CAO holds Goldman Sachs to account
(China Daily)
Updated: 2005-03-18 09:15

China Aviation Oil Corp (CAO), which is struggling to stave off bankruptcy after losing US$550 million in derivatives trading, has sued one of its creditors - Goldman Sachs Group Inc.

Singapore-listed CAO accused J. Aron & Company, a Goldman Sachs' commodity division, of "misrepresentation, negligence, breach of statutory duties and/or deceit" in contracts, CAO said in a statement late Wednesday.

The lawsuit comes after several creditors, including South Korea's SK Corp and Japan's Sumitomo Mitsui Banking Corp, proposed the rejection of the restructuring plan offered by CAO in January. CAO will be liquidated, should the plan fail to win approval from half of its creditors, which represent 75 per cent of CAO's outstanding debt.

"The company is seeking damages from J. Aron or a rescission of two agreements entered into between the company and J. Aron for the restructuring of the company's options portfolio in January and June 2004," the statement said.

A Hong Kong-based spokesperson of Goldman Sachs (Asia) yesterday responded: "We believe this claim is without merit, and we will contest vigorously."

CAO once dominated China's aviation oil imports. It racked up the US$550 million loss in speculative trading last November after it made the wrong bet on the movement of oil prices. The debacle is the largest financial scandal to rock Singapore since the collapse of Barings Bank in 1995.

To avoid collapse, CAO put forward a restructuring plan in January to write off 58.5 per cent of its outstanding debt.

But the firm's creditors were unsatisfied, claiming the payment was too small and the pay-back period too long.

SK Energy Asia, which is owed US$14.3 million, asked for judicial management earlier this month. It said the move will make negotiations more "transparent and credible."

CAO has said such a move would lead to the liquidation of the company.

A Singapore-based oil broker, with close ties to CAO, said yesterday that CAO made the right decision in suing Goldman Sachs.

"Most of the brokers here think CAO should have fought back far sooner," said the broker, who refused to be identified. "During negotiations, CAO should be more aggressive, and take the initiative."

It is difficult to speculate whether CAO's claim is based in fact or not. But the investigation may end with unexpected results that may favour the interests of CAO, said the broker.

And the investigation will give CAO more time to manoeuvre, he added.

After the scandal was exposed, the Singapore authorities launched a criminal investigation into the company and its former chief executive officer, Chen Jiulin.

In an interview with Xinhua News Agency last month, Chen accused the executives of CAO's Beijing-based parent company, China Aviation Oil Holdings, of negligence.

He claimed the executives failed to act promptly to limit the losses after he informed them of the situation

The loss could have been held at less than US$100 million, instead of more than half a billion, according to Chen.

The parent company has denied the charge.

Chinese authorities have urged all State-owned enterprises to learn from CAO's case, improve their corporate governance and strengthen risk control mechanisms.

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