating to years prior to 2005 have been restated since the treatment during years 1999 to 2004 was inadequate due to a different interpretation of the commercial aspects ofthe exportation of gas to Brazil. Particularly, proved reserves for these periods did not take into account commercial agreements for the gas exported to Brazil other than the Gas Sales Agreement ("GSA") between [Yacimientos Petroliferos Bolivianos S.A.] and Petrobras, and the contract to supply gas to the thermoelectric power plant at Cuiaba (Brazil). The reserves restatement in Bolivia affects mainly the giant gas-condensate fields of Sabalo and San Alberto....
105. Specifically, with regard to years prior to 2003, the Restatement announced a downward revision of proved oil reserves as follows:
At December 31, 1999, the aggregated effect on proved reserves volumes of the reserves restatement was a downward revision of 188 million BOE, comprising to 4% of the total proved reserves originally stated at that date.
At December 31, 2000, the aggregated effect on proved reserves volumes of the reserves restatement was a downward revision of 111 million BOE, comprising to 2% of the total proved reserves originally stated at that date.
At December 31, 2001, the aggregated effect on proved reserves volumes of the reserves restatement was a downward revision of 373 million BOE, comprising to 7% of the total proved reserves originally stated at that date.
At December 31, 2002, the aggregated effect on proved reserves volumes of the reserves restatement was a downward revision of 593 million barrels of oil equivalent, comprising 11 % of the total proved reserves originally stated at that date.
2003 and 2004
106. The Restatement also announced that the Company had revised its proved reserves at
December 31, 2004 and 2003 due to the following reasons:
-30- For Bolivia, the proved reserves restatement at December 31, 2004 and 2003 was due to not taking into account commercial agreements for the gas exported to Brazil other than the GSA and the contract to supply gas to the thermoelectric power plant at Cuiaba. For Argentina the reported volumes at the gas-condensate reservoir of Loma La Lata-Sierras Blancas, which had originally been booked on the basis of computer reservoir simulation modeling, were not sufficiently supported by actual reservoir performance. This conclusion is attributable to recent processing of technical information available in 2003 and 2004. [Emphasis added.]
107. At December 31, 2003, the aggregated effect of the Restatement on proved reserves volumes was a downward revision of 914 million BOE, amounting to 17% of the total proved reserves originally reported at year-end 2003 (5,433 million BOE). According to the Restatement,
fields in Bolivia accounted for 63% of the restated volume at that date, and the reservoir of Loma la
Lata accounted for the remaining 37%.
108. At December 31, 2004, the aggregated effect of the Restatement on proved reserves volumes was a downward revision of 790 million BOE, amounting to 16% of the total proved reserves originally reported at year-end 2004 (4.925 billion BOE). According to the Restatement, fields in Bolivia accounted for 68% of the restated volume at that date, and the reservoir of Loma la
Lata accounted for the remaining 32%.
2005
109. The Restatement revealed a downward revision in year 2005 of 464 million BOE, or
11 % from previously booked proved reserves after giving effect to the restated reserves as of
December 31, 2004. The principal revisions to proved reserves in 2005, country by country, are as follows:
Argentina (2005)
110. At December 31, 2004, the Company's proved reserves in Argentina were 2,110 million BOE, after giving effect to the restatement of prior years. In 2005, Repsol revised this amount downward by 256 million BOE or 12%. The Restatement indicated that 67 million BOE
-31- were reclassified as "non-proved" reserves because there was no certainty at December 31, 2005, that certain contractual concessions would be renewed as the result of changed legislation. The
Restatement attributed the remaining negative revision of 189 million BOE to "technical revisions, such as revisions of [gas in place] in gas fields because of adjustments of the pressure evolution, greater decline of the primary oil production and acceleration of the water cut in oil fields."
111. The Restatement detailed an array oftechnical problems affecting multiple Argentine fields that precluded a portion of the proved reserves from being classified as proved under SEC rules. Specifically, the revision of previous estimates were made to:
a) The Chihuido de la Sierra Negra ... reservoir for which the new evaluation implies a negative revision of 40.2 million barrels of oil equivalent ... for technical reasons relating to the production performance of the reservoir that has been adversely affected by multiple factors, including the effect of interrupted production in late 2004 and problems with the injection wells and the handling of the produced fluids, which has caused a downward deviation in short and medium-term production estimates.... The total revision, taking into account both reasons, amounts to 49% of the reservoir proved reserves at December 31, 2004....
b) The Ramos/Chango Norte-Porcelana gas-condensate field, where the updated analysis of the pressure evolution by the material balance method resulted in a negative revision of the net proved reserves of 41.4 million barrels of oil equivalent ... which represent 39% of the field proved reserves at December 31, 2004....
c) The Porton/Chihuido of the Salina/Chihuido of the Salina Sur reserve area, where the net proved reserves were reduced by 21.7 million barrels of oil equivalent ... principally due to the volumetric adjustments of the GIIP of the gas-caps and its corresponding liquid hydrocarbons....
d) The Aguada Toledo-Sierra Barrosa reservoir, for which the review of the production-reinjection history, together with the evolution ofthe pressures ofthe gas- cap and its analysis by the material balance method resulted in a negative revision of 21 million barrels of oil equivalent ... of which 28% have been reclassified as non proved reserves....
e) The Lomas del Cuy/Los Perales reserve areas, formed by oil reservoirs, located in the western flank of the Golfo de San Jorge basin, where there has been a global negative revision of 17.3 million barrels of crude oil, 17% of the crude oil proved reserves at December 31, 2004.... The fundamental reason for the negative revision is the increased exponential decline used by Gaffney, Cline & Associates to estimate
-32- the proved reserves, for the primary oil recovery, of wells drilled before 2001 in Los Perales and Lomas del Cuy....
Bolivia (2005)
112. At December 31, 2004, the Company's proved reserves in Bolivia were 722 million
BOE after giving effect to the Restatement. In 2005. Repsol made a negative revision of the previous restated amount by 122 million BOE or 16%.
113. Notably, the Hydrocarbon Law that altered the applicable tax regime and the
commercial and operating environment for the oil and gas industry in Bolivia accounted for, at most,
108 million BOE, just a small fraction of the total 1.254 billion BOE affected by the Restatement,
and its effect was limited to the Yapacani and Rio Grande Fields. Rather, the Restatement attributed
a significant portion of the revision to "changes in performance in some fields," which stood in stark
contrast to the January 26, 2006 announcement ofthe Company's intent to restate and comments that
Brufau made during the conference that day (as detailed above).
114. Specifically, the Company stated that the revision of previous estimates in 2005
attributed to Bolivia were made to:
The Yapacani field where, mainly as a result of the new Hydrocarbon Law, the new investments, for the previously planned expansion ofthe gas treatment plant and the infrastructure to increase the transportation capacity of the Boomerang area pipeline, have been put in hold. This decisions (sic) have resulted in a negative revision of 55 million barrels of oil equivalent ... which represented 63% of the field restated proved reserves at December 31, 2004.
The Rio Grande field, where there was a negative revision by 53 million barrels of oil equivalent ... which represented 55% of the field restated proved reserves at December 31, 2004. The causes of that revision, which made the projects marginal, were the negative results of the wells workovers made during 2005 in the gas- condensate reservoirs of Cajones, San Telmo Wm and San Telmo X, its subsequent technical re-evaluation and the negative impact ofthe tax system imposed by the new Hydrocarbon Law on the profitability of new investments necessary for their development.
The San Alberto field for which the new technical estimate, that implied a reduction of the proved GIIP estimate due to the volumetric re-evaluation that takes into
-33- account the latest geological and petrophysical review and that is in line with the dynamic estimate by material balance, has led to a negative revision of net proved reserves of 35 million barrels of oil equivalent . . . which represented 15% of the filed restated proved reserves at December 31, 2004.
Venezuela and the Rest of the World
115. In Venezuela, the proved reserves were revised downwards by 58.4 million BOE. Of
this revision, 50 million BOE was due to contractual reasons related to operating service agreements,
and the rest of the negative revisions were attributed to "technical adjustments."
116. The negative revisions of the proven reserves for the "rest of the world," where
Repsol had restated previously booked proved reserves, included Algeria and Libya, where proved
reserves were revised downwards by 17.2 million and 10 million BOE, respectively, primarily as a
result of changed contractual circumstances.
117. As indicated in the following chart that Repsol attached to the Restatement, in sum,
the net effect of the Restatement was as follows:
Proved developed and undeveloped reserves of crude oil, condensate, natural gas liquids and natural gas
(As restated)
Thousands of Barrels of Oil Equivalent
Africa and Central and Rest of Total Spain Middle East Argentina South America the World
Reserves at 31 December 2002 (1) 4,668 ,477 4,242 246,275 3,079 ,366 1,322.849 15,745
Revision of previous estimates (444,824) 1,231 9,227 (462.378) 8,401 (1,306) Increase due to improvements in recovery techniques 35,105 1,154 Extensions and discoveries 191.307 4,125 26.712 160,470 Purchase of reserves 48'.289 951 577 480.7,0 - Sale of reserves
Production (413,348) ( 1,481) (28,673) (277,423) (105,510) (262)
Reserves at 31 December 2003 (2) 4,519,006 4.974 232,684 2,400,229 1.866,941 14.178 Revision of previous estimates (98,248) 147 (17,765) (61,123) (19,559) 51
Increase due to improvements in recovery techniques 19,603 - - 18,124 1,478 - Extensions and discoveries 119,231 4,219 29,,86 78.608 7,038 Purchase of reserves 16,378 16,378 - -34- Sale of reserves (13,363) (13.363)
Production (426,671) (1,373) (24,942) (276,193) (124,052) (111)
Reserves at 31 December 2004 (3) 4,135,956 3,749 194,195 2 , 110,424 1 , 819,795 7,794 Revision of previous estimates (463,907) 907 (25,519) (255.819) (153,513) 37
Increase due to improvements in recovery techniques 7,129 7.129 - - Extensions and discoveries 39,6224 31 19.976 19,617 Purchase of reserves 44,489 44.489 Sale of reserves (19,277) ((9.277) --
Production (415,886) (1,259) (24, 175) (257,615) (132 ,720) (118)
Reserves at 31 December 2005 (4) 3,328,128 3,397 144,533 1,624,095 1,548,391 7,712 (1) Including 333,315 thousand barrels of oil equivalent relating to the minority interests of Andina (2) Including 326,525 thousand barrels of oil equivalent relating to the minority interests of Andina (3) Including 353,303 thousand barrels of oil equivalent relating to the minority interests of Andina (4) Including 268,626 thousand barrels of oil equivalent relating to the minority interests of Andina
Accounting Consequence of the Restatement
118. Astonishingly, faced with a restatement that removed 1.25 billion BOE from its books
at a time when global crude oil prices had sky-rocketed, as demonstrated by the graph below, Repsol
claims that the Restatement had only a minimal impact on its balance sheet.
