Rongsheng Issues Profit Warning, Chairman in $13 Million Insider Trading Case

The U.S. Securities and Exchange Commission (SEC) said today in a statement it filed a complaint in Manhattan on July 27, 2012 against a company controlled by shipbuilder China Rongsheng Heavy Industries Group Holdings Ltd (Rongsheng) [HKG:1101] Chairman Zhang Zhirong, and other traders alleging they profited more than USD $13 million from insider trading in Nexen Group ahead of China's state owned CNOOC Ltd.'s $15.1 billion bid for Canadian oil company Nexen.

Rongsheng shares dropped 18% to a record low of HK $1.15 in trading on Monday.

The company today also issued a profit warning for its first half year earnings saying its profits will have a sharp decline as a result of the global shipbuilding downturn.

Rongsheng shares have fallen more than 75% in the past year.  

Wrongdoing

While not alleging any wrongdoing by Mr. Zhang, the SEC stated he "controls another company that has a 'strategic cooperation agreement' with CNOOC," which is wording used on Rongsheng's website to describe its relationship with CNOOC.

The SEC complaint states that unnamed Singapore traders used accounts in the names of Philllip Securities and Citibank C.N., and a company owned and controlled by Zhang Zhirong Well Advantage, made trades in accounts at UBS Securities and Citigroup Global Markets ahead of the CNOOC/Nexen merger and made trading profits of $7 million in the instance of the Singapore traders and $6 million in the case of Well Advantage.

Prior to this trading activity, the accounts had either been sporadically used or dormant in the six months prior to the trades.

Rongsheng said in a Hong Kong Exchange filing today it did not expect the U.S. investigation to have an effect on its operations, and that Mr. Zhang did not have an executive role in the company, nor was he a member of the management team responsible for the day-to-day business activities and operation of the Group.

The SEC froze assets in excess of $38 million controlled by Well Advantage on the same day it launched its complaint.

Discussing the matter today in the Canadian daily The Globe and Mail, Steven Leung, a director of UOB Kay Hian said, "Since weak earnings had been expected and the stock had already come down quite a bit, the early selling was mainly triggered by the insider trading probe."

"Investors are very sensitive to this kind of news and they simply unloaded their stakes on the worry that they will not be able to exit their investment if the company involved gets suspended," he added.