ALBERTA SECURITIES COMMISSION DECISION. Citation: Re Zhang, 2018 ABASC 28 Date: Fengjiu Zhang. Tom Cotter James Oosterbaan

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1 ALBERTA SECURITIES COMMISSION DECISION Citation: Re Zhang, 2018 ABASC 28 Date: Fengjiu Zhang Panel: Tom Cotter James Oosterbaan Representation: Don Young for Commission Staff Perry Mack, Q.C. for Fengjiu Zhang Hearing: January 12, 2018 Decision: February 15,

2 1 I. INTRODUCTION [1] In a notice of application (NOA) issued on December 28, 2017, Alberta Securities Commission (ASC) staff (Staff) applied for an order under ss. 198(1)(d) and (e) and 198.1(2)(c) or (d) of the Securities Act (Alberta) (the Act) reciprocating an order made by the United States (US) Securities and Exchange Commission (the SEC) against Fengjiu Zhang (Zhang). [2] The SEC order on which Staff's application was based was made September 28, 2017 against Zhang and another individual (the SEC Order). The SEC Order imposed various sanctions against Zhang; however, the only provision Staff sought to reciprocate directed that: Pursuant to Section 21C(f) of the [US Securities Exchange Act of 1934], Zhang... is... barred from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act [15 U.S.C. 78l] or that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. 78o(d)] for a period of three (3) years from the entry of this Order. [3] We heard Staff's application on January 12, 2018 (the Hearing). No one appeared for the respondent, Zhang. However, Staff advised us that Zhang has local counsel, and that both Zhang and his counsel were aware of the application. Staff also advised us that Zhang's counsel indicated he would not be attending the Hearing, but authorized Staff to represent his position as follows: "So long as the [p]anel is not going beyond what [Staff are] seeking, which is the threeyear director and officer ban, he has no submissions to make and is not contesting the application on behalf of Mr. Zhang." II. BACKGROUND [4] In support of their application, Staff tendered into evidence an affidavit sworn by a member of the ASC's Enforcement Division (the Staff Affidavit). The Staff Affidavit attached a copy of the SEC Order and recited a few facts therefrom. [5] On the basis of the SEC Order and offers of settlement made by Zhang and his corespondent, the SEC found that Zhang had violated US insider trading provisions specifically, s. 10(b) of the US Securities and Exchange Act of 1934 (the Exchange Act) and Rule 10b-5 thereunder with respect to the securities of publicly-traded, Calgary-based Nexen Inc. (Nexen) prior to the announcement on July 23, 2012 (the Announcement) that Nexen would be acquired by the Chinese energy company, CNOOC Limited (CNOOC), for approximately US$15.1 billion. At the relevant time, Zhang, a citizen of the People's Republic of China, was a resident of Calgary and president and chief executive officer of CNOOC's Canadian subsidiary, CNOOC Canada Inc. Through that position, and prior to the Announcement, he knew about the negotiations between Nexen and CNOOC and their status. [6] The SEC Order indicated that "[l]ess than a week before the Announcement", Zhang contacted a friend living in the US and asked her to purchase Nexen securities on his behalf. She did so, then sold the securities in the months following the Announcement for a profit of US$65, In addition, Zhang tipped another friend, his co-respondent in the SEC proceedings. That individual purchased Nexen securities on "the last trading day before the Announcement", and sold them shortly after the Announcement for a profit of US$11,

3 2 [7] In early 2017, following CNOOC's acquisition of Nexen, Zhang left Calgary and moved to Beijing, China. He was resident in Beijing at the time of the SEC Order. [8] According to the recitals in the SEC Order, Zhang and his co-respondent submitted offers of settlement in anticipation of the institution of proceedings by the SEC. They consented to the entry of the SEC Order against them "without admitting or denying the findings made [t]herein", but agreed to the imposition of sanctions against them. As against Zhang, those sanctions included a cease-and-desist order, a monetary penalty, a disgorgement order, and the aforementioned three-year director-and-officer ban. III. ANALYSIS [9] Before its repeal effective July 1, 2015, s. 198(1.1) of the Act set out the ASC's jurisdiction to reciprocate orders of domestic and foreign securities regulatory authorities. That section required that respondents be provided with "an opportunity to be heard" before the ASC could issue a reciprocal order based on a conviction, judgment, order or settlement originating in a jurisdiction outside Alberta. Reciprocal order decisions from the ASC before July 1, 2015 generally referred to the need for Staff to meet "two statutory preconditions" to the application of s. 198(1.1): first, to show that the respondents were given adequate notice of the application and an opportunity to be heard; and second, to show that the respondents had been made subject to or were parties to a conviction, judgment, order or settlement originating in another jurisdiction and imposing "sanctions, conditions, restrictions or requirements" on them (see, for example, Re Leemhuis, 2008 ABASC 585 at paras and Re Casavant, 2010 ABASC 162 at para. 4). [10] The current reciprocal order provisions in s of the Act have modified the first precondition. They now allow the ASC to issue an order "with or without providing an opportunity to be heard". Thus, it is arguable that no notice of this application to Zhang was required. It is not necessary for us to decide that issue, however, as we are satisfied based on Staff's representations at the Hearing that Zhang had adequate notice of the application and was provided with an opportunity to be heard, but declined to participate in the Hearing. [11] The second precondition remains substantially the same under s (2). The portions relevant to this application provide that we may "make an order under section 198(1)(a) to (h) in respect of a person... " if that person is either "subject to an order made by... a securities regulatory authority outside Canada... imposing sanctions, conditions, restrictions or requirements on the person... " (s (2)(c)) or "has agreed with... a securities regulatory authority outside Canada... to be subject to sanctions, conditions, restrictions or requirements" (s (2)(d)). [12] Sections 198(1)(a) to (h) of the Act allow us to make various orders against a respondent where we consider it to be "in the public interest to do so". They include the orders sought by Staff on this application: "that a person resign one or more positions that the person holds as a director or officer of an issuer... " (s. 198(1)(d)) and "that a person is prohibited from becoming or acting as a director or officer or as both a director and an officer of any issuer... " (s. 198(1)(e)).