Exhibit 3 Crude Oil Price : New and Previous Baselines
100 Brent. USS per b .., i r' : -gaa i I t n ': -W e) . `? O0
1 =-- I.s^lirns
i5o
25
55
4Q CIO$
^..rc« I' _ i,le- else rch ta)'t::.F ,:
(April 21 , 2006, based on Brent North Sea crude oil reference price)
119. On January 26, 2006, when Repsol announced its anticipated restatement, the
Company indicated that the expected downward revision in proved reserves had caused the
-35- Company to test the affected production assets for impairment, as determined on the basis of discounted expected net cash flows. According to the January 2006 announcement of Repsol's intention to restate reserves downward, an initial estimate ofthe aggregate impairment charge for the specific assets affected by the revisions (i.e., the proved reserves removed from the books) as of
December 31, 2005, "would amount to less than €50 million euros," an astonishingly small impairment charge in light of the enormous reduction of over 1.25 billion BOE or 25% of Repsol's proved reserves as of December 31, 2004.
120. In the January 26, 2006 disclosure, Repsol claimed that the estimated impairment charge, as a percentage of the Company's total production assets, was much smaller than the reduction in reserves, as a percentage of Repsol's total reserves, mainly due to the following factors:
The production assets affected by the reserve reduction are carried on our books at a relatively low level compared to their recoverable value due to current and expected high hydrocarbon prices. As a result, even after the effect of the reserve reduction, the remaining recoverable value of most of these assets continues to be above their book value.
In addition, the decline in production at the fields affected by the reserve reduction occurs predominantly in the later years of field life. As a result, the reduction in the present value of the net cash flows resulting from this decline is substantially lessened.
121. On June 16, 2006, when it announced the findings ofthe "independent" investigation,
Repsol said that the Company's net asset impairment charge included in its consolidated statements of income for the year ended December 31, 2005, and attributable to the reduction of proved reserves would be just €23 million.
122. While the book value of the reserve reduction may only be €23 million, as the
Company claims, in an arm's-length transaction the value of over 1.25 billion BOE would be well in excess of several billion dollars.
-36- 123. According to data provided in the Restatement, the following table shows the purported present value ofthe future net income for 2004 and 2005 related to the Company's proved oil and gas reserves as restated:
Total Millions of Euros (Restated) At 31 December 2004: Future cash flows 54,143
Future development, production and abandonment costs 18 , 862)
Future net cash flows before taxes 35,281 Future income tax expenses (11.587)
Future net cash !lows after taxes 23,694 Effect of discounting at 10",%% (9,318)
Present value (1) 14, 377
At 31 December 2005: Future cash flows 69,362
Future development, production and abandonment costs (24.794)
Future net cash flows before taxes 44,568 Future income tax expenses (15,177)
Future net cash flows after taxes 29,391 Effect of discounting at 10%, (10,335)
Present value (2) 19,056
(1) Including EUR 417 million relating to the minority interests of Empresa Petrolera Andina, S.A. (2) Including EUR 442 million relating to the minority interests of Empresa Petrolera Andina, S.A.
-37- 124. The following table is based on information provided in the Restatement and shows the detail of the changes in the present value of future net income for 2004 and 2005 related to the proved oil and gas reserves as restated:
Total Millions of Euros (Restated)
Balance at I January 2004 13,377
Changes due to sale or transfer prices or future production costs 3,710
Changes in future development Costs (1,085)
Oil and gas sales and transfers in the period (3,355) Net changes due to extensions, discoveries and improvements in the 781 recovery of reserves
Net changes due to purchases sales of assets 56
Net changes due to revisions of Reserves (201)
Previously estimated development costs incurred in the year 404
Effect of discounting to a different date and exchange rate effect 122
Other non-specific changes 353
Changes in income tax 215
Net change 1,000
Balance at 31 December 2004 (1) 14,377
Changes due to sale or transfer prices or future production costs 9,053
Changes in future development Costs (1,055)
Oil and ,as sales and transfers in the period (4.477)
Net changes due to extensions, discoveries and improvements in the 654 recovery of reserves Net changes due to purchases/sales of assets 0.34 Net changes clue to revisions of Reserves (2,860)
Previously estimated des clopment costs incurred in the year 778
Effect of discounting to a different date and exchange rate effect 3,482
Other non-specific changes
Changes in income tax (1,235) Net change 4,679
Balance at 31 December 2005 (2) 19,056
(1) Including EUR 417 million relating to the minority interest of Empresa Petrolera Andina, S.A. (2) Including EUR 442 million relating to the minority interests of Empresa Petrolera Andina, S.A.
-38- 125. The Restatement also included the following table setting forth the reconciliation of present value of future net income as restated with present value of future net income as originally reported for the years 2004 and 2003:
Millions of euros 2004 2003 As originally reported at December 31 14,887 14,184 Effect of the Reserves Restatement Amounts at beginning of year (807)
Movements during the year 297 (807) Total (1) (510) (807) At December 31 as restated 14_377 13.377
(1) Including @102 and £ 140 million as of December 31, 2004 and 2003 respectively related to minority interest of Empresa Petrolera Andina, S.A.
Reporting Proved Oil and Gas Reserves
126. The term "reserves" generally describes the total volume of future oil and gas 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. When valuing the fundamentals of an oil and gas exploration and production company, Wall Street research analysts and investors consider both "proven reserves," meaning the in-ground petroleum reserves that satisfy SEC and FASB proven reserve reporting requirements (as detailed below), and oil and gas reserve replacement ratios ("RRR"), meaning the rate at which an oil and gas company identifies new proven reserves to offset the oil and gas that is produced ("pulled" or "lifted" from the ground) each year.
127. The level of proven oil and gas reserves at year-end and the rate at which an oil and gas exploration and production company replaced reserves depleted during the year are two of the most important pieces of information that the financial sector analyzes when comparing and
-39- contrasting the past and prospective operational performance of oil and gas exploration and production firms. Accordingly, standardized methods ofreserve reporting are necessary for analysts and the public at large to put a value on the assets of an exploration and production company, such as Repsol, and to make comparative analyses between competing companies.
128. In the early days ofthe oil industry, companies were measured by production rates, in which the practice was to produce as much oil and gas as quickly as possible. The growth of integrated oil companies - such as Repsol - with their need to plan sources of petroleum supply for
"downstream" petroleum refining and marketing operations resulted in the need to measure the ability of the company's oil and gas reserves to produce oil and gas over a long period of time. This led to the development of methods to quantify "original oil-in-place," producible volumes, future productions rates, and other matters that fall under the purview of petroleum engineering. As considerations of economic conditions were added into the analysis, such as discounted cash flow evaluation methods, there existed a need to establish a uniform method to define and report "proven" oil and gas reserves.
SEC and FASB Requirements
129. Financial Accounting Standard 69 ("FAS 69") (Disclosures about Oil and Gas
Producing Activities), which the Financial Accounting Standards Board (FASB) issued in November
1982, is the accounting standard required for all companies quoted on the NYSE, including foreign companies such as Repsol, to report the amount of oil and gas reserves. FAS 69 provides the reporting and accounting rules and reporting formats for: (a) proved oil and gas reserve quantities;
(b) capitalized costs relating to oil and gas producing activities; (c) costs incurred for property acquisition, exploration, and development activities; (d) results of operations for oil and gas producing activities; and (e) a standardized measure of discounted future net cash flows relating to proved oil gas reserve quantities (it requires future production revenues to be calculated by applying -40- year-end oil and gas prices to year-end reserves, and bases future costs on year-end costs and the assumed continuation of existing economic conditions).
130. Further, the SEC defined what is meant by the various terms incorporated into FAS
69, such as "oil and gas producing activities," "exploration costs" and, perhaps most importantly,
"proved reserves," in Rule 4-10 of Regulation S-X (Financial Accounting and Reportingfor Oil and
Gas Producing Activities Pursuant to the Federal Securities Laws and the Energy Policy and
Conservation Act of 1975), 17 CFR § 210.4-10 (a) ("Rule 4-10"). The thrust of Rule 4-10 is that oil and gas companies may "disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions."
131. Rule 4-10 provides that oil and gas reserves should be sub-divided into categories of
"proved" and "unproved" reserves. Unproved reserves are further divided into "probable" and
"possible." These categories are essentially based on the relative risk of recovery of the reserves in each category. The risk is not, however, in the existence of the volumes of gas or oil in the reserves, but the likelihood that the expectations for future production and economic conditions (i.e., commodity prices) will be met. The risk is accounted for by assigning the anticipated future volume of oil production to a certain category ofreserve based upon that risk. The overstatement ofreserves at issue in this action involves Repsol's false and misleading statements related to the Company's
"proven" reserves, as opposed to "unproven" reserves.
