The U.S. Securities and Exchange Commission obtained a court order to freeze assets of traders who allegedly reaped more than $13 million by trading illegally ahead of Cnooc Ltd. (883)’s announcement that it would buy Nexen Inc. (NXY)
Hong Kong-based Well Advantage Limited, controlled by Zhang Zhirong, and other unidentified traders stockpiled shares of Nexen based on confidential information about the deal, the SEC said in a July 27 statement announcing a complaint filed at federal court in Manhattan. The court order froze about $38 million in assets, the SEC said.
Nexen’s stock rose more than 50 percent on July 23 after Cnooc, China’s largest offshore oil and gas explorer, said it would pay $15.1 billion in cash to acquire the Calgary-based company. Well Advantage’s owner Zhang, a billionaire, is the controlling shareholder of China Rongsheng Heavy Industries Group Holdings Ltd. (1101), a Hong Kong-based company that engages in significant business activities with Cnooc, the SEC said.
“This may be the tip of an iceberg suggesting that the government in China has to be more careful about their business and business partners,” said Joseph Fan, co-director of the Institute of Economics and Finance at the Chinese University of Hong Kong.
Many individuals doing business with state-owned enterprises are well connected and there are complicated relationships and transactions between them, Fan said.
Zhang, 43, is the chairman and founder of China Rongsheng Heavy Industries, a Chinese shipbuilder, and developer Glorious Property Holdings Ltd. (845) Zhang wasn’t available for comment, Glorious Property’s public relations manager Doris Chung said.
China Rongsheng Heavy Industries said in a statement today that Zhang doesn’t have any executive role, and business operations won’t be affected. The shipbuilder won an order from state-owned Cnooc to build a deepwater pipe-laying vessel in 2007 and Cnooc was one of the cornerstone investors in its initial public offering in Hong Kong in November 2010.
Shares of Rongsheng Heavy fell 16.4 percent today to close at HK$1.17, its lowest level since its listing, after saying earlier today its first-half profit will drop significantly on a decline in orders and prices. The stock has slumped 85 percent since its Hong Kong stock sale.
“Given news that the SEC has ordered a freeze on accounts allegedly related to Rongsheng Chairman Zhang Zhi Rong, we believe our recent upgrade to ‘hold’ for Rongsheng, based on Rongsheng hitting crisis level valuations half that of peers, now appears to have been too early,” Religare Capital Markets’ analyst Vincent Fernando wrote in a note to client today. He downgraded the stock to a sell.
Hong Kong’s Securities and Futures Commission and Cnooc declined to comment on the case.
Unknown traders used accounts at Singapore-based Phillip Securities Pte and Citibank N.A. in Singapore to trade illegally in the shares of Nexen, according to the SEC’s complaint.
The Monetary Authority of Singapore didn’t immediately respond to e-mailed questions seeking comment. Freddie Lacorte, a Singapore-based spokesman at Phillip Securities Pte. and James Griffiths, a Hong Kong-based spokesman at Citigroup Inc. also declined to comment.
Zhang was listed as China’s 38th richest person with a fortune of $2.9 billion in the 2010 Hurun Report, which tracks the country’s wealthy.
Glorious Property also said today its normal business operations won’t be affected. Its shares plunged by 10.6 percent, the most since its listing in Oct, 2009, to close at HK$1.18 in Hong Kong.
“Well Advantage and these other traders engaged in an all- too-familiar pattern of misusing inside information to place extremely timely trades and profit handsomely from their illegal acts,” Sanjay Wadhwa, deputy head of the SEC’s market abuse enforcement unit, said in a statement.
Well Advantage lists as an address a company that provides secretariat services. A woman at the secretariat company who declined to be identified said she wasn’t able to comment.
Almost all of the purchases of Nexen stock occurred during the seven trading days before the acquisition was announced, and the accounts used for the transactions had little or no history of buying Nexen shares.
Data compiled by Bloomberg showed trading in bullish Nexen options reached the highest level since 2008 before Cnooc announced it would buy the energy company. A total of 47,302 calls traded on the company’s U.S. shares last week, with bullish contracts reaching 24,554 on July 20, the most since March 2008.
Call options that convey the right to acquire shares for a given price by a certain date usually offer higher returns than stock to traders speculating on takeover. Nexen said last year it was exploring a sale and the departure of its chief executive officer in January spurred speculation it might find a buyer.