The U.S. securities regulator filed a complaint in court on Friday against a firm controlled by a Chinese billionaire and other traders, accusing them of making over $13 million from insider trading ahead of a bid by China's CNOOC for Canadian oil company Nexen Inc.
The Securities and Exchange Commission said the federal court in Manhattan had frozen assets worth over $38 million belonging to Hong Kong-based Well Advantage, controlled by businessman Zhang Zhirong, and other unnamed traders who used accounts in Hong Kong and Singapore to trade in Nexen stock.
They made trading profits of $7 million and $6 million respectively by using inside knowledge of the merger to buy Nexen shares before the announcement, the SEC says.
The trading was suspicious, the SEC claims in its complaint, because the accounts used to buy the shares had 'either no history or extremely limited history" of buying Nexen shares before July 2012.
CNOOC said on July 23 it had agreed to acquire Nexen for $15.1 billion, China's biggest foreign takeover bid. Shares of Nexen jumped almost 52 percent that day.
The unnamed Singapore traders used accounts in the names of Phillip Securities and Citibank, while Well Advantage made its trades through accounts held at UBS Securities and Citigroup Global Markets. Neither of the Well Advantage accounts had traded Nexen shares since January 2012, and the Citigroup account had been completely dormant for over six months.
Zhang Zhirong also controls China Rongsheng Heavy Industries Group Holdings, which according to a company filing in October 2010, entered a strategic cooperation agreement with CNOOC.
A spokeswoman for CNOOC declined to comment. Calls to Well Advantage's office in Hong Kong were not answered on Saturday.
Hong Kong's Securities and Futures Commission also declined comment while officials at the Monetary Authority of Singapore were not immediately available.
The SEC does not allege any wrongdoing by Zhang, but notes that he is the controlling shareholder of a company that engages in significant business activities with CNOOC.
Zhang was ranked the 22th richest Chinese person by Forbes Magazine in September 2011. But his net worth fell by more than half in the past year to $2.6 billion in March 2012 as shares of Rongsheng tumbled. The stock ended at HK$1.4 on Friday against an IPO price of HK$8.0 fixed in November 2010.
Well-timed bullish bets in Nexen options ahead of the announcement also raised eyebrows among some market watchers on the day the deal was announced.
"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," said Sanjay Wadhwa, deputy chief of the market abuse unit in the SEC's enforcement division.
In addition to freezing the traders' assets and directing them not to destroy any evidence, the SEC is seeking a judgment "ordering the traders to disgorge their ill-gotten gains with interest, pay financial penalties, and permanently bar them from future violations," according to a statement.
The SEC is cracking down on insider trading, it says, having brought 57 insider trading actions in the financial year 2011 against 124 individuals and entities, a nearly 8 percent increase in the number of filed actions from the prior fiscal year.
Wadhwa acknowledged in his statement "the challenges of investigating misconduct in the U.S. by trading accounts located overseas," and the SEC will have to work with regulators in Hong Kong and Singapore where the alleged insider trading took place.
This article is copyrighted by Reuters
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