132. Rule 4-10(a) provides the definition ofproved reserves for SEC 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 operations conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of
-41- changes in existing prices provided only by contractual arrangements, but not on escalations based on 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 and current economic conditions as of each balance sheet date. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing natural forces and mechanisms of primary recovery are included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed 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 undrilled 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.
133. Repsol's definition of "proved reserves," "proved developed reserves" and "proved undeveloped reserves," as stated in Repsol's 2003 20-F and 2004 20-F, is, in all material respects, identical to the SEC's definition. Specifically, in its 2003 20-F and 2004 20-F, Repsol stated that:
Proved Reserves : Proved oil and gas reserves are the estimated volumes of crude oil, natural gas and others liquid hydrocarbons which geological and engineering data demonstrates with reasonable certainty that can be extracted from known reservoirs in future years under existing economic and operating conditions, such as prices and costs as of the date of the estimates. Prices include consideration of changes in existing prices only by contractual arrangements, but not of escalations based upon future conditions.
Proved Developed Reserves : Proved developed reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods and current economic conditions as of each balance sheet date. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing natural forces and
-42- mechanisms of primary recovery are included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.
Proved Undeveloped Reserves : Proved undeveloped 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, but does not include reserves attributable to any acreage for which an application of fluid injection or other improved recovery techniques is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. Reserves on undrilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation.
SEC Increases Its Scrutiny of Reserve Reporting Requirements
134. By 1999, the SEC began to intensify its scrutiny of oil company reserves, and in 2000 and 2001, the Commission's staff issued interpretive guidance on the disclosure ofproved reserves in accordance with Rule 4-10. This guidance included Division of Corporate Finance: Current
Accounting and Disclosure Issues, June 30, 2000, and Division of Corporate Finance: Frequently
Requested Accounting and Financial Reporting Interpretations and Guidance, March 30, 2001.
135. In the guidance, the SEC staff:
(i) Emphasized the conservatism underlying the definition of"proved reserves";
(ii) Highlighted that "[t]he concept of reasonable certainty implies that, as more technical data becomes available, a positive, or upward, revision is much more likely than a negative, or downward, revision";
(iii) Specifically advised that, in "developing frontier areas ... [i]ssuers must demonstrate that there is reasonable certainty that a market exists for the hydrocarbons and that an economic method of extracting, treating and transporting them to market exists or is feasible and is likely to exist in the near future .... Significant lack ofprogress on the development of such reserves may be evidence of a lack of commitment. Affirmation ofthis commitment may take the form of signed sales contracts for the products;" and
(iv) Noted that with respect to hydrocarbon volumes whose production depends on the extension of government permits or licenses, indicated that automatic renewal of such permits or licenses "cannot be expected ... unless there is a long and clear
-43- track record which supports the conclusion that such approvals and renewals are a matter of course."
136. When the fiscal terms of a petroleum license are changed, such as when the host government's share ofproduction is increased or when taxes and royalties are increased, the impact on the producer may be a reduction in the net volume of produced oil and gas to the producer's
account, and thus the producer must make a reduction in net proved reserves. In other words, proved reserves must be decreased if the volume of expected production is decreased because of existing
economic factors.
137. Contract changes will also reduce the share of unproduced oil and gas in the ground
(or "proved reserves") and the future value and net present value of the oil and gas in the ground.
Under SEC rules, contract changes that impact the volume and value of a producer's share ofoil and
gas reserves require a revision of the producer's proved reserve estimates. This is because the
"existing economic and operating conditions" have been changed.
138. Furthermore, volumes of oil and gas can be included as proved reserves only if they
are expected to be produced during the term of a license. If there is no assurance that a license will
be extended beyond its expiration date, volumes of oil and gas that will be produced after the license
terminates cannot be included as proved reserves. Similarly, gas reserves may only be classified as
"proved" if there is the infrastructure to produce them (or planned and financed to be constructed)
and a contract to sell the production (a market). If, for example, a major natural gas discovery has
no market (i.e., a pipeline to deliver the gas to a liquid natural gas plant), it cannot be classified as
"proved."
139. Petroleum reserves may also be required to be adjusted due to changes in
performance of an oil field. Reserve estimates are based on mathematical formulae that incorporate
direct and indirectly measured and assumed empirical data concerning the character ofthe producing
-44- reservoir. These parameters include, but are not limited to, the area and thickness of the reservoir; the geological continuity of the reservoir; the porosity (void space) and permeability (fluid conductivity) of the reservoir; the percent water, gas and oil saturation; the pressure ofthe reservoir; initial production rates; the rates at which production and reservoir pressures decline; and recovery factors for the gas and oil in place (typically 70% of the gas might be recovered and perhaps only
30% of the oil in place in the reservoir on primary recovery).
140. If new geological data become available as a result of new drilling or seismic imaging, then reserves must be re-calculated to reflect the new data. An example might be the assumption that a reservoir sand had uniform thickness and porosity and permeability across the undrilled flank of a new producing field, when in fact, further development drilling indicated that the sand was actually much thinner and of poorer reservoir quality (lower porosity and permeability, higher water saturation) than originally assumed.
141. Changes in reservoir performance also require revisions of earlier reserve estimates.
Future production rates and recovery factors are forecasted based on initial production rates and initial pressure declines over time. Actual production rates and pressure declines may vary from forecasted rates due to the reservoir geological variation that was not initially recognized; production at rates above or below forecasts due to market restrictions; and production at too high rate resulting in reservoir damage and a reduction in recovery factor.
142. Importantly, reservoir performance problems usually become apparent over time. It is rare to suddenly have a significant production or pressure drop, except where there is a mechanical failure (which can usually be fixed and will not impact reserves). Production rates and pressures are typically measured daily, and increasing water cuts (percent of water in the oil and gas production stream) occur over many months and years in a mature field.
-45- 143. As a result of the foregoing, the Company's financial statements filed with the SEC during the Class Period were also materially false and misleading.
144. Defendants knowingly or recklessly made numerous false and misleading statements concerning the Company's business and financial results that caused the price of the Company's
ADSs to become and remain artificially inflated throughout the Class Period, causing harm and damages to Lead Plaintiffs and other Class members when the truth was revealed and the inflation in the price of the stock caused by the defendants' misrepresentations and omissions came out as the price of the stock declined.
145. As an initial matter, and as has now been admitted by the Company by virtue of
Restatement as more particularly set forth above, the Company did not comply with Rule 4-10 and
FAS 69 in estimating and classifying its reserves before and during the Class Period, and therefore, statements about the quantity of proved reserves, the present value of future net income from the proved reserves, and regarding the Company's compliance with SEC and FASB rules on estimating and reporting proved reserves were materially false and misleading.
Pre-Class Period Materially False and Misleading Statements
146. As Repsol has now admitted by virtue of the Restatement, its reported proved reserves were materially overstated, and thus false and misleading, since at least year-end 1999.
Specifically, in its annual reports filed with the SEC on Form 20-F corresponding to each of the following years, Repsol stated that the quantity of the Company's proved reserves at year-end were as follows:
-46- As Reported (in Year-End millions of BOE)
1999 4,535
2000 4,778
2001 5,606
2002 5,261
2003 5,433
147. The statements about the quantity of Repsol's proved reserves referenced above in
¶146 were materially false and misleading when made because, as was disclosed for the first time in the Restatement, Repsol had materially overstated its proved reserves since at least 1999, and the year-end aggregated effect of the overstatement was 188 million BOE at 1999; 111 million BOE at
2000; 373 million BOE at 2001; 593 million BOE at 2002; and 914 million BOE at 2003.
148. Moreover, the annual reports that Repsol filed with the SEC on Form 20-F for years ended 1999 through 2004 stated that Repsol's proved reserves were estimated "in accordance with guidelines established by the Securities and Exchange Commission and accounting principles set by the Financial Accounting Standards Board." These statements were materially false and misleading when made because, as the Company has now admitted, its reported proved reserves had not been classified in accordance with SEC guidelines or FASB principles during these periods.
149. The statements referenced above in ¶T 146 and 148 remained alive and uncorrected throughout the Class Period.
-47- Materially False and Misleading Statements Made During the Class Period
150. The Class Period begins on February 22, 2005. On that date, Repsol issued a press
release reporting the Company's 2004 year-end financial results and the Company's proved reserves
as of December 31, 2004. The press release stated, in pertinent part, as follows:
". . . in compliance with the most strict Securities and Exchange Commission (SEC) standards, under the caption `revisions of previous estimates', proved reserves were revised downward by 4.1 %, to 4,926 million barrels of oil equivalent (boe)." [Emphasis added.]
151. That same day, defendants Brufau and Manas participated in a web-cast conference
call with investors and with Wall Street research analysts who reported on Repsol. During this call,
Brufau said, in pertinent part, as follows:
"At year-end, our Company had 4,926m [million] barrels of oil equivalent in proved reserves . This implies a negative reserves replacement ratio for the year...." [Emphasis added.]
152. Brufau further added that:
... in reserve what has happened is that we completed our commitment about reviewing all the reserves that were not operated by us. That is the first thing that happened which affected some of the big assets that we have mainly in Trinidad, Tobago and Argentina. And as a consequence of that process and following very strictly the SEC's stipulations, the reserves were down by a net, as you know, of 223m [million] barrels. [Emphasis added.]
