Hanlong Mining's office in Sydney's CBD. Picture: Jane Dempster Source: The Australian THE head of a Chinese firm, his wife and three others are being investigated over claims they used inside knowledge of the group's plans to take over Australian mining companies to make almost $2 million in profits betting on the sharemarket.
The Australian Securities & Investments Commission has successfully frozen the assets of the five, who include Hanlong Mining Investments managing director Steven Hui Xiao, and it has imposed travel bans ahead of a hearing in the NSW Supreme Court next week.
ASIC sought the action while it investigates what it believes is insider trading related to the shares of two Australian companies - Bannerman Resources and Sundance Resources - before they were the subject of takeover bids by Hanlong worth a combined $1.4 billion in July.
ASIC believes the three men and two women used contracts for difference, which are financial instruments that allow investors to bet on stock price movements without having to buy the physical shares.
The five, who include fellow Hanlong employees vice-president Calvin Zhu and Fan Zhang, have not been charged or asked by the court to respond to the allegations. Mr Zhang is the sole director of a company called Wingatta, which is also under investigation. Mr Xiao's wife, Xike Hu, and another woman, FanFan Chen, are also targets of the insider trading probe.
The Hanlong executives are banned from leaving Australia until September 22, when the matter will be back in court, although Mr Xiao, who has been suspended by Hanlong pending the investigation, was granted permission to fly to Hong Kong yesterday. He is expected to return to Sydney today and will face an examination by ASIC.
Mr Xiao's wife, who lives on Sydney's upper North Shore, undertook to surrender her passport until her husband's return. The couple have two children, a five-year-old and a nine-month-old, and several properties.
Hanlong is part of the China-based Sichuan Hanlong Group. Its vice-president, Kang Huan Ju, is on his way to Sydney to "oversee the transitional management of Hanlong's interests in Australia", the company said in a statement, adding it had no plans to shelve its planned investments in Australian companies.
"It is important to note Hanlong Mining is not under investigation and is conducting business as usual," the company said. "The employees involved are assisting and co-operating in the investigation. They will stand down from their current positions in Hanlong and all other directorships of publicly listed companies associated with Hanlong pending the outcome of the investigation."
A spokeswoman for the Department of Foreign Affairs and Trade said yesterday the Chinese government had not approached the Australian government over the ASIC investigation. "As a matter of courtesy we have advised officials at the Chinese embassy in Canberra of the ASIC media release on the matter," the spokeswoman said.
The move by ASIC against the five - several of whom are Australian citizens - follows three prominent legal actions in China against Australian business people, in particular Stern Hu. According to court documents, their companies made close to $2m in profits in July, the month Hanlong announced separate takeovers of Sundance Resources, which has projects in the the African republics of Cameroon and Congo, and uranium miner Bannerman Resources.
The markets surveillance team at ASIC picked up the unusually large number of CFD trades relating to Sundance and Bannerman in July, with the $144m Bannerman deal announced on July 11 and the $1.4bn Sundance takeover one week later, on July 18.
CFDs are controversial because they are considered "extremely risky" by ASIC, which recently issued new guidelines for companies that issue the products.
CFDs have been banned in several European countries, most recently in France, Italy, Spain and Belgium.
ASIC launched its investigation into CFD trading in Sundance and Bannerman in late July, and obtained information from various companies, including CFD traders IG Index and CMC Markets Asia Pacific and banks.
Documents lodged in the NSW Supreme Court reveal the investigation allegedly uncovered a number of trades and links between the five people. Mr Xiao traded in Bannerman CFDs during March and April and in Sundance CFDs between February and May this year. According to ASIC, he made a $32,295 loss trading in Bannerman CFDs. Shares in the company collapsed after the Japanese tsunami and nuclear accident hurt uranium mining shares.
According to the court documents, Mr Xiao's wife, Ms Hu, had a more concentrated trading period. She bought in Bannerman CFDS on July 4 and 5, and sold them on July 11, the day the Hanlong takeover was announced. She is said to have made a $48,277 profit.
She also allegedly bought Sundance CFDs the week before the Hanlong takeover was announced and sold them on the day of the announcement. ASIC believes she made a $688,070 profit on those trades.
Mr Zhang's company Wingatta allegedly bought and sold CFDs in both Sundance and Bannerman and made a profit of $1.2m.
ASIC believes Mr Zhu may have accessed Wingatta's trading account.
ASIC rushed to court last week to obtain urgent orders to freeze assets and to prevent the five from leaving Australia, pending further investigations into the suspicious trades.
When asked to justify the orders, ASIC's barrister David Stack said Mr Xiao was "being investigated for insider trading contraventions".
"If one is found guilty of these contraventions there are very serious consequences," Mr Stack said.
"You go to jail ordinarily for that kind of contravention."
ASIC's investigation is in its early stages, but Mr Stack said that while there might be "an innocent explanation", he also told the court "the evidence is very strong".
Mr Xiao is set to return from Hong Kong today after having been granted permission to leave Australia for two days. He and his wife live in the north Sydney suburb of St Ives.
In giving reasons for extending travel bans and asset-freezing orders yesterday, judge Reginald Barrett made it clear that "it is much to early to say what the outcome of any such investigation might be".
ASIC also believes that Hanlong may sue Mr Xiao and Mr Zhu for compensation, and call on them "to account for their secret profits".
Additional reporting: Teresa Ooi
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