IT WAS one of those chairman-to-chairman type of meetings when Peter Mansell, well known in Perth business, met David Smith, chairman of the emerging uranium miner Bannerman Resources.

Mansell was about to be officially anointed as the new chairman and head of iron ore business for Hanlong mining, the resource arm of the privately held Chinese conglomerate, Sichuan Hanlong.

Mansell recalled that he had been instructed by either Steven Hui Xiao, Hanlong’s managing director, or its vice-president, Calvin Zhu, to meet Smith and discuss Hanlong’s interest in a 100 per cent takeover of Bannerman.

Little did Mansell expect that Hanlong’s manoeuvrings for Bannerman, and the iron ore company Sundance Resources, would see him unwittingly thrust into a forensic investigation by the corporate regulator on alleged insider trading in securities and derivatives by Xiao, Zhu, Hanlong’s trading manager, Fan Zhang, and their wives.

So far, the Australian Securities and Investments Commission says it has identified 16 Australian and offshore trading accounts associated with the three men and their partners, reaping more than $3 million in suspect profits.

The glimpse into the inner workings of Hanlong was contained in documents tendered in the New South Wales Supreme Court this week, as ASIC revealed it would take six months to complete its complex and record-rich investigations.

While Mansell was otherwise engaged in the Bannerman negotiations, he recounted to ASIC that either Xiao, or Zhu, had told him Hanlong was talking to the trustees of the estate of a mining magnate, Ken Talbot, to acquire the Talbot group’s 16 per cent stake in Sundance Resources.

Talbot’s death in a plane crash while inspecting Sundance’s Mbalam iron ore project in Africa in June last year had put his empire into play, and Hanlong, with its ambitions to become one of the top five iron ore producers in the world, saw the Talbot holding as a fit.

It acquired the Talbot stake in March, and made a formal takeover offer for Sundance in July.

The Sundance board has since recommended that its shareholders accept Hanlong’s $1.65 billion takeover. While Hanlong has stood down the executives, uncertainty over the ASIC investigation continues to delay a decision by the Foreign Exchange Review Board about the takeover.

Next week, the regulator returns to court to make out its case for a travel ban on Xiao’s wife, Xike Hu, whom it considers a flight risk. Xiao, a Chinese national, is himself in breach of a court order and has failed to return to Australia after what should have been a brief visit to China.

The 37-year-old told his solicitor that because of high blood pressure was advised not to make the long flight to Australia.

Xiao’s solicitor, John Mitchell, rang ASIC late on November 28, alerting it to the situation. ASICs inquiries the next day to Australian Customs and Border Protection elicited the answer that existing court orders did not specifically stop Xike Hu from ”leaving or attempting to leave” Australia.

Hu had already agreed to court orders to surrender her passport to her lawyer, and is believed to be at the couple’s home in Sydney with her two young children. While ASIC seeks to hold Hu hostage until Xiao’s return, it has also amassed information that it says points to her role in the suspect trading.

And it intends to question her again, and this time impel her to answer questions about her husband’s activities following the High Court decision on November 30, which found there was no common law privilege against spousal incrimination in Australia.

In earlier examinations with investigators, Xiao and Hu both refused to answer 48 questions on spousal privilege grounds. The ASIC specialist in charge of the case, Colin Luxford, said in an affidavit that during an examination of Hu in early October, she said she did not know what a contract for difference was, she had not heard of Bannerman before the ASIC investigation, and she had never worked for Hanlong, though she still received a wage from the company.

But ASIC says that it has identified an IG Markets trading account in Hu’s name, in which Bannerman and Sundance contracts for difference were traded just before Hanlong’s respective takeover bids were announced to the market.

The announcement pushed the shares up 25 per cent, and the trades produced $736,000 profit.

Luxford said IG Markets had phone recordings of 20 calls by a Mandarin-speaking woman who identified herself as Ms Hu, regarding the movement of funds, and the placements of orders between March and July 2011.

ASIC had also identified a foreign exchange account held by Hu, in which $1.127 million was transferred just after the announcements into five bank accounts in China – one held by her husband, Xiao, and the rest by Caixia Xiao, her sister-in-law. Some of those funds transferred were the profits from the suspect trading, Luxford said.

ASIC has also turned its attention to Calvin Zhu, an Australian citizen. Court documents reveal that trading manager Fan Zhang said he went to a Commonwealth Bank at the request of Zhu and opened both a CFD, and trading account, under the name Wingatta.

He ”followed whatever Mr Zhu told him to do”, and passed the account’s internet password to Zhu. The Wingatta account generated profit of $1.2 million.

Zhu and Xiao have told ASIC that many of the transactions were nominee trading for Hanlong. One new offshore account associated with Xiao, Gold Pattern International Trading Account, made a combined profit $1.05 million, and Xiao has claimed Gold Pattern was a nominee of Hanlong Resources Hong Kong.

Peter Mansell told ASIC he had no knowledge of any company nominee strategy, and ASIC notes there was no record of this in any of the Hanlong accounts.

But the nominee claim by Xiao and Zhu has put ASIC on notice that some provisions of the Corporations Act – section 1043(i) and 1043(j), which exempts companies and officers from coming under the insider-trading umbrella in certain circumstances – will indeed have its day in court.

Republished from SMH: http://www.smh.com.au/business/insider-trading-investigation-traps-unwitting-20111208-1ol93.html#ixzz1fzIRDiMj – 9 December 2011