Singapore Oil Company Chief Arrested in Trading Losses

By WAYNE ARNOLD 

olice arrested the chief executive of China Aviation Oil Singapore yesterday

morning as he returned to Singapore from China to face questions and a
lawsuit related to his company's $550 million in losses from derivatives
trading.

Chen Jiulin, chief executive of the company, the Singapore subsidiary of China
Aviation Holdings in Beijing, has yet to be charged with any crime. The
Commercial Affairs Department in Singapore said it was questioning him at its
headquarters as part of its investigation into possible violations of Singapore's
securities and futures regulations. China Aviation later issued a statement saying
that Mr. Chen had been released.

Once a luminary in Singapore's mainland Chinese business community, Mr. Chen,

43, left Singapore last week, a day after his company announced that its
derivatives-trading losses had forced it into insolvency and that he had been
suspended as chief executive. Upon opening its own investigation, Singapore's
securities exchange asked Mr. Chen to return to assist in the inquiry. A company
spokesman said Mr. Chen had gone to China to visit his sick mother.

Investors are demanding to know how the company, which has a virtual monopoly
on importing jet fuel to China, lost so much money so quickly and why executives
at the company and its controlling shareholder, the government-owned China
Aviation Holdings Company, waited a while to tell them.

Officials in Singapore have already said that the city-state's reputation as a

financial center is at stake in the investigation. Lawyers said they expected
investigators to file charges, if any, within days. Singapore has not witnessed such
a high-profile securities scandal since 1995, when Nicholas W. Leeson fled the
island after losing $1.2 billion at Barings Bank.

Four other China Aviation executives surrendered their passports to police pending
the results of the investigations. Among them were Gerald Rigby, a former
executive at ChevronTexaco's Caltex unit who heads China Aviation's jet fuel
procurement division, and Abdallah Kharma, a British-educated oil industry
veteran who was in charge of trading other products, including derivatives.

Also yesterday, a group of Indonesian investors filed a lawsuit against China

Aviation and China Aviation Oil Holding, accusing them of violating terms of an
agreement under which China Aviation was to buy shares the investors held in the
local refiner, Singapore Petroleum. China Aviation agreed in September to buy the
shares for 362.2 million Singapore dollars ($220 million). But the day after its
revelation about its derivatives loss, China Aviation announced that its
shareholders had rejected the deal.

China Aviation has asked Singapore's High Court to grant it a six-week extension
to the deadline for filing details of its restructuring plan, which it has been
discussing with China Aviation Oil Holding and the investment arm of Singapore's
government, Temasek Holdings. The court is due to hear its application on Friday.

"The process takes some time to come up with a scheme of arrangement, so more
time is needed to come up with the thing and present it to creditors," said Gerald
Woon, a spokesman for China Aviation Oil.

Auditors from PricewaterhouseCoopers, meanwhile, are already going through

China Aviation's records on behalf of the Singapore Exchange to determine what
went wrong. The company had told analysts that it had a risk-management system
in place that should have prevented losses of such magnitude.

Any trade that produced a loss of at least $200,000 had to be reported to a

committee monitoring risk, and any position with an unrealized loss of $350,000 or
more had to be closed, meaning in most cases that the trader would have to sell the
unprofitable security before its value deteriorated any further - unless Mr. Chen
gave his direct permission not to. Any trades producing $500,000 or more in losses
had to be closed with no exceptions.

In an affidavit filed to the High Court last week, Mr. Chen said the company had
informed China Aviation Oil Holding of its problems on Oct. 10. China Aviation
Oil Holding then sold 15 percent of the company in a block trade to Deutsche
Bank in Singapore, which then sold the shares on immediately to hedge fund
managers.

Earlier this week, Deutsche Bank defended the trade, saying it had been conducted
in accordance with market regulations and that China Aviation Oil Holding had
assured it of its subsidiary's financial health.

