INSIDER-TRADING INVESTIGATION

SEC freezes assets of Chinese trader over bets made on Qihoo before talk of delisting

PUBLISHED : Wednesday, 24 June, 2015, 6:08pm
UPDATED : Wednesday, 24 June, 2015, 6:45pm

The US Securities and Exchange Commission has frozen the assets of a trader in mainland China for suspicious activity, a move that could blunt the trend of Chinese companies rushing to delist in the United States.

The SEC said on Tuesday it obtained an emergency court order to freeze the assets of Luo Haijian, who hails from the Guangdong provincial capital of Guangzhou.

In a complaint filed in a federal court in Manhattan, the SEC alleged that Luo made a profit of more than US$1 million after trading in a US brokerage account in advance of a public announcement by New York-listed Qihoo 360 Technology last week that it had received a buyout offer at a significant premium. 

A lawyer or spokesperson for Luo could not immediately be identified or contacted.

Qihoo 360, the biggest internet and mobile security software provider in China, received a massive US$9.6 billion offer to go private from a consortium led by its chairman and chief executive Zhou Hongyi.

"The suspicious timing and size of Luo's trades spurred us to move swiftly to freeze his proceeds and ensure that potentially illegal profits cannot be siphoned out of this account beyond a US court’s jurisdiction while our investigation continues," Andrew Calamari, the regional director of the SEC’s New York office, said in a statement.

The SEC alleged that Luo made bets that Qihoo's share price would rise in the short term and purchased approximately US$700,000 of out-of-the-money call options prior to the buyout announcement. 

Beijing-based Qihoo's shares soared to a high of US$72.65 on June 17 in New York. The stock finished up 6.21 per cent to US$70.15 that day, its highest close since reaching US$74.33 on November 28 last year.

After Qihoo’s share price rose sharply, Luo sold all of his options and then requested that his brokerage firm -- the San Francisco office of Credit Suisse Securities -- wire-transfer about US$600,000 of the proceeds from his Qihoo trades to a bank account in Singapore.

Luo, who is chief executive at Chinese gaming company 4399 Company, had no prior history of trading Qihoo securities in the recently opened brokerage account. 

The SEC’s complaint charged Luo with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The agency is seeking a final judgement ordering Luo "to disgorge his ill-gotten gains with interest and penalties". 

The emergency court order obtained by the SEC also prevents Luo from destroying any evidence. 

READ MORE: US-listed China tech shares in demand ahead of delisting wave

If past campaigns against insider-trading activity in the US are any measure, the SEC's action against Luo could put a damper on the growing interest of US-listed Chinese companies, especially those in the internet sector, to go private.

The SEC may suspend trading in a stock when it is of the opinion that such an action would be in the interest of investors and the public. This includes cases of trading by insiders and potential market manipulation.

Over a dozen proposals to take US-listed Chinese firms private have been announced recently. 

These include offers made to Qihoo 360, online dating platform Jiayuan.com, real estate services provider E-House (China) Holdings, social networking service Renren, and hosting, network, cloud infrastructure and content delivery network services company 21Vianet Group.

Homeinns Hotel, Sungy Mobile, Wuxi PharmaTech, China Mobile Games and Entertainment Group, Taomee, JA Solar, Mindray Medical, iDreamSky Technology and online dating app Momo join the same list.

Moreover, two Chinese developers of online games, Perfect World and Shanda Games, have recently agreed to delist in the US.

Interest in taking US-traded Chinese companies private is growing due to the belief that they can earn better valuations by re-listing as A-shares in their home market, said Ricky Lai, a research analyst at Guotai Junan International.