We reported, about a week ago, that a subsidiary of China’s third largest oil companies, CNOOC Group, CNOOC Ltd. (SEHK: 0883) (NYSE:CEO), had struck a deal to buy the Calgary-based Nexen Inc (NYSE:NXY) (TSE:NXY), for about $15.1 billion.
On Saturday, the U.S. Securities and Exchange Commission froze the assets of traders involved in illegal trading of Nexen shares, ahead of CNOOC’s announcement. The acquisition entailed a payment of $27.50 per common share by CNOOC, which amounted to a 61 percent premium on Nexen’s closing price on July 20. Bloomberg reports that a group of traders, most notable of them was Hong Kong-based Well Advantage Limited, collected more than $13 million in trading, based on confidential information. The court order, in response to SEC filing, has frozen approximately $38 million in assets.
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According to the SEC complaint, filed on 27th July in Manhattan court, the shady trading took place in the week preceding July 23rd, the day the official announcement was made. After the announcement, Nexen’s share price rose 52 percent to close at $26.35 , up $9.06.
“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.
The accounts used for these illegal transactions had negligible records of buying Nexen shares prior to this incident. The owner of Well Advantage, Zhang Zhi Rong, is also the founder and controlling shareholder of a Hong-Kong based company called Rongsheng Heavy Industries Group Holdings Ltd. (SEHK:1101). Rongsheng Heavy is a shipbuilder and petrochemical engineering firm which has a history of doing business with CNOOC. Zhang Zhi Rong is China’s 38th richest man of 2010, according to local estimates.
“This incident is uncommon and a conclusion has yet to be drawn,” said Ronald Wan, a Hong Kong-based managing director at China Merchants Securities, which oversees about $1.5 billion. “It comes as a warning that Chinese enterprises need to improve their corporate governance.”
Shares of Rongsheng Heavy have fallen as much as 18 percent, the biggest decline since its November 2010 listing. Zhang Zhi Rong has been unavailable for comment.
Opposition from the US
The CNOOC-Nexen deal is subject to review and approval by the Canadian government. As Nexen was looking for an international buyer for a while now and the terms of the acquisition were in favor of the Canadian oil and gas company, the approval by authorities was expected. CNOOC previously acquired Opti Canada Ltd (TSX:OPC) and also holds 16.7 percent share in Canadian oil sand developer, MEG Energy Corp (TSX:MEG).
The Nexen buy by CNOOC is so far the biggest Chinese acquisition of a foreign company. US Senator Charles Schumer of New York, in a draft letter obtained by Reuters, emphasized that the Committee on Foreign Investment in the United States, (CFIUS) should not approve the deal unless China allows reciprocal access to the United States. He believes that the deal would benefit economically but this should also be seen as an opportunity to have equal access to Chinese markets. The Democratic leader in the U.S. House of Representatives, Nancy Pelosi also stated that CFIUS should thoroughly review the agreement, and judge its merits before any decision is made.