153. The statements referenced above in ¶¶150-152 were materially false and misleading when made because, as the Company now admits, Repsol did not adhere to SEC standards when estimating its reported proved reserves, and Repsol's reported proved reserves at December 31,
2004, had, in reality, been overstated by 790 million BOE or 17%. The statement that Repsol had written down 4.1 % of its reserves was also materially false and misleading when made because the write-down was in fact 5.3 % of that Repsol's reserves after giving effect to the Restatement.
-48- 154. On June 30, 2005, Repsol filed its 2004 20-F, which defendants Brufau and Manas both signed and certified in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the
"Act"). The 2004 20-F stated that:
Repsol YPF estimates that at December 31, 2004 it had proved net oil and gas reserves ofapproximately 4,926 million barrels ofoil equivalent, a 9.34% decrease in comparison to 5,433 million barrels of oil equivalent at December 31, 2003. Reserves at December 31, 2003 represented a 3.27% increase from 5,261 million barrels of oil equivalent at December 31, 2002. The decrease in proved net oil and gas reserves as of December 31, 2004 compared to such reserves as of December 31, 2002 was 6.37%. The reserves replacement ratio, excluding acquisitions and sales made during each respective year, was -19.6% and 25.0% ofthe annual production in 2004 and 2003, respectively, or -18.9% and 141.7% ofthe annual production in 2004 and 2003, respectively, including new acquisitions and sales.
As a result of the joint analysis with independent engineers and additional information from various fields, proved reserves have decreased by 222.7 million barrels of oil equivalent (4.1% of the initial reserves). [Emphasis added.]
155. The statements referenced above in ¶154 were materially false and misleading when made because, as the Company now admits, defendants overstated Repsol's 2004 year-end reserves by 790 million BOE, or 16% of the proved reserves originally reported as of December 31, 2003; overstated 2003 year-end reserves by 914 million BOE, or 17% of the total reserves originally stated as of December 31, 2002; and overstated 2002 year-end reserves by 593 million BOE or 11% ofthe total reserves originally stated as of December 31, 2001. The statement that Repsol had written down 4.1 % of its reserves was also materially false and misleading when made because the write- down was in reality 5.3% ofRepsol's proved reserves after giving affect to the Restatement.
156. The 2004 20-F also stated that:
Unless otherwise indicated below, Repsol YPF estimated its proved oil and gas reserves as ofDecember 31, 2004, 2003 and 2002 in accordance with guidelines established by the Securities and Exchange Commission and accountingprinciples set by the Financial Accounting Standards Board.
-49- Repsol YPFprepares its assumptions and estimates regarding oil andgas reserves taking into consideration the rules and regulations establishedfor the oil and gas industry by the U.S. Securities and Exchange Commission and the accounting principles laid down by the U.S. Financial Accounting Standards Board. In accordance with these rules, proved oil and gas reserves are the estimated volumes of crude oil, natural gas and other liquids and hydrocarbons which geological and engineering data demonstrate with reasonable certainty that can be extracted from known fields in future years under existing economic and operating conditions, such as prices and costs as of the date of the estimates.
The other proved reserves in each year were estimated by the Company in accordance with the rules and regulations established for the oil and gas industry by the U.S. Securities and Exchange Commission and the accounting principles laid down by the Financial Accounting Standards Board which govern stock market information practices in the U.S.A. [Emphasis added.]
157. The statements referenced above in ¶156 were materially false and misleading when made because, as the Company had now admitted, defendants had not estimated the Company's proved oil and gas reserves as of December 31, 2004, 2003 and 2002 in accordance with SEC rules or FASB accounting standards.
158. The 2004 20-F also stated that the present value of future net income from the proved reserves was €14,877 and €14,184 million in fiscal 2004 and 2003 respectively. This statement was materially false and misleading when made because, as the Company now admits, the Restatement gave rise to a reduction of $807 million and $510 million dollars (as reported on page 22 ofthe 2004
20-F - elsewhere this amount is recorded in euros) in the standardized measure of discounted future net cash flow in 2003 and 2004, respectively.
DEFENDANTS' SCIENTER
159. Throughout the Class Period, defendants Brufau and Mafias acted intentionally or with reckless disregard for the truth when they issued materially false and misleading statements that overstated Repsol's proved oil and gas reserves and claimed the reserves were classified and
-50- reported in "strict compliance" with FASB accounting standards and the rules and regulations established for the oil and gas industry by the SEC.
160. Factors giving rise to a strong inference of scienter include, among others, the following: (1) the nature, magnitude and time period covered by the Restatement; (2) conclusions of a Repsol internal investigation that depict a complete absence of meaningful internal controls along with a pervasive lack ofunderstanding of SEC rules; (3) a write-down of 4.1 % ofproved reserves at year-end 2004 that raised a glaring red flag over Repsol's reserves auditing process; (4) personnel changes and "urgent" auditing reforms that occurred just after the Individual Defendants assured investors of "strict compliance" with SEC rules on reserve reporting; (5) the Company's historical lackluster performance in replacing its reserves; (6) revelation of the reserve overstatement only one day after Bolivian authorities threatened to register the reserves with the SEC (and thereby possibly reveal the overstatement); and (7) various other indicators of scienter as described more particularly below.
The Nature, Magnitude and Duration of the Overstatement Supports a Strong Inference of Scienter
161. The fact that the Company has restated its proved oil reserves for 1999 through 2004
(and wrote down more down in 2005), constitutes an admission that Repsol reported falsified financial statements throughout the Class Period. Not only does the restatement confirm that the
Company's reported financial results were materially false and misleading, but based on the nature, magnitude and duration ofthe improper reserve accounting practice, all ofwhich violated FASB and
SEC rules, the Company's restatement constitutes strong circumstantial evidence that defendants
Brufau and Manas knew, or at a minimum, recklessly disregarded the overwhelming lack ofinternal controls, including a lack of proper understanding of and training on the SEC requirements for
-51- booking proved reserves and the absence of a meaningful deliberative process for determining proved reserves and resolving disputes about their classification.
162. Moreover, the fact that the accounting irregularities involved the classification ofthe
Company's most important assets - its oil reserves - that were basic and essential for the future prospects of the Company, also gives rise to the inference that defendants knew, or recklessly
disregarded, an auditing process that had "systemic flaws," as the Company now admits (as
described below).
163. Further, the sheer magnitude and duration of the overstatement also demonstrates
defendants' scienter. The overstatement admittedly involved over 1.25 billion barrels of oil
equivalent, amounting to over 25 percent of the Company's reported reserves at 2004 year-end, and
that dates back to 1999. Indeed, in reaction to the 20 percent restatement of proven reserves that
Shell Oil announced in January 2004, Lynn Turner, a former SEC chief accountant, stated that "a 20
percent restatement ofproven reserves is a humungous error," and added that "...to have missed its
proven reserves by that much is not an oversight. It's an intentional misapplication of the SEC's
rules."
Findings of an Internal Investigation Support a Strong Inference of Scienter
164. The findings of an "independent" internal investigation (the "Internal Investigation")
conducted by the Audit and Control Committee of the Board of Directors with the assistance of
outside counsel King & Spaulding regarding the facts and circumstances surrounding the
Restatement give rise to a strong inference that defendants Brufau and Manas knew, or were reckless
in not knowing, that Repsol's proved reserves were not classified in a manner that complied with the
"strictest criteria from the Securities and Exchange Commission," and thus they had no reasonable
basis to announce that Repsol had 4,925 million BOE in "proved" reserves at 2004 year-end.
-52- 165. On June 16, 2006, Repsol disclosed the findings of the Internal Investigation,
indicating that they were based on, among other things, 120 interviews that King & Spaulding held
with over 75 individuals, including former employees and management staff, in Spain and
Argentina, field engineers, technical directors, engineering consultants and reserves auditors who rendered services to the Company. King & Spaulding also reportedly collected and reviewed (the
June 16, 2006 announcement of the conclusions stated "revised" not reviewed) a large number of
documents, amounting to more than 2 million pages, and had access to the files and documents
contained in the computers of over 60 employees.
166. The Internal Investigation's conclusions attributed the overstatement of proved reserves to "systemic flaws" in Repsol's reserve reporting functions - dating back at least to 1999 -
and revealed an astounding lack of proper internal controls, over at least a five-year period, with regard to auditing and reporting the Company's most significant assets - its oil reserves - in a manner that complied with SEC and FASB rules. The June 16, 2006 announcement admitted that:
the process for determining reserves with respect to the Company's fields in Bolivia and Argentina was flawedfrom 1999 to 2004 and Company personnel at times failed to apply properly U.S. Securities Exchange Commission ("SEC") criteria for reporting proved reserves. [Emphasis added.]
167. The Internal Investigation revealed that the failure to adhere to proper SEC reserve reporting requirements throughout the Class Period was principally due to:
• a "lack of proper understanding of and training on the requirements of the SEC for booking proved reserves";
• "undue optimism regarding the technical performance of the fields and (for Bolivia) commercialization of the gas and focus on the Company's replacement ratio";
• the "absence of a meaningful deliberative process for determining proved reserves, and resolving disputes";
-53- • an "unwillingness to accept personal responsibility for reporting internally adverse facts regarding reserves and a corresponding tendency to view such issues as falling within another person's or department's jurisdiction"; and
that "over time problems emerged and grew in the absence of delineation of responsibilities for booking proved reserves and in the absence of clear directives pre-2005."
168. The announcement of the Internal Investigation's findings also revealed that King &
Spalding had prepared an investigative report for the Audit and Control Committee setting forth the findings of the Internal Investigation. A summary of King & Spaulding's findings was attached to the June 16, 2006, announcement, and stated, in part, as follows:
We conclude that the reserves process with regard to the particular Argentine and Bolivian assets was flawed from 1999 to 2004 and that Company personnel at times failed to apply properly, as to those assets, the SEC criteria for reporting proved reserves. From 1999 to 2004, the reserves group was included within the E&P business division, and did not consider itself to have an auditing function. [Emphasis added.]
