Cnooc’s Nexen acquisition marred by insider trading charges

A company controlled by Chinese billionaire Zhang Zhi Rong has become embroiled in an insider trading scandal surrounding Cnooc’s record $15.1 billion acquisition of Canadian oil and gas company Nexen.

On Friday, securities regulators in the US froze the assets of Well Advantage after its trading in Nexen shares attracted suspicion. The SEC said that the British Virgin Islands company and other unknown investors had stockpiled shares in Nexen after gaining possession of “material non-public information about the impending acquisition”, which stood to make them a profit of more than $13 million when they tried to liquidate the entire position on Thursday.

“Well Advantage and these other traders engaged in an all-too-familiar pattern of mis-using inside information to place extremely timely trades and profit handsomely from their illegal acts,” said Sanjay Wadhwa, deputy chief of the SEC enforcement division’s market abuse unit.

According to the SEC, Well Advantage bought more than 830,000 shares in Nexen on July 19 and had an unrealised trading profit of more than $7 million after Nexen’s stock rose more than 50% on news of the deal. The other unknown traders were up $6 million after buying more than 676,000 Nexen shares through Singapore accounts during the days before the announcement.

Though Zhang is not directly accused of any wrongdoing, the charges raise some difficult questions. He is the founder and chairman of Hong Kong- and US-listed China Rongsheng Heavy Industries, which has had a “strategic cooperation agreement” with Cnooc since 2010, according to its latest annual report.

Zhang also controls 100% of Well Advantage, according to a disclosure of interests filed with the stock exchange in Hong Kong at the start of this year.

The SEC’s emergency court order freezes $38 million of the traders’ assets and prohibits them from destroying any evidence. They are charged with violating the SEC’s Rule 10b-5, one of the most important securities regulations in the US. The rule’s prohibition against insider trading does not require proof that an insider actually used material non-public information when conducting a trade — possession of such information alone is sufficient to violate the provision.

In addition to the emergency relief, the SEC said that it is seeking “a final judgment ordering the traders to disgorge their ill-gotten gains with interest, pay financial penalties and permanently bar them from future violations”.

Cnooc’s acquisition of Nexen faced another hurdle on Friday when Chuck Schumer, a US senator, wrote a letter to Treasury Secretary Tim Geithner arguing that the US should block the deal unless China agrees to stop manipulating its currency, among other things.

The company withdrew a proposed 2005 merger with Unocal after Schumer led opposition to the deal.