China Aviation Oil — $550M in unauthorized oil trades, the CEO went to jail

China Aviation Oil (Singapore) Corporation was a Singapore-listed subsidiary of China Aviation Oil Holding Company, a Chinese state-owned enterprise. It was the sole supplier of imported jet fuel to China's civil aviation industry. The company traded oil derivatives to hedge its jet fuel purchases against price volatility, but its traders exceeded position limits and took speculative positions without updating risk management controls.

In late 2004, crude oil prices surged past $55 per barrel, triggering massive margin calls on CAO's open positions. The company had not disclosed its losses, and the margin calls exceeded its resources. On 29 November 2004, CAO announced a $550 million loss from derivatives trading and filed for bankruptcy protection in Singapore. The loss was larger than the company's total market capitalization.

CEO Chen Jiulin was arrested by Singapore police. He pleaded guilty to insider trading, failure to disclose losses, making false financial statements, and conspiring to deceive Deutsche Bank. In March 2006 he was convicted and fined S$335,000. Four other executives were also arrested. The scandal was described as Singapore's most serious financial event since the collapse of Barings Bank in 1995.

CAO's parent company provided a $100 million emergency loan, which was insufficient. BP, Temasek Holdings, and the parent company jointly invested $130 million to stave off bankruptcy. The company underwent restructuring and survived. The case became a landmark for corporate governance failures in Singapore-listed Chinese companies.

The company hid mounting losses until a $55 oil price surge triggered margin calls it could not meet, costing $550M and landing the CEO in jail.

CAO's risk management rules were not updated to reflect the aggressive trading strategy. Traders exceeded position limits without controls.

The company failed to disclose mounting losses for months. When crude oil prices surged past $55 per barrel, margin calls exceeded the company's resources.

CEO Chen Jiulin was convicted of insider trading and fraud. He was convicted. The scandal was Singapore's biggest since Barings.

When a company's trading exceeds its risk controls — and the losses are hidden — the margin call is not the crisis. The concealment is.