169. The King & Spaulding summary of findings also stated that:
The Company did not have a formal reserves manual or formal process before 2002, although reserves personnel were familiar with the SEC criteria. In 2002, the Company adopted a formal reserves manual and instituted a triennial external audit review process. However, this manual was not disseminated to allpersonnel who needed to understand the SEC requirements for proved reserves, and it did not provide a dispute resolution procedure. [Emphasis added.]
170. The conclusions ofthe Audit and Control Committee's Internal Investigation and the summary of findings by King & Spaulding reveal that even the slightest inquiry by the Individual
Defendants, particularly prior to February 22, 2005 when Repsol announced a downward revision of its 2004 year-end reserves by 222.7 million BOE or a 4.1 %, would have revealed that there was no reasonable basis to believe that the proved reserves reported on the first day of the Class Period had been classified in accordance with SEC rules.
171. In addition to the announcement of the Internal Investigation's conclusions attached thereto were various recommendations of King & Spaulding to remedy the Class Period weaknesses
-54- in the Company's internal controls, and weaknesses dating back to 1999. The recommendation included, among others: (i) "adding a requirement that all personnel involved with the reserve booking process sign a Certificate of full disclosure of data in connection with internal and external audits"; (ii) that "[p]ersonnel at the business units and in the fields must take greater responsibility for the reserves process"; (iii) that "the [reserves control] group could benefit from new leadership and new hires ... [who] would provide a benefit and underscore management's commitment to apply the best practice in booking reserves"; and (iv) that Repsol should "hire additional experienced reserve evaluators (especially those with experience with gas fields) to bolster the [reserves control] group and the technical teams at the business units, and to facilitate the periodic rotation ofreserves personnel to different fields."
172. Each of these recommendations - particularly that the reserves control group "could benefit from new leadership" and that the Company lacks sufficient experienced reserve auditors constitutes strong circumstantial evidence that the Individual Defendants knew, or at a minimum, recklessly disregarded the complete breakdown in internal controls and accounting practices related to the Company's most important asset - its oil reserves.
The 4.1% Reserve Write-Down at Year-End 2004 Supports a Strong Inference of Scienter
173. On February 22, 2005 (the first day ofthe Class Period), Repsol issued a press release that reported the Company's fiscal 2004 results and announced a downward revision of 222.7 million BOE, then representing 4.1 % of the Company's reported proved oil and gas reserves at
December 31, 2003 (after giving effect to the Restatement, the 2004 year-end write down was actually 5.3%).
174. Specifically, the February 22, 2005 press release stated, in part, that:
... in compliance with the most strict Securities and Exchange Commission (SEC) standards , under the caption "revisions ofprevious estimates," proved reserves were -55- revised downward by 4.1%, to 4,926 million barrels of oil equivalent (boe). This downward adjustment corresponds to the gas fields in Ramos and Loma La Lata, and Trinidad & Tobago, as well as the Albacora Leste oil field. [Emphasis added.]
175. The 2004 20-F reported that the 4.1 % downward revision resulted from, among other things:
An overall negative revision in Trinidad and Tobago of 148.4 millions of barrels of oil equivalent .. . mainly due tofull compliance with the SEC's definition ofproved reserves. [Emphasis added.]
176. On the same day as the February 22, 2005 press release announcing the 4.1% downward revision, defendants Brufau and Mafias participated in a web-cast conference call with investors and Wall Street analysts. During the call, defendant Brufau added:
... what has happened is that we have complete[d] our commitment about reviewing all the reserves that were not operated by us. That is the first thing that happened which affected some of the big assets that we have mainly in Trinidad, Tobago and Argentina. And as a consequence of that process andfollowing very strictly the SEC's stipulations, the reserves were down by a net, as you know, of223m barrels. [Emphasis added.]
177. According to a research report issued that same day by a Morgan Stanley research analyst, the markets were "shocked by the 4.1 % reserve downgrade" and that Repsol had "one ofthe poorest organic reserve replacement ratios ofjust 33% during the year."
178. The "shocking" 4.1% downgrade occurred just months after defendant Brufau assumed the helm at Repsol, and any meaningful investigation into the facts and circumstances surrounding the downgrade and Repsol's abysmal reserve replacement ratios would have revealed the "lack ofproper understanding of and training on the requirements ofthe SEC for booking proved reserves," or that there was "an absence of a meaningful deliberative process for determining proved reserves, and resolving disputes," or an "absence of clear directives pre-2005," or any of the other myriad of internal control deficiencies set forth in the Internal Investigation's conclusions or King &
Spaulding's summary of findings. Even the slightest inquiry into the circumstances giving rise to
-56- the write-down of 4.1 % of the reserves would have revealed that from 1999 to 2004 the reserves group "did not consider itself to have an auditing function" or that the reserves control manual "was not disseminated to all personnel who needed to understand the SEC requirements for proved reserves, and it did not provide a dispute resolution procedure."
179. Further, each of these deficiencies raised a red flag that should have been glaringly
obvious to defendant Maflas, who served from 1996 to 2000 as Deputy Chief Financial Officer, from
2000-2002 as Corporate Director for Planning and Control, and from July 2003 as CFO.
Personnel Changes and Internal Control Reforms Support a Strong Inference of Scienter
180. Soon after Repsol announced its 4.1 % downward revision of the Company's proved
reserves, Repsol transferred the oil and gas reserve auditing function from the E&P business unit to
the Audit and Control Committee of the Company's Board of Directors. The Audit and Control
Committee retained an outside consultant to "urgently" collaborate in preparing an Internal Reserves
Control Manual. This transfer of responsibility and the "urgent" collaboration of an outside
consultant to prepare a reserves control manual gives rise to a strong inference that the Individual
Defendants had known or recklessly disregarded that Repsol's 2004 year-end reserves were not
classified in "strict compliance" with SEC rules.
181. Specifically, on April 28, 2005, the Company announced that the Audit and Control
Committee of the Board of Directors would assume the function of overseeing the auditing and the
Company's oil and gas reserves.
182. Further, according to a Company press release on June 16, 2006, titled "Chronology
of the independent reserves revision," the following other changes occurred in 2005:
April 2005
• Creation of a Reserves Control Division, independent of the business units that reported directly to the Audit and Control Committee. -57- • An outside consultant was hired "urgently" to collaborate in preparing an Internal Reserves Control Manual.
June 2005
• The Audit and Control Committee presented a "Program of External Reserves Audits" and allotted the task to independent auditors Gaffney, Cline & Associates ("CG&A"), DeGolyer & McNaughton ("D&M"), and Ryder Scott Company ("RSC").
July 2005
The Internal Reserves Control Manual was presented to the Board's Audit and Control Committee, taking "into consideration the most recent SEC regulations."
The Internal Reserves Control Manual was approved by the Repsol Executive Committee.
September - December 2005
• Repsol commenced a training program on reserves evaluation, as per the Internal Reserves Control Manual, that involved 9 seminars and more than 250 employees.
Repsol's Declining Oil and Gas Reserves Supports a Strong Inference of Scienter
183. Prior to and during the Class Period, Repsol's future prospects were in increasing jeopardy because the Company was not replacing its proved oil and gas reserves at the same rate that the Company was producing oil. That Repsol's oil producing "upstream" business - and the spout
for Repsol's downstream business - was essentially a business that was in liquidation gives rise to a
strong inference that Repsol and the Individual Defendants acted knowingly or recklessly when they
overstated the reserves in order to conceal this dire truth. In fact, conclusions from the Internal
Investigation specifically attributed the overstatement to, among other things, the ". . . focus on the
Company's replacement ratio."
184. Specifically, the 2002 20-F stated that:
Repsol YPF estimates that at December 31, 2002, it had proved net oil and gas reserves of approximately 5,261 million barrels of oil equivalent, a 6.2% decrease in comparison to 5,606 million barrels of oil equivalent at December 31, 2001....
-58- 185. The 2002 20-F also reported that, excluding acquisitions and sales of reserves in
2002, Repsol's organic reserve replacement ratio was only 69.5% of the Company's 2002 annual production.
186. Cortina and defendant Manas reported the same results during a February 25, 2003 conference call with research analysts. Cortina stated that Repsol's "reserves fell in 2002 to a level of 5.3 billion barrels of oil accrual. Projection only includes 622 million barrels from our leaner minorities," and added that "... the yearly [reserve replacement] ratio has been 70%."
187. On February 24, 2004, Repsol issued a press release that reported its 2003 year-end
financial results. The press release claimed that Repsol's net proven oil and gas reserves, as of
December 31, 2003, were 5,433 million BOE, which represented a 3.3% increase in comparison to
5,261 million BOE at December 31, 2002. Repsol, however, attributed the increase to an
acquisition. In fact, as Repsol acknowledged in its 2003 20-F, "the [2003] reserves replacement
ratio, excluding acquisitions and sales made during [the] year was 25.0% . . . of the annual
production. . . ." After giving effect to the Restatement, proved reserves at year-end 2003 did not
increase by 3.3%, but fell from 4,519 million BOE at year end 2003 to 4,135 million BOE, down
approximately 8.5%.
188. Research analysts expressed concern over the low reserve replacement ratio reported
at year-end 2003, and its negative impact on future operations. For example, a JP Morgan oil and
gas industry analyst issued a research report on February 25, 2004, titled "Repsol - Upstream
Options are Limited," and reported that the Company's proven oil and gas reserves at year-end 2003
revealed "a very weak performance versus most of its key peers." The JP Morgan analyst also wrote
that:
... we feel that the continuing low reserve replacement leaves their upstream portfolio with little opportunities to grow in the foreseeable future.... Repsol's
-59- organic reserve replacement in 2003, post revisions, was a disappointing 25%. Management confirmed that outside of further bookings in Trinidad, no other projects are identified as stand out reserve additions for 2004. Repsol's three-year average reserve replacement is now running at 59%. Essentially, this is at the bottom of their peer group range.
