Will They Contest the Freeze?

It looks like the SEC has stopped a big insider trading scheme. At least for the moment. But can the SEC find the evidence to prove its suspicions about Well Advantage? I doubt it.

The case involves trading in shares in advance of the announced $15 billion acquisition of a Canadian oil producer, Nexen, by the state-owned Chinese oil company, China National Offshore Oil Corporation, or CNOOC. On Monday, July 23, 2012 CNOOC offered to acquire Nexen for $27.50 per share, a 60% premium over the Friday closing price. Three series of trades had lots of red flags, generating profits in excess of $13 million. The SEC obtained a freeze on those accounts, preventing the owners from getting their suspicious gains.

One series of trades involved accounts at Citigroup and UBS held by Well Advantage. Well Advantage purchased 831,033 shares of Nexen at a cost of about $14.3 million. The buys were made just two trading days prior to the announcement. Well Advantage had not traded in Nexen shares since at least January 2012. The Citigroup account had been dormant for six months. On the Thursday following the Monday deal announcement, a sell order was placed to liquidate the Nexen position in the account for a gain of $7.2 million. (That’s a nice piece of change for a week’s work.)

Another account was at Phillips Securities in Singapore. From July 12,2012 through July 20, 2012, the Phillip Account purchased 597,990 shares of Nexen stock for approximately $10 million. Prior to the July 2012 purchases, the Phillip Account had engaged in only negligible trading of Nexen stock since August 2010. By the end of trading on July 24, 2012, the account had sold 582,990 of its shares realizing profits of approximately $5.1 million.

The third account was at Citibank. That account only purchased 78,220 shares on July 17, realizing a profit of $721,000 when they were sold on July 23.

The SEC’s problem will be proving that the trades were made based on inside information. So far, the only link is in the first series of trades, Well Advantage’s beneficial owner, Zhang Zhi Rong, is a controlling shareholder of Rongsheng, a company that, according to its own public statements, maintains a close business relationship with CNOOC. The SEC will still need to find the smoking gun that proves Well had inside information. Given that the accounts likely involve foreign nationals it will be hard for the SEC to prove its case.

Of course the SEC may be hoping that it does not need to prove its case. The defendants will have to get relief from the asset freeze. That means allowing the SEC access to their communications and files to look for the smoking gun.

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