Shares in China Rongsheng Heavy Industries Group Holdings Ltd tumbled 18 per cent on Monday after the U.S. securities regulator accused a company controlled by the shipbuilder's chairman of insider trading ahead of China's CNOOC Ltd's bid for Canadian oil company Nexen Inc.
The U.S. Securities and Exchange Commission filed a complaint in a U.S. court on Friday against a company controlled by Rongsheng Chairman Zhang Zhirong, and other traders, accusing them of making more than $13-million (U.S.) from insider trading ahead of CNOOC's $15.1-billion bid for Nexen.
On Monday, Rongsheng shares dropped as much as 18 per cent to $1.15 (Hong Kong), a record low, leaving the company with a market capitalisation of just over $1-billion. The company also issued a profit warning, saying first-half earnings would fall sharply as a result of a global shipbuilding downturn, a factor that has already pushed its shares down more than 75 per cent in the past year.
"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," said Steven Leung, a director at UOB Kay Hian.
"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 said.
A June 2012 filing showed that billionaire Zhang held 47.75 per cent of shares in Rongsheng.
Rongsheng – which entered a strategic cooperation agreement with CNOOC in 2010 – said in a Hong Kong filing that it did not expect the U.S. investigation to affect its operations. It said Zhang did not have an executive role in the company.
The SEC does not allege any wrongdoing by Mr. Zhang, but notes that he is the controlling shareholder of a company that engages in significant business activities with CNOOC. CNOOC in Beijing has declined comment on the matter.
"The news around the chairman comes on the back of other operational and credibility issues," Barclays said in a note to clients. "We think China Rongsheng presents significant company-specific risk."
The SEC said on Friday that a federal court in Manhattan had frozen assets worth more than $38-million belonging to Hong Kong-based Well Advantage, controlled by Mr. Zhang, and other unnamed traders who used accounts in Hong Kong and Singapore to trade in Nexen stock.
They made trading profits of $7-million and $6-million respectively using inside knowledge of the merger to buy Nexen shares before the announcement, the SEC alleges.
Mr. Zhang was ranked the 22th richest Chinese person by Forbes Magazine in September 2011. But his net worth fell by more than half in the past year to $2.6-billion in March 2012 as shares of Rongsheng tumbled.
Shares of Glorious Property Holdings Ltd, a Chinese real-estate developer in which Zhang has a 68 per cent stake based on a December 2011 filing, also fell sharply. The stock fell as low as $1.12 (Hong Kong), down 15 per cent from Friday.
Glorious Property said in a statement on Monday that the U.S. investigation would not affect the business of the developer. At $1.12 (Hong Kong), the shares are down 40 per cent from its 2012 high late in February, leaving it with a market capitalisation of about $1.13-billion.
CNOOC said on July 23 it had agreed to acquire Nexen for $15.1-billion, China's biggest foreign takeover bid. Shares of Nexen jumped almost 52 per cent that day.
The unnamed Singapore traders used accounts in the names of Phillip Securities and Citibank C.N, while Well Advantage made its trades through accounts held at UBS Securities and Citigroup Global Markets. Neither of the Well Advantage accounts had traded Nexen shares since January 2012, and the Citigroup account had been completely dormant for over six months, the SEC says.