189. On the same day, an analyst with Delta Lloyd Securities commented that "excluding a purchase in Trinidad and including adjustments made for operations in Argentina, Repsol's underlying reserves replacement ration is near to 25% for 2003. Also for 2004, management expects lower RRR, as new significant reserves bookings are only planned for 2005."
190. Neither analyst was aware that Repsol's reported proved reserves at year-end 2003 had been overstated by 914.2 million BOE.
191. If Repsol's depleting oil and gas reserves replacement ratios had alarmed analysts at fiscal 2003 year-end, the Company's reserve replacement ratios at year-end 2004 - even when overstated as Repsol now admits - portrayed an even more troubling picture. In its 2004 20-F,
Repsol acknowledged that:
. . . at December 31, 2004 [Repsol] had proved net oil and gas reserves of approximately 4,926 million barrels of oil equivalent, a 9.34% decrease in comparison to 5,433 million barrels of oil equivalent at December 31, 2003.... The reserves replacement ratio, excluding acquisitions and sales made during each respective year, was -19.6% ... of the annual production in 2004... or -18.9% ... of the annual production in 2004... including new acquisitions and sales.
192. On February 22, 2005, defendants Brufau and Manas participated in a conference call with analysts regarding Repsol's 2004 year-end results. During the call, defendant Brufau acknowledged that:
... 2004 was not a good year for Exploration. From discoveries and extensions and improved recovery, we have incorporated 139m of barrels of oil in additional reserves, which has been insufficient to replace this year's production. At year-end, our Company had 4,926m barrels ofoil equivalent in proved reserves. This implies a negative reserves replacement ratio for the year, including revisions of previous estimate.
-60- 193. On February 23, 2005, an oil and gas industry analyst with Societe Generale issued a research report critical of Repsol's lackluster rate ofreplacing its oil and gas reserves. Specifically, the analyst wrote:
Organic reserve replacement rate was 32.5% in 2004, giving 4,926 mboe vs. 5,433 mboe at end 2003, a reserve life of 11.6 years vs. 13.1 previously. Organic reserve replacement rate was 25% in 2003, 69% in 2002 and 81% on 2001. These figures are much lower than the at least 100% needed to replace production. Repsol YPF is far away the sector laggard. [Emphasis added.]
194. On that same day an analyst with JP Morgan issued a research report critical of
Repsol's inadequate reserve replacements, and maintained an "underweight" investment recommendation. Specifically, the research analyst wrote:
The company posted an organic reserve replacement rate ofjust 32.5% versus peer group average of order of 100% of those that have reported so far. Given that reserve replacement is a key indicator of future growth potential we see this as a cause for concern not least because the same figure for 2003 for Repsol was just 25%.
195. On February 23, 2005, an analyst with Espirito Santo Research issued a research report titled "Lower Reserve Replacement and Results," and downgraded its Repsol investment recommendation to "neutral." The analyst wrote:
Though we expected the group not to be able to restore 100% of the reserves consumed throughout the year (427 mboe), that reserves have actually declined by c9% is a worse figure than we were expecting. This low reserve replacement ratio comes after another low year of reserve replacement in 2003.
196. The research analysts who reported on Repsol did not know at that time that, in fact,
Repsol's proved reserves at 2004 year-end had been overstated by 790 million BOE and that
Repsol's proved reserves were in much greater distress than the Company was letting on.
197. In fact, as Repsol now admits, Repsol's proved reserves, as restated, were being depleted prior to and throughout the Class Period. For example, Repsol had 5,233 million BOE in proved reserves at December 31, 2001 (after giving effect to the restatement). Repsol's proved
-61 - reserves had plummeted to just 3,328 million BOE by December 31, 2005, an astounding 36%
decrease.
198. When Repsol is compared to its industry peer group ofpublicly traded, international,
integrated oil companies that produce, refine and market oil, including BP (BP), ConocoPhillips
(COP), Chevron (CVX), ENI (E), Hess (HES), Marathon Oil (MRO), Murphy Oil (MUR), Royal
Dutch Shell (RDS), Total (TOT), and Exxon Mobil (XOM), during the period 2001 through 2005,
Repsol's proven oil and gas reserve replacement rate was at the bottom of the oil sector barrel.
199. During the period from December 31, 2000 through December 31, 2005, Repsol's reserve replacement rate was only 41% compared with a reserve replacement rate of 285% for
ConocoPhillips, the sector leader, and 169% for Murphy Oil, the runner-up. In fact, based on data
obtained from John S. Herold, Inc., an independent research firm that specializes in the analysis of
companies, transactions, and trends in the global energy industry, Repsol had the lowest 5-year average reserve replacement rate compared to its eleven-company peer group, as set forth in the following table:
Reserve Replacement Rate
kker 2001 2002 2003 2004 2005 5-yr amg
P 141% 822% ,sr_1 209% 230% 285% IRO 82% 2620, 181% 227% 169% P 195% 95% 164% 43% 138% ES Y9[ 10 -1% 131% „v`X -7% 120%
M 1 ij^i C'a 9G?; t 1 % lie% •tPt^ OT 123% il.:?a IJ:'o " a 9 3% 109% UR 248% _4% ^.i% 1; 97% DS 97%% 132% 70% 39% 73% 78% REP 305%% 87% 138% -15%%^ -276% 41% 2 1 2O2 2tr3 200. :;s5 5}i No
200. Further, in addition to being the industry laggard in its reserve replacement rate,
Repsol's per barrel cost of replacing its oil and gas reserves was astonishingly high compared to
-62- many of its industry peers. For example, and as indicated on the following table, in terms ofreserve
replacement cost, Repsol's five year average cost was $12.19 per barrel, ranking it number 9 out of
the 11-company peer group. By comparison, BP had the best 5-year average reserve replacement
cost at $4.83 per barrel, and Exxon was second best at $5.48 per barrel. Reserve Replacement Costs
$ts 2041 2002 2003 2404 2006 Wav P $3.66 $3.64 54 77 X6.42 $7.35 $4.83 'jV S'.44 307 5 5.87 55.03 $5.48 05 $£.1s ;i.16 $6.70 $5.53 DT $4.72 $4.55 51.57 .85 $10.69 $6.38
ARO $17.54 $4.61 7 $5.53 51.718 $7.52 $5 E $5.95 $7.0 t' = -y $8.43 ub`R 55. `•.9 $5.3 . 24 _ 33 ` x $9.03 -1a
RDS $6.18 511.36 5 1.2 125 21. S L 46 911.29 -$15 REP $1.48 Ss.49 $5.11 M.3.84 $2.43 51219 .820 H=S l'I55 i 3 f $13.97 $12.77 I ,R -15S 55H2 2 ^ :' t.2; 562.33 819.35 -s25 2905 2002 2303 2. 14 203; 5 ys evq (Source: John S. Herold, Inc.)
Bolivian Nationalization of Oil Fields Supports a Strong Inference of Scienter
201. Bolivia's effort to nationalize its oil fields and its proclamation that it was going to
"register the reserves in the name of the state" with the SEC, gives rise to a strong inference that the
defendants knew or, at a minimum, recklessly disregarded that Repsol had overstated its proved
reserves (in Bolivia), and that they had issued the Restatement to avoid the truth being revealed by
others.
202. As discussed above, in March 2005, Bolivia passed the Hydrocarbon Law. The law added a 32% tax on top of an already existing 18% royalty payment, and was passed, in part, in response to calls to nationalize Bolivia ' s petroleum fields.
203. In fact, Repsol acknowledged in its 2005 20-F that:
In May 2005, the Bolivian Congress voted to impose an additional 32% tax on oil and gas production in Bolivia pursuant to the new hydrocarbon law. Protests -63- continued, however, and the protestors began to demand, among other things, the nationalization of Bolivia's natural gas industry. In connection with these protests, Mr. Mesa resigned as President on June 9, 2005. Mr. Mesa was replaced by Eduardo Rodriguez Veltze, the President of the Supreme Court, who has stated his intention of calling general elections in the short-term. This could lead to a new government more broadly supported in Congress than that of Mr. Mesa. Regulations implementing the new hydrocarbon law have not yet been fully promulgated and, therefore, the impact of such law and regulations cannot be assessed.
204. By December 2005, Bolivia had elected Evo Morales, leader of the Movement to
Socialism party, as its president. During the presidential campaign, Morales had frequently advocated nationalizing Bolivia's petroleum fields, and soon after being elected to office, Morales had threatened to execute on his platform to take greater control over Bolivia's oil and gas reserves.
205. An article published on January 12, 2006 in the oil and gas trade journal "Gas Matters
Today" quoted Morales stating "the state will exercise its right of ownership and that means it will decide on the use of those resources." Morales added that foreign companies "will be partners, not owners .... There is a sentence in some contracts that says the multinationals acquire rights at the mouth of the extraction. That clause is not going to be there any more."
206. On January 10, 2006, LatinNews Daily published an article stating that Morales' team
"already looks more on the ball than its predecessors: it has noticed, and complained about, a report by the Spanish energy company, Repsol-YPF to the US Securities and Exchange Commission which categorizes the gas reserves it is exploiting in Bolivia as Repsol's own."