In his affidavit to the High Court, Mr. Chen said that China Aviation Oil had
received claims from creditors demanding a total of $247.5 million, including
$143.6 million from Mitsui & Company Energy Risk Management and $15.4
million from Goldman Sachs. But both companies said this week that China
Aviation Oil had paid back most of what it owed them.

In the meantime, China Aviation has subcontracted other companies from China to
purchase and import the country's jet fuel, Mr. Woon said. In its statement, the
company said it was planning to set up a new subsidiary to take responsibility for
the business. Financed by China Aviation Oil Holding in Beijing, the new
subsidiary would rent out China Aviation's facilities and personnel, the statement
said.

Photo: Chen Jiulin, chief of China Aviation Oil Singapore, left, was released after being
arrested and questioned yesterday in a securities inquiry. (Photo by Lianhe
Zaobao/Reuters)

Police arrested the chief executive of China Aviation Oil Singapore yesterday morning as
he returned to Singapore from China to face questions and a lawsuit related to his
company's $550 million in losses from derivatives trading.

Chen Jiulin, chief executive of the company, the Singapore subsidiary of China Aviation
Holdings in Beijing, has yet to be charged with any crime. The Commercial Affairs
Department in Singapore said it was questioning him at its headquarters as part of its
investigation into possible violations of Singapore's securities and futures regulations.
China Aviation later issued a statement saying that Mr. Chen had been released.

Once a luminary in Singapore's mainland Chinese business community, Mr. Chen, 43,
left Singapore last week, a day after his company announced that its derivatives-trading
losses had forced it into insolvency and that he had been suspended as chief executive.
Upon opening its own investigation, Singapore's securities exchange asked Mr. Chen to
return to assist in the inquiry. A company spokesman said Mr. Chen had gone to China
to visit his sick mother.

Investors are demanding to know how the company, which has a virtual monopoly on
importing jet fuel to China, lost so much money so quickly and why executives at the
company and its controlling shareholder, the government-owned China Aviation Holdings
Company, waited a while to tell them.

Officials in Singapore have already said that the city-state's reputation as a financial
center is at stake in the investigation. Lawyers said they expected investigators to file
charges, if any, within days. Singapore has not witnessed such a high-profile securities
scandal since 1995, when Nicholas W. Leeson fled the island after losing $1.2 billion at
Barings Bank.

Four other China Aviation executives surrendered their passports to police pending the
results of the investigations. Among them were Gerald Rigby, a former executive at
ChevronTexaco's Caltex unit who heads China Aviation's jet fuel procurement division,
and Abdallah Kharma, a British-educated oil industry veteran who was in charge of
trading other products, including derivatives.

Also yesterday, a group of Indonesian investors filed a lawsuit against China Aviation
and China Aviation Oil Holding, accusing them of violating terms of an agreement under
which China Aviation was to buy shares the investors held in the local refiner, Singapore
Petroleum. China Aviation agreed in September to buy the shares for 362.2 million
Singapore dollars ($220 million). But the day after its revelation about its derivatives
loss, China Aviation announced that its shareholders had rejected the deal.

China Aviation has asked Singapore's High Court to grant it a six-week extension to the
deadline for filing details of its restructuring plan, which it has been discussing with
China Aviation Oil Holding and the investment arm of Singapore's government, Temasek
Holdings. The court is due to hear its application on Friday.

''The process takes some time to come up with a scheme of arrangement, so more time
is needed to come up with the thing and present it to creditors,'' said Gerald Woon, a
spokesman for China Aviation Oil.

Auditors from PricewaterhouseCoopers, meanwhile, are already going through China

Aviation's records on behalf of the Singapore Exchange to determine what went wrong.
The company had told analysts that it had a risk-management system in place that
should have prevented losses of such magnitude.

Any trade that produced a loss of at least $200,000 had to be reported to a committee
monitoring risk, and any position with an unrealized loss of $350,000 or more had to be
closed, meaning in most cases that the trader would have to sell the unprofitable
security before its value deteriorated any further -- unless Mr. Chen gave his direct
permission not to. Any trades producing $500,000 or more in losses had to be closed
with no exceptions.

