Part V: The SEC and Chinese Issuers: Transparency And Accountability

This is the fifth and concluding segment of a series examining issues arising in SEC Enforcement Actions relating to issuers from the PRC whose shares are traded in the U.S.

Insider trading compliance

Insider trading has long been a priority for the Commission. Since the reorganization of the enforcement division and the creation of its market abuse specialty unit which focuses in part on these cases, the SEC has been very aggressive in brining insider trading actions.

A number of recent SEC insider trading cases have involved residents of the PRC. Once example is SEC v. All Know Holdings Ltd., Case No. 11 cv 8605 (N.D. Ill. Filed Dec. 5, 2011), a case which centers on the acquisition of Global Education and Technology Group Ltd. by Pearson plc.

Global is a Cayman Islands corporation headquartered in Beijing, China. It provides English language services in China. Global’s American Depository Shares or ADSs are traded on NASDAQ. Pearson is a British corporation headquartered in London whose shares are traded in New York and London. On November 21, 2011 Pearson announced the acquisition of Global at a premium of 105% over the previous day share closing price. Global’s share price spiked 97% from $5.37 to $10.60.

Named as defendants are All Know Holdings Ltd, a British Virgin Islands Company, Lili Wang, Sha Chen, the president of All Know, and ZhiYao. Each of the defendants made large purchases of Global ADSs in the days shortly prior to the deal announcement. None of the purchasers had a history of trading in these shares, although Ms. Wang had bought shares in Global’s IPO. In some instances the traders do not appear to have the financial means to conduct the trading.

Ms. Wang is the only defendant which the complaint connects to the transaction other than through trading. She has an undefined relationship with Xiaodong (Veronica) Zhang, the co-founder and Chairman of the Board of Global. On information and belief the complaint claims Ms. Zhang financed the trading of Ms. Wang.

The complaint does not allege a source of information for the other trading groups. It also does not allege a connection between the four groups. The Commission’s complaint alleges violations of Exchange Act Section 10(b). At the time the complaint was filed the SEC obtained an emergency freeze order over $2.7 million is trading profits. The case is in litigation.

Another insider trading action involving PRC residents is SEC v. Yang, Case No. 12-cv-02473 (N.D. Ill. Filed April 4, 2012). The complaint names as defendants Siming Yang, a New York City resident who, until recently, worked for a New York City investment adviser; Prestige Trade Investment Ltd., a company created in January 2012 by defendant Yang; Caiyin Fan, a PRC citizen; Shui Chong (Eric) Chang, a resident of Hong Kong formerly employed at Deutsche Bank Securities, New York City; Biao Cang, a PRC citizen resident in Hong Kong; Jia Wu, a PRC citizen; and Ming Ni, a PRC citizen resident in Hong Kong.

The action centers on the March 27, 2012 announcement by Xianfu Zhu, Chairman and CEO of Zhongpin Inc., that he had submitted a non-binding proposal to take the company private by purchasing all the outstanding shares at $13.50 per share, a 46% premium.

The SEC’s complaint focuses largely on the trading of each defendant shortly prior to the deal announcement: Defendants Yang and Fan purchased 2,571 call options and 58,000 shares and had unrealized profits of $733,000; Prestige purchased over 3 million shares of stock and had unrealized profits of $7.6 million; Defendant Chang purchased 4,035 call options and 32,500 shares of stock yielding unrealized profits of $828,188 after the deal announcement; Defendant Cang bought 306 call options which yielded realized profits of $39,745; Defendant Wu bought 257 call options which yielded realized profits of $34,288; and Defendant Ni purchased 4,300 shares of stock and 169 call options which yielded realized profits of $57,108.

A key allegation in the complaint is coordinated activity. Defendants Yang and Chang are alleged to have used a computer with the same IP address to access brokerage accounts. Defendants Cang, Wu and Ni are alleged to have accessed their brokerage accounts using networks with the same IP address and hardware with identical Media Access Control addresses.

The complaint alleges violations of Exchange Act Section 10(b). The Commission obtained a temporary freeze order. The case is in litigation.

Another insider trading case centered on the acquisition of Canada based Nexen, Inc. by China based CNOOC Limited, announced on Monday July 23, 2012. Within days of that announcement the SEC 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: 1) The buys were made just two trading days prior to the announcement; 2) Well Advantage had not traded in Nexen shares since at least January 2012; 3) The Citigroup account had been dormant for six months; and 4) 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: 1) The timing of the transactions; 2) The size of the transactions; 3) The lack of prior history of significant trading in the shares, although there had been some transactions; and 4) 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: 1) The timing of the transactions; 2) The size of the transactions; 3) The profitability of the transactions which yielded profits of about $721,000; and 4) The lack of prior trading history in Nexen shares. The position in the Citibank account was liquidated immediately after the deal announcement. The case is in litigation.


Although the number of securities class actions is declining, the Commission and the PCAOB continue to struggle with issues, their executives and auditors based in the PRC. To date neither the SEC nor the PCAOB have been able to obtain the degree of cooperation and transparency required for trading in the U. S. capital markets. The promise of SOX and the PCAOB that the Board would have access to the work papers of firms registered with it has yet to be fulfilled despite repeated efforts by U.S. officials. While the recent filing by the SEC in the Deloitte Touche Tohmatsu subpoena enforcement action suggests that progress is being made, if past history is a guide it will be a long road.

Other cases involving Chinese issuers and their executives only serve to highlight the difficulties and lack of transparency regarding these companies while raising issues about accountability. Financial fraud, manipulation and insider trading are issues in all markets. They can be particularly difficult to police in a forum which is known its shroud of secrecy and impenetrability.

Nevertheless, it is clear that Chinese companies and their executives want access to international capital markets and business channels, including those in the U.S. As this drive continues these companies and their executives will find it necessary adopt the much greater degree of transparency and accountability required by the U.S. and international markets.

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