Monday, December 6, 2004
Singapore probes China firm
John Burton & Francesco Guerrera / Singapore December 06, 2004
Singapore's white-collar crime unit on Friday launched an investigation into the financial scandal at China Aviation Oil (CAO), the Chinese jet-fuel importer that revealed this week the loss of US$550 million in derivatives trading.
The probe by the police's Commercial Affairs Department could also focus on allegations that CAO's Chinese state parent, China Aviation Oil Holdings (CAOHC), engaged in insider trading when it sold a 15 per cent stake in CAO in October to cover the derivatives losses without informing investors of the problem.
The Monetary Authority of Singapore, the city-state's financial regulator, and the Singapore Exchange (SGX) said they were working closely with the CAD on the investigation.
The SGX has already commissioned a separate investigation led by PwC, the accountancy firm, to examine Singapore-listed CAO's involvement in derivatives trading and the failure of internal controls to stem the losses.
The insider trading allegation is potentially the most serious criminal charge in the case.
The company is racing against time to secure court protection from creditors, which include Mitsui & Co., Fortis Bank, Goldman Sachs, Barclays Capital, Macquarie Bank and Sumitomo Mitsui Standard Bank.
Another creditor has given CAO until next Thursday to repay the US$14.3 million it is owed. Failure to repay the sum will result in CAO being deemed insolvent, according to court documents seen by the FT.
In an affidavit filed with Singapore's High Court this week seeking bankruptcy protection for CAO, Chen Jiulin, CAO chief executive, alleged that CAOHC's share placement was meant to raise funds to cover the derivatives losses instead of being used for investment purposes as CAO had told investors.
Chen said CAO informed its parent of mounting derivatives losses on October 10. On October 20, CAOHC surprised the market by offering the S$196m share placement, which Mr Chen said had been originally scheduled to take place at the end of the year. More than US$100 million from the placement was loaned back to CAO to cover margin calls, according to the document.
Deutsche Bank, which arranged the share placement, is also expected to be questioned on whether it was aware of the financial problems at CAO. Deutsche Bank declined to comment on the probe Friday.
Any investigation of CAOHC could encounter jurisdictional problems since the company is based in China.
Singapore would need the cooperation of Chinese authorities to conduct a probe of CAOHC and possibly prosecute a case if wrongdoing was established. Singapore is also seeking the return of Chen after he flew to China this week, only hours after the derivatives losses were revealed and he was suspended from his post.
The SGX has asked CAOHC to help return Chen, who is also CAOHC vice-president, to Singapore for inquiries.
An investigation of CAOHC's role in the share placement would likely dim a proposed joint rescue of CAO by CAOHC and Temasek Holdings, the Singapore state investment agency that holds an indirect 2 per cent in CAO.
A possible collapse of CAO, however, is not expected to affect China's jet fuel imports, which account for nearly 40 per cent of total domestic demand.
Unipec, the trading arm of Chinese refiner Sinopec, is said to have been designated by Beijing to take over all December jet fuel contracts from CAO to secure uninterrupted supplies for the world's second biggest energy consumer.
Singapore Petroleum, a local refiner, said on Friday it had stopped supplying jet fuel to CAO since December 1 and that it was still owed US$15.3m for a cargo of jet fuel.