4 3 [13] While ss. 198(1)(d) and (e) refer to prohibitions against acting as a director or officer of "an" issuer and "any" issuer respectively, the SEC Order only prohibits Zhang from acting as a director or officer of a limited class of issuer any "that has a class of securities registered pursuant to Section 12 of the Exchange Act... or that is required to file reports pursuant to Section 15(d) of the Exchange Act... ". Such issuers have securities "registered on a national securities exchange" (Exchange Act at s. 12) or must file certain "supplementary and periodic information, documents, and reports as may be required" (Exchange Act at s. 15(d)). [14] The issuers referred to in the SEC Order are thus generally analogous to "reporting issuers" in this jurisdiction. As defined at s. 1(ccc) of the Act, a reporting issuer includes an issuer "whose securities have been at any time since February 1, 1982 listed and posted for trading on an exchange recognized... by the [ASC]". At the relevant time, Nexen's common shares were listed on both the New York Stock Exchange and the Toronto Stock Exchange. CNOOC's common shares were listed on the New York Stock Exchange and the Stock Exchange of Hong Kong. [15] The NOA indicated that Staff were seeking a ban which would prohibit Zhang from acting as a director or officer of "any" issuer, which is broader than a ban which would prohibit Zhang from acting as a director or officer of any reporting issuer. However, at the Hearing Staff clarified that they sought only to reciprocate "what had happened down in the [US]", and submitted that they would be content with an order confining the scope of the ban to reporting issuers. [16] If Staff had not made this concession, we may have had concerns about the order sought for the reasons discussed by the British Columbia Court of Appeal in Lines v. British Columbia (Securities Commission), 2012 BCCA 316. That case concerned a reciprocal order made by the British Columbia Securities Commission with terms more onerous than the order issued by the originating jurisdiction (in that case, also the SEC) based on a "no-contest" settlement one where, as here, the respondent neither admitted nor denied the misconduct alleged. In view of the position taken by Staff at the Hearing, however, it is not necessary for us to decide the issue. [17] We are satisfied that what we have described above as the "second precondition" to a reciprocal order has been met in this case. Zhang both entered into a settlement agreement with the SEC "a securities regulatory authority outside Canada" and consented to an order made by the SEC "imposing sanctions, conditions, restrictions or requirements" on him. [18] We are also satisfied that reciprocation of the SEC Order would serve the public interest (Leemhuis at paras ). The misconduct described in the SEC Order would have constituted contraventions of insider trading and tipping provisions in the Act, which serve to protect investors and the integrity of the Alberta capital market. The impugned conduct occurred partly in Alberta, when Zhang was a resident of Calgary, and involved the securities of an Albertabased reporting issuer. We agree with Staff that there is "a nexus to Alberta and the public interest in Alberta is affected". That interest should be protected through the imposition of the orders sought on this application.

5 4 [19] We are of the view that our order should be restricted to director and officer positions with reporting issuers. Zhang's alleged misconduct involved the securities of an issuer (Nexen) "registered on a national securities exchange", and occurred while he was an officer of CNOOC's Canadian subsidiary; CNOOC's securities were also "registered on a national securities exchange". The scope of the director-and-officer ban imposed under the SEC Order was evidently tied to Zhang's activities and his position at the relevant time. Confining our order to director and officer positions with reporting issuers will serve the public interest and is consistent with the principle of comity reflected in s IV. SANCTIONS ORDERED [20] For the reasons given, we order in the public interest under s of the Act that: under s. 198(1)(d), Zhang must resign all positions that he holds as a director or officer of any reporting issuer; and under section 198(1)(e), Zhang is prohibited from becoming or acting as a director or officer (or both) of any reporting issuer until September 28, [21] This proceeding is concluded. February 15, 2018 For the Commission: Tom Cotter "original signed by" "original signed by" James Oosterbaan