In an affidavit filed to the High Court last week, Mr. Chen said the company had
informed China Aviation Oil Holding of its problems on Oct. 10. China Aviation Oil
Holding then sold 15 percent of the company in a block trade to Deutsche Bank in
Singapore, which then sold the shares on immediately to hedge fund managers.

Earlier this week, Deutsche Bank defended the trade, saying it had been conducted in
accordance with market regulations and that China Aviation Oil Holding had assured it of
its subsidiary's financial health.

In his affidavit to the High Court, Mr. Chen said that China Aviation Oil had received
claims from creditors demanding a total of $247.5 million, including $143.6 million from
Mitsui & Company Energy Risk Management and $15.4 million from Goldman Sachs. But
both companies said this week that China Aviation Oil had paid back most of what it
owed them.

In the meantime, China Aviation has subcontracted other companies from China to
purchase and import the country's jet fuel, Mr. Woon said. In its statement, the company
said it was planning to set up a new subsidiary to take responsibility for the business.
Financed by China Aviation Oil Holding in Beijing, the new subsidiary would rent out
China Aviation's facilities and personnel, the statement said.
With the increase in losses from the use of derivatives, it can be expected that insures will claim under various
types of bonds
While the 1995 collapse of Barings PLC focused the media's and public's attention on another massive loss
sustained from trading in "derivatives," the insurance industry has braced itself for a new round of claims by
financial institutions and investors that have incurred these losses and other liabilities.(1) One type of insurance
that may be the subject of claims is the fidelity bond. But there are coverage issues that arise in claims involving
derivatives-trading losses.
A "derivative" generally is defined as a financial agreement whose value depends on, or is "derived from," the
performance of an underlying financial asset such as a bond, currency, or an index of securities.(2) The term is
commonly used to describe a broad range of instruments such as futures, options on securities, options on
futures, forward contracts, structured notes, swap agreements, and mortgage pool participations. While some
derivative instruments are traded on exchanges or through organized markets, as is the case with futures and
options on futures, over-the-counter derivatives, such as swaps and structured notes, are individually negotiated
between the parties. An entity or individual usually invests in a derivative to reduce risk, known as hedging," or
as an alternative to investing in more traditional securities.(3)
Employee Dishonesty Insuring
Agreements
Generally speaking, there are two types of fidelity bonds available in the commercial insurance market: (1) the
financial institution bond and (2) the commercial crime bond. The financial institution bond covers banks,
brokerage houses, investment banks, and savings and loan associations. The commercial crime bond is usually
purchased by corporations or other business entities.
Although fidelity bonds, whether issued to financial institutions or corporations, provide coverage to the insured
entity for losses caused by such perils as forgery, certain counterfeited documents, "on-premises" losses, or
damage to property, the main insuring agreement provides coverage for losses caused by "dishonest and
fraudulent acts" or, as in the case with some commercial crime bonds, "theft," committed by "employees" of the
insured entity.(4)
Since the mid-1970s, most financial institution bonds have contained an employee dishonesty insuring
agreement covering:
Loss resulting directly from dishonest or fraudulent acts of an employee committed alone or in collusion with
others.
Dishonest or fraudulent acts as used in this insuring agreement shall mean only dishonest or fraudulent acts
committed by such employee with the manifest intent
(a) to cause the insured to sustain such loss, and
(b) to obtain financial benefit for the employee or for any other person or organization intended by the employee
to receive such benefit, other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing,
pensions or other employee benefits earned in the normal course of employment.(5)
Under this language, the insured entity generally must show four main elements in order to demonstrate a
covered claim. First, the insured show that it has sustained a "loss." Fidelity bonds are not liability policies; they
are generally considered to be indemnity policies that reimburse only the insured's out-of-pocket loss.1 Second,
the insured must show that the loss was caused by dishonest or fraudulent acts committed by an "employee" of
the insured.1 Third, the …