SEC files insider trading charges over Nexen bid

SEC files insider trading charges over Nexen bid

2012-07-27 19:14 ET - Street Wire

Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission
Also Street Wire (C-NXY) Nexen Inc

by Mike Caswell

The U.S. Securities and Exchange Commission has filed insider trading charges against a group of buyers of Nexen Inc. shares, and has obtained an emergency court order freezing $38-million worth of assets it says are connected to the group. (All figures are in U.S. dollars.) The SEC claims that the buyers acquired hundreds of thousands of Nexen shares ahead of the $15-billion takeover offer that CNOOC Ltd. made for the company on July 23, 2012. They then sold immediately after the deal became public.

One of the defendants is a private British Virgin Islands company called Well Advantage Ltd., which is controlled by prominent Hong Kong businessman Zhang Zhi Rong. The SEC says that Mr. Rong has connections to China-based CNOOC Ltd., the company that made the Nexen offer. One of his holdings is an entity called China Rongsheng Heavy Industries, which has a "close business relationship with CNOOC," according to the SEC.

The emergency order freezes assets worth more than $38-million and prohibits the buyers from destroying any evidence connected to their trading. Mr. Rong's Well Advantage is the only buyer that the SEC has identified by name. It describes the others as "certain unknown traders" who acquired Nexen through omnibus accounts.

The full allegations against Well Advantage and the others are contained in a civil complaint the SEC filed on Friday, July 27, in the Southern District of New York. The complaint says that the insider trading took place in the days leading up to the $15.1-billion takeover bid Nexen received from state-owned CNOOC (also known as the China National Offshore Oil Corp.). The bid, which represented a 61-per-cent premium, sent Nexen to $25.90 on the New York Stock Exchange, up from $17.06 the day before.

According to the SEC, Well Advantage bought 831,033 shares of Nexen for approximately $14.3-million just two trading days prior to the announcement. Then, on Thursday, July 26, Well Advantage placed an order to sell its entire position. The SEC calculates the gain on the sale to be $7.2-million.

Prior to July 19, Well Advantage's trading in Nexen had been minimal, the SEC says. One of its accounts, at Citigroup Global Markets Inc., had never traded Nexen and had been dormant for six months. The other account, at UBS Securities LLC, had not traded Nexen since January, 2012. "On information and belief, at the time Well Advantage purchased shares of Nexen stock as alleged above, it was in possession of material, nonpublic information about CNOOC's proposed acquisition of Nexen," the complaint states.

As for the unidentified buyers, the SEC says they bought their stock through omnibus accounts in Singapore starting on July 12, 2012. One of those accounts, which was held at Phillip Securities, bought 597,990 shares for approximately $10-million, the complaint states. In the two years leading up to the takeover, that same account had negligible Nexen trading, buying a total of 3,800 shares in four transactions.

Another omnibus account in Singapore, held at Citibank, bought 78,220 shares for $1.31-million, the SEC claims. "The timing, size and profitability of these trades, as well as the lack of prior history of trading in Nexen stock in the account, make these trades highly suspicious," the complaint reads.

The SEC provides no specifics about how the buyers may have learned about the Nexen takeover. The complaint only states that material information regarding the acquisition was disclosed to them by somebody "who tipped such information with the expectation of receiving a benefit."

The complaint seeks an order barring future violations plus disgorgement of profits and appropriate civil penalties.