207. On January 25, 2006, The Financial Times issued an article titled "Repsol: Bolivian plans threaten a quarter of stated reserves," which reported that Bolivia was planning to register its oil and gas reserves with the SEC. Specifically, the article stated:
Plans by the Bolivian government to renationalise (sic) oil and gas reserves could have a major impact on Repsol YPF, the Spanish petrochemicals group. The government has announced that its major goal is to register the reserves in the name of the state with the US market regulator, the SEC. Sector sources believe that the government will have to carry out a legal reform before it can do this. [Emphasis added.] -64- 208. The next day, on January 26, 2006, Repsol revealed its intention to restate its Bolivian reserves downward by 658.6 million BOE.
209. On May 1, 2006, after the end of the Class Period, Bolivia executed on its threat to nationalize the country's petroleum fields. As Repsol reported in its 2005 20-F:
Supreme Decree 28.701, published on May 1, 2006, has nationalized all of Bolivia's natural hydrocarbon resources and the Bolivian State, through Yacimientos Petroliferos Bolivianos ("YPFB"), the Bolivian oil company, took over their commercialization for the internal market as well as their industrialization and exportation.
210. In connection with the nationalization of its petroleum fields, Bolivia commenced an audit of the reserves. According to an article by Oil Daily published on July 20, 2006, titled "Bolivia
Launches Audit of Foreign Oil Firms' Reserves," the Bolivian government:
launched this week an audit of more than 50 natural gas fields being developed by foreign oil companies as part of the country's nationalization of its hydrocarbons industry. The audits are expected to take place on fields operated by foreign companies, including Spain's Repsol ... according to local press reports. The government hopes the audit will help determine the country's total proved and probable reserves, as well as the extent to which foreign companies have invested in Bolivia.
False Assurance of Evaluating Internal Controls Supports a Strong Inference of Scienter
211. In addition to a strong inference of the Individual Defendants' scienter by virtue of their positions as CEO and CFO, defendants Brufau and Manas attested to having "designed" and
"evaluated" the Company's internal controls, "or caused such disclosure controls and procedures to be designed under our supervision," when in fact there were "systemic flaws" in the Company's internal controls, which the Internal Investigation's conclusions and the King & Spaulding summary of findings admit, gives rise to a strong inference of knowledge or, at a minimum, a reckless disregard for the truth.
-65- 212. Specifically, pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002, Brufau and
Maras each signed the 2004 20-F and certified that:
The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
(c) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and ...
213. They also proved a similar assurance in the text of the 2004 20-F, which stated:
An evaluation was performed under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of its disclosure controls and procedures, as of December 31, 2004. Based on this evaluation, Repsol YPF's Chief Executive Officer and Chief Financial Officer concluded that Repsol YPF's disclosure controls and procedures are effective at the reasonable assurance level for gathering, analyzing and disclosing the information that Repsol YPF is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC's rules and forms. Repsol YPF's management necessarily applied its judgment in
-66- assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding management's control objectives.
Additional Scienter of the Individual Defendants
214. In addition to the above factors, the following facts also give rise to a strong inference of scienter.
Defendant Brufau
215. The fact that Brufau was formerly employed at Arthur Andersen, where he advanced to the level ofPartner and Director ofAuditing, gives rise to a strong inference that he knew, or was reckless in not knowing, that Repsol had failed to adhere to proper SEC rules and FASB accounting standards when it estimated and classified its reserves and that Repsol's internal controls - particularly those related to estimating and classifying the important oil and gas reserves - were virtually non-existent, as described by the conclusions of the Internal Investigation and King and
Spaulding's summary of findings.
216. That Brufau was a member of Repsol's Audit and Control Committee prior to becoming CEO in October 2004, also gives rise to a strong inference of scienter. According to the
2004 20-F, the Audit and Control Committee was responsible for, among other things: (i) "periodic inspection of the preparation of financial and economic information"; (ii) "formulation and submission to the Board of Directors, for its consideration ... a proposal regarding the designation of the external auditors [and] the renewal, termination and terms of their appointment; (iii) formulation of the scope of the auditors' work; (iv) monitoring Repsol's "relationship with the external auditors; and assuring their independence. In particular, the Audit and Control Committee pre-approves the activities, both audit and non-audit, to be carried out by the external auditors."
Importantly, the Audit and Control Committee was charged with the "supervision of internal financial control systems and the annual internal audit."
-67- 217. A strong inference of scienter is further evidenced by defendant Brufau's comments
in a January 26, 2006 conference call with analysts concerning the Company's announcement of its
forthcoming restatement. When asked on the call about what portion ofthe restatements was due to
technical reasons, rather than the Bolivian tax rule, Brufau responded that "most belongs to the law.
.. ," and "therefore, I would say in Bolivia, most is because of the hydrocarbon law," and "if I have
to say a rough number, it would be a 50/50 basis or something like that." As would be revealed
months later, the Hydrocarbon Law accounted for less than 108 million BOE or 10 percent of the
Restatement. Brufau's attribution of roughly half the 1.25 billion BOE downward revision to the
May 2005 Hydrocarbon Law when over 90 percent of the Restatement had nothing to do with the
Hydrocarbon Law and predated May 2005, supports a strong inference of an intent to conceal the
Company's failure to classify and report reserves in accordance with SEC rules and FASB principles during the Class Period.
Defendant Malias
218. That defendant Manas ceased his employment at Repsol in February 2006, just one month after the Company announced its intention to remove 1.25 billion BOE from its books, gives rise to a strong inference of scienter.
219. Further, conclusions ofthe Audit and Control Committee's purported "independent"
Internal Investigation reported that:
With respect to the conduct of the current members of the Company's Board of Directors and executive committee, the independent review affirmed that there is no basis to believe that any of them participated in or had knowledge ofthe existence of any defects with respect to the Company's reserves process. [Emphasis added.]
220. At the time ofthe report, Manas was no longer employed at Repsol , and thus was not a "current member" of the executive committee.
-68- 221. That Manas was a member ofthe Board of Directors' Disclosure Committee prior to and during the Class Period gives rise to a strong inference of his scienter. According to the 2004
20-F, the Disclosure Committee was responsible for, among other things, performing the following functions:
To monitor the overall compliance with regulations and principles of conduct of voluntary application, especially in relation to listed companies and their corporate governance.
To direct and coordinate the establishment and maintenance of:
Procedures for the preparation of accounting and financial information to be approved and filed by Repsol YPF or which is generally released to the markets;
Internal control systems that are adequate and efficient to ensure that Repsol YPF's financial statements included in annual and quarterly reports, as well as any accounting and financial information to be approved and filed by Repsol YPF, are accurate, reliable and clear;
Processes to identify risks to Repsol YPF's businesses and activities that are significant and which may affect the accounting and financial information to be approved and filed;
To assume the functions that the laws of the United States and the SEC regulations applicable to Repsol YPF may attribute to a Disclosure Committee or Internal Committee of a similar nature, and especially those relating to the SEC regulations dated August 29, 2002 ("Certification of Disclosure in Companies' Quarterly and Annual Reports," in relation to the support for the certifications by Repsol YPF's principal executive officer and principal financial officer as to the existence and maintenance by Repsol YPF of adequate procedures and controls for the generation of the information to be included in the Annual Report on Form 20-F, and other information of a financial nature;
To take on similar functions to those stipulated in the SEC regulations for a Disclosure Committee with regard to the existence and maintenance by Repsol YPF of adequate procedures and controls regarding the preparation and content of the information to be included in the annual financial statements (to be formulated by the directors in compliance with Spanish Company Law), and any accounting or financial information to be filed with the Spanish stock market authorities ("Comision Nacional del Mercado de Valores"), the Argentine stock market authorities ("Comision Nacional de Valores de Argentina") and other regulators of the stock markets on which Repsol YPF's stock is traded;
-69- To review and supervise Repsol YPF's procedures for the preparation and presentation of the following information:
Official notices to the Spanish stock market authorities, the SEC, the Argentine stock market authorities and other regulators of the stock markets on which Repsol YPF's stock is traded;
Interim financial reports;
Press releases containing financial data on results, earnings, large acquisitions, divestments or any other information relevant to the shareholders;
General communications to the shareholders;
Presentations to analysts, investors, rating agencies and lending institutions;
To formulate proposals for a "Code of Ethics" and an "Internal code of conduct on the stock markets" that follows applicable rules and regulations or any other standards deemed appropriate;
To supervise any such Committee of a similar nature that YPF may set up as a company listed on a U.S. stock market.
LOSS CAUSATION/ECONOMIC LOSS
222. During the Class Period, as detailed above, defendants engaged in a scheme to deceive the market and a course of conduct that artificially inflated the price of Repsol ADSs and operated as a fraud or deceit on Class Period purchasers of Repsol ADSs by failing to disclose that the Company was overestimating its reserves which would lead to a restatement of its financial results going back to 1999. Specifically, Repsol has now disclosed, among other things, that it did not adhere to SEC rules or FASB accounting standards when estimating and reporting its proved net oil and gas reserves. When defendants' prior misrepresentations and fraudulent conduct were disclosed and became apparent to the market, Repsol ADSs fell precipitously as the prior artificial inflation came out of the price of Repsol's ADSs. As a result of their purchases of Repsol ADSs, during the Class Period, Lead Plaintiffs and other Class members suffered economic loss, i.e., damages under the federal securities laws. -70- 223. By overstating its proven reserves and not adhering to SEC and FASB accounting standards, defendants presented a misleading picture of Repsol's business and prospects. Instead of truthfully disclosing during the Class Period the true value of Repsol's reserves and the true quality of the Company's internal controls, defendants issued materially false and misleading statements.
224. These false and misleading statements had their intended effect and caused the price of Repsol's ADSs to trade at artificially inflated levels throughout the Class Period, reaching as high as $33.75 per ADS on September 23, 2005.
