Another Suspicious Trading Insider Trading Case

On Monday July 23, 2012 the highly publicized acquisition of Nexen, Inc. by CNOOC Limited was announced. By the end of the week, the SEC had investigated and brought an insider trading action against Well Advantage Limited and unknown traders related to two accounts. The agency won a freeze order over millions of dollars in profits made from trading in the shares of Nexen which appreciated 52% on the deal announcement. The case is based largely on the timing and size of the trades which the complaint calls “suspicious.” SEC v. Well Advantage Limited (S.D.N.Y. filed July 27, 2012).

The deal was highly publicized since it involves the acquisition of Canadian owned oil assets by a Chinese oil company. Nexen is a global energy company domiciled in Canada with its headquarters in Calgary. Its shares were listed on the Toronto and New York Stock Exchanges. CNOOC is China’s largest producer of crude oil and natural gas. The company is based in Hong Kong and its shares are listed on the Stock Exchange of Hong Kong Limited.

The only named defendant is Well Advantage, a British Virgin Island company based in Hong Kong. It is indirectly owned by Zhang Zhi Rong, a Hong Kong business man who controls a number of companies including China Rongsheng Heavy Industries, a company which public sources say has a close business relation to CNOOC. Two accounts are also identified in the complaint. One is at Phillips Securities PTE Ltd., a Singapore-based brokerage firm. The other is Citibank NA, A/C HK 4.

Two trading days before the deal announcement, Well Advantage purchased 831,033 shares of Nexen at a cost of about $14.3 million. The purchases were made through accounts at UBS Securities LLC and Citigroup Global Markets Inc. On “information and belief” the purchases were made while the trader or traders were in possession of inside information because:

• The buys were made just two trading days prior to the announcement;

• Well Advantage had not traded in Nexen shares since at least January 2012;

• The Citigroup account had been dormant for six months; and

• Well Advantage is headquartered in Hong Kong, the same location as CNOOC’s main office and its beneficial owner, Zhang Zhi Rong, is a controlling shareholder of Rongsheng, a company that has a close business relation to CNOOC, according to public reports.

On the Thursday following the Monday deal announcement, a sell order was placed to liquidate the Nexen position in the account. At the time the account had an unrealized gain of $7.2 million.

In the Phillips omnibus account, beginning July 12, 2012 and continuing through July 20, 2012, 597,990 Nexen shares were purchased for about $10 million. At the time of the transactions the trader or traders were, based on information and belief, in possession of material non-public or inside information because of:

• The timing of the transactions;

• The size of the transactions;

• The lack of prior history of significant trading in the shares, although there had been some transactions; and

• The profitability of the trades which yielded about $15.1 million.

The position in the account was largely liquidated on Tuesday, July 24, 2012.

The Citibank account purchased 78,220 shares of Nexen on Tuesday, July 17, 2012 at a cost of about $1.31 million shares. The trader or traders who directed the transactions were in possession of inside information at the time, based on information and belief, because of:

• The timing of the transactions;

• The size of the transactions;

• The profitability of the transactions which yielded profits of about $721,000; and

• The lack of prior trading history in Nexen shares.

The position in the Citibank account was liquidated immediately after the deal announcement.

This is not the first “suspicious” trading insider trading case brought by the Commission. Previously, the agency has brought insider trading cases against unknown purchasers who acquired large stakes in take-over stocks shortly before the deal announcement despite the fact that there was no readily identifiable source of inside information. Typically the traders in those cases were, as here, off shore and had little history with the stock. Unlike the trades here however, the traders in many of those cases leveraged their position by purchasing options or a combination of options and shares.

The Commission has been successful with a number of its prior “suspicious trading” cases. In some instances, however, difficulties in international discovery have hindered its efforts. Whether the SEC will be able to develop the proof necessary to sustain its suspicions here will play out over the next several months as enforcement officials again battle the difficulties of international discovery.