Chen Jiulin returned to Singapore from China three days ago to atone for his company's sins. After spending most of Wednesday being questioned by Singapore police about his company's US$550 million derivatives loss, the suspended chief executive of China Aviation Oil (Singapore) Corp (CAO) was suitably humble when he stumbled into the media spotlight. 'I come to explain,' Mr Chen told a scrum of reporters who had spent most of the day staking out police headquarters. 'I have an obligation and a responsibility to do so.' Yet while the 43-year-old from Hubei province now feels duty-bound to tell the truth about CAO's disastrous foray into derivative trading, that certainly was not the case at the time the company was playing double-or-nothing with other people's money. Mr Chen and his traders started off small when they first stepped into the options market in the second half of last year, with the company's initial transaction involving just two million barrels of oil. Within a few months, CAO traders were apparently selling short into a rising market, then reversing their positions as prices began to fall, raking up massive losses before the company applied for court protection last week. Not that CAO's 7,000-odd minority shareholders knew about any of this. When CAO unveiled its third-quarter results on November 13, Mr Chen brazenly insisted the company's full-year outlook was 'still quite positive' and there would be 'major increases in earnings' next year. His flagrant non-disclosures could end up landing him in a Singapore jail for as long as seven years. But the far more intriguing aspect of Singapore's biggest financial scandal since rogue trader Nick Leeson broke Barings Bank in 1995 involves the role of CAO's Beijing-based parent company, China Aviation Oil Holding. Mr Chen said in an affidavit he filed last week in support of CAO's bid for court protection that he told the parent company on October 10 that it was already facing realised losses of US$80 million and potential losses of US$180 million as a result of its disastrous derivative trades. Yet just 10 days later, the Beijing-based company sold down its 75 per cent stake in CAO to 60 per cent through a share placement organised by Deutsche Bank. The US$108 million raised ended up going straight to CAO to help it meet its margin calls. Even if Mr Chen was not being entirely frank with his bosses in Beijing, it seems extraordinarily unlikely that they knew nothing about CAO's derivatives losses when they made the placement. CAO and its parent share not only a common chairman, Jia Changbin, but also some directors. 'To us that's cheating,' David Gerald, the president of the 63,000-member Securities Investors Association of Singapore, said about the share placement. 'It smacks of poor integrity and dishonesty. 'CAO and its parent company arranged the placement despite the fact that they knew of the company's massive derivatives losses.' The apparent willingness of both CAO and its parent company to flagrantly breach Singapore's disclosure rules highlights the problem that many Chinese-related companies have with adhering to some of the basic principles of good corporate governance. 'I think China and Chinese companies have great depth in terms of entrepreneurship and technical expertise,' said Mak Yuen Teen, co-director of the Corporate Governance Centre at the National University of Singapore. 'However, given that it is still not that long ago that China was a centrally planned economy, there is a lack of modern management expertise, including finance, accounting and management skills and lack of knowledge of international market practices, disclosure and transparency standards.' Hugh Young, the managing director of Aberdeen Asset Management Asia, agrees. 'Awareness of corporate governance is still relatively poor in China and the CAO scandal is a pretty good example of that,' Mr Young said. 'The losses that the company made on their derivative trading is the sort of problem that could have happened anywhere in the world. But the next step in the process - where a parent company was apparently selling stock having been given prior information - is more demonstrative of the fact that China still doesn't understand all of the issues of corporate governance.' It remains to be seen just how tough Singapore's corporate regulators and police will end up being with all of the parties involved in the debacle. The island's politicians have certainly been keen to stress that Singapore's reputation as a regional financial centre rests on how it deals with the case. Singapore will not want to lose its position as a major sponsor of Chinese companies listing abroad by offending the Chinese government. While the Singapore government probably will take a cautious approach to its dealings with China Aviation Oil Holding over its role in its subsidiary's derivative scandal, savvy investors already seem to be voting with their feet. China stocks on the Singapore market have dropped in value by close to 8 per cent since the CAO scandal erupted last week. 'Interestingly, those companies which have larger institutional following have fallen considerably more, while those with small retail investors have been more robust,' said Mr Mak. 'It seems like the smart money is leaving Chinese stocks, while the smaller retail investors are hanging in, hoping for better times,' he said.