225. As a direct result of defendants' admissions and the public revelations regarding the true value of Repsol's reserves, on January 26, 2006, when the Company announced that it expected to restate its proved oil and gas reserves by an astounding 25%, shares ofRepsol ADSs fell $2.12 per
ADS, or 7 percent, to close at $27.99 per ADS. The Company's ADSs continued to decline on
January 27, 2006, when they fell $1.34 per ADS, or 4.79 percent, to close at $26.65 per ADS, before reaching an intra-day low of $26.55 per share.
226. The decline in the value of Repsol's ADSs was a direct result ofthe nature and extent of defendants' fraud finally being revealed to investors and the market. The timing and magnitude of the decline of Repsol ADSs negate any inference that the loss suffered by Lead Plaintiffs and other Class members was caused by changed market conditions, macroeconomic or industry factors or Company-specific facts unrelated to defendants' fraudulent conduct. The economic loss, i.e., damages, suffered by Lead Plaintiffs and other Class members was a direct result of defendants'
fraudulent conduct.
NO SAFE HARBOR
227. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to the false statements alleged herein. Many ofthe statements pleaded
herein were not specifically identified as "forward-looking statements" when made, and many were -71- representations about the Company's present status and thus were not "forward-looking." To the
extent there were and forward-looking statements: (a) there were no meaningful cautionary
statements identifying the important then-present factors that could cause actual results to differ materially from those in the purportedly forward-looking statements; and (b) the particular speakers of such forward-looking statements knew that the particular statements were false or misleading, and/or the forward-looking statements were authorized and/or approved by an executive officer of
Repsol who knew that those statements were false when made.
228. Any purported warnings contained in the press releases and statements quoted herein were generic and unparticularized boilerplate statements of risks, and thus lacked meaningful cautionary language necessary to insulate the purportedly forward-looking statements.
CLAIMS FOR RELIEF
COUNT I
Against All Defendants for Violations of Section 10(b) of the Exchange Act and Rule lOb-5 Promulgated Thereunder
229. Lead Plaintiffs repeat and reallege each and every allegation above as though set forth fully herein. This Count is brought pursuant to Section 10(b) of the Exchange Act, 15 U.S.C.
§78j(b), and Rule lOb-5(c) promulgated thereunder, 17 C.F.R. 240.10b-5, on behalf of all Class members against Repsol and the Individual Defendants.
230. Throughout the Class Period, defendants, directly and indirectly, by the use ofmeans and instrumentalities of interstate commerce, the United States mails and a national securities exchange, employed a device, scheme and artifice to defraud, made untrue statements of material fact and omitted to state material facts necessary in order to make the statements made, in light ofthe circumstances under which they were made, not misleading , and engaged in acts, practices and a
-72- course ofbusiness which operated as a fraud and deceit upon Lead Plaintiffs and the members ofthe
Class.
231. The Company and the Individual Defendants, as the most senior officers of Repsol during the Class Period, are liable as direct participants in all the wrongs complained of herein.
Through their positions of control and authority, the Individual Defendants were in a position to and did control all of the Company's false and misleading statements and omissions, including the content of all of its public filings and press releases more particularly set forth above. In addition, certain of these false and misleading statements constitute "group published information," which the
Individual Defendants were responsible for creating. The Company is liable for each of the statements of the Individual Defendants through the principles of respondeat superior.
232. Defendant Brufau is liable for his own statements in press releases, conference calls, shareholder meetings, annual and quarterly reports, as more particularly set forth above.
233. Defendant Maras is liable for his own statements in press releases, conference calls,
shareholder meetings, annual and quarterly reports, as more particularly set forth above.
234. As detailed above, defendants had actual knowledge of the misrepresentations and
omissions ofmaterial facts set forth herein, or acted with reckless disregard for the truth in that they
failed to ascertain and to disclose such facts, even though such facts were available to them. Such material misrepresentations and/or omissions were made knowingly or recklessly and for the purpose and effect of concealing the level of Repsol's operating condition and future business prospects from the investing public and supporting the artificially inflated price of its securities.
235. Lead Plaintiffs and the other members ofthe Class relied upon defendants' statements
and upon the integrity of the markets in purchasing Repsol ADSs at artificially inflated prices.
-73- 236, In bringing these claims, Lead Plaintiffs and all members of the Class are entitled to the presumption ofreliance established by the fraud-on-the-market doctrine. At all times relevant to this Complaint, the market for Repsol ADSs was highly efficient for the following reasons, among others:
(i) Repsol ADSs were traded on the NYSE, a highly efficient market;
(ii) As a regulated issuer, Repsol filed periodic reports with the SEC;
(iii) Repsol's ADSs were followed by numerous securities analysts employed by major brokerage firms, such as Credit Suisse First Boston, Deutsche Bank, JP Morgan, Morgan Stanley, and UBS Warburg, who wrote reports that were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace;
(iv) Repsol regularly issued press releases, which were carried by national and international newswires. Each of these releases was publicly available and entered into the marketplace; and
(v) The market price of Repsol ADSs reflected the effect ofnews disseminated in the market.
237. As a direct and proximate cause of the wrongful conduct described herein, Lead
Plaintiffs and other members of the Class suffered damages in connection with their purchases of
Repsol ADSs when the truth was revealed at the end of the Class Period and the value of Repsol's
ADSs dropped. Had Lead Plaintiffs and the other members of the Class known of the material
adverse information not disclosed by defendants, or been aware of the truth behind the defendants'
material misstatements, they would not have purchased Repsol ADSs at artificially inflated prices.
238. This claim was brought within two years ofthe discovery ofthe fraud and within five
years of the making of the statements alleged herein to be materially false and misleading.
239. By virtue of the foregoing, defendants violated Section 10(b) of the Exchange Act
and Rule IOb-5 promulgated thereunder and are liable to Lead Plaintiffs and the members of the
Class, each of whom has been damaged as a result of such violations.
-74- COUNT II
Against the Individual Defendants for Violations of Section 20(a) of the Exchange Act
240. Lead Plaintiffs repeat and reallege each of the allegations above as though set forth fully herein. This Count is brought pursuant to Section 20(a) of the Exchange Act, 15 U.S.C.
§78t(a), on behalf of all Class members.
241. For all the reasons set forth above in Count One, Repsol is liable to Lead Plaintiffs and Class members who purchased Repsol ADSs based on the materially false and misleading statements and omissions set forth above, pursuant to Section 10(b) of the Exchange Act, 15 U.S.C.
§ 78j(b), and Rule IOb-5, 17 C.F.R. §240.1Ob-5 promulgated thereunder.
242. Throughout the Class Period, the Individual Defendants, by virtue of their positions and/or specific acts described above, were controlling persons within the meaning of Section 20(a) of the Exchange Act.
243. The Individual Defendants had the power to, and did, directly and indirectly, exercise control over Repsol, including the content and dissemination of statements which the Lead Plaintiffs allege are false and misleading.
244. The Individual Defendants each were provided with and had access to reports, filings, press releases and other statements alleged to be misleading prior to and/or shortly after they were issued and had the ability and responsibility to prevent the issuance of the false and misleading statements or to correct the statements so as to render them not false and misleading. The Individual
Defendants had direct involvement, influence and authority in the day-to-day operations of Repsol and caused the company to engage in acts constituting violations of the federal securities laws as set forth in Count I above.
-75- PRAYER FOR RELIEF
WHEREFORE, Lead Plaintiffs, on their own behalf and on behalf of the Class, pray for judgment as follows:
A. Declaring the action to be a proper class action and certifying Lead Plaintiffs as class representatives under Rule 23 of the Federal Rule of Civil Procedure;
B. Awarding compensatory damages in favor of Lead Plaintiffs and the other Class members against all defendants, jointly and severally, for the damages sustained as a result of the wrongdoings of defendants, together with interest thereon;
C. Awarding Lead Plaintiffs fees and expenses incurred in this action, including reasonable allowance of fees for Lead Plaintiffs' attorneys, and experts; and
D. Granting such other further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Lead Plaintiffs demand a trial by jury.
September 1, 2006 Respectfully submitted,
SCHIFFRIN & BARROWAY, LLP LERACH COUGHLIN STOIA GELLER MICHAEL K. YARNOFF RUDMAN & ROBBINS LLP JOHN A. KEHOE (JK-4589) SAMUEL H. RUDMAN (SR-7957) ROBERT W. BIELA DAVID A. ROSENFELD (DR-7564)
j aka .. °', es d ^
JOHN A. KEHOE DAVID A. k.OSENFELD
280 King of Prussia Road 58 South Service Road, Suite 200 Radnor, Pennsylvania 19087 Melville, New York 11747 Telephone: 610/667-7706 Telephone: 631/367-7100
Lead Counselfor Lead Plaintiffs and the Class
I:\Repsol\Pleadings\060901 Consolidated Amended Complaint.doc
-76- CERTIFICATE OF SERVICE
I hereby certify that on September 1, 2006, a copy of the foregoing Consolidated
Amended Class Action Complaint was sent, via U.S. Mail, postage prepaid to the following parties on the attached service list.
David A. Rosen Id REPSOL (LEAD) Service List - 8/31/2006 tos-oo19) Page 1 of 1
Counsel For Defendant(s) Joyce S. Huang Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas New York, NY 10019-6064 212/373-3000 212/757-3990 (Fax)
Counsel For Plaintiff(s) Samuel H. Rudman Michael K. Yarnoff David A. Rosenfeld John A. Kehoe Mario Alba, Jr. Robert W. Biela Lerach Coughlin Stoia Geller Rudman & Schiffrin & Barroway, LLP Robbins LLP 280 King of Prussia Road 58 South Service Road , Suite 200 Radnor, PA 19087 Melville , NY 11747 610/667-7706 631/367-7100 610/667-7056 (Fax) 631/367-1173(Fax)