China Aviation Oil (Singapore) Corporation Limited’s Jet Fuel Scandal (2005) – Casestudy

6 mins read

China Aviation Oil (Singapore) Corporation Ltd. (CAO) was involved in the biggest scandal of the city-state of Singapore since the Nick Leeson case (1995), in which Baring Bank collapsed and lost around $1.3 billion in speculative trading. Following losses of around $550 million, CAO filed for bankruptcy in November 2004. Improper application of accounting principles, and inadequate risk management systems for the speculative options deal, were the major contributing factors towards CAO’s failure.

CAO’s major portion of business came from deals in jet fuel procurement. By 2000 it obtained 92% market share of jet fuel imported to China’s civil aviation industry. A marked increase in the profits of the company was due to the monopoly CAO had in the market. Enjoying monopoly in the market the following years showed a marked increase in the profits of the company. However, wrong bets on fuel prices in 2004, by taking a bearish stance in the jet fuel market, forced the company into a scandal which cost CAO dearly.

The CEO, Mr. Chen Juilin, was held responsible for the loss and arrested and charged with fraud and failure to report losses and subsequently was fined $330,000/= and imprisoned for over 4 years.

The path to ruin

CAO started its option trading in 2002[1] . Initially, CAO used to deal only in derivatives of futures and swaps to hedge its jet fuel market risk. However, in the mid 2003, in order to bolster its profile in the market, CAO started trading in speculative derivative options.

The objective behind the speculative options trading was to generate profits from the premium. However, the risk of such trades was not properly assessed by CAO; in fact CAO did not have the proper risk management framework to handle such complex options. The PwC reports:

The fact that the company commenced speculative options trading in the first quarter of 2003, without putting in place a proper risk management environment, raises questions on the strength of its corporate governance” (Chan Sue Ling and Yoolim Lee)

Originally, CAO took a bullish view of the jet fuel market. Predicting that the market price of jet fuel would continue its upward trend, CAO took a long position in the market, and sold puts and bought calls. CAO predicted correctly. Favorable market trends resulted in CAO exercising the call options at expiry. Written put options expired worthless. CAO gained from the exercise of call options and from the premium of put options; this strategy yielded enormous profit for CAO in the first three quarters of 2003.

By the end of 2003, CAO revised its strategy to a bearish stance; CAO predicted that the trend of jet fuel prices would reverse and the prices of jet fuel would go down. The CEO signed contracts with several banks, buying put options and selling call options. But that was a wager the company lost. The prices soared well above the strike price of the call of $38 and CAO faced a large deficit.

Losses could have been floored if CAO had followed the risk management procedure, where a stop-loss limit would have affectively applied and further trading halted. However, despite mark to market losses of $30 million by mid 2004, the CEO increased the bet; he bought back the short-dated option and sold longer dated option. That was done in the hope that the jet fuel prices would eventually decline and the premium could be used to cover the losses. The move instead resulted in increased exposure for CAO.

The jet fuel price continued its upward trend and by October 2004, the mark-to-market losses increased to $180 million. By November 2004, when the losses had mounted to $550 million, CAO was required to meet the margin requirements but was not completely successful in doing so. CAO in their Scheme of Arrangement, dated the 30 November 2004, stated:

“the company was unable to meet some of the margin calls arising from its speculative trades, resulting in the company being forced to close the positions with some of its counter parties. From 26 October 2004 to date, the accumulated losses from these closed positions amounts to approximately US$390 million. The Company is in the process of closing the remaining outstanding positions and estimates the losses from the closure of these positions to be approximately US$160 million” (China Aviation Oil)


CAO started trading options in 2002 and 2003 but the trading was not disclosed in the financial statements. Then from March 28, 2003, CAO started trading options on its own account. By not following the best accounting principles, CAO made a very crucial error in the valuation of options. CAO valued options at intrinsic value and ignored time value of money. Such erroneous valuation of the option was done throughout 2004 by CAO. That resulted in accounting errors being present in the all quarterly disclosures.

According to the assessment done PwC, CAO should have followed IAS 39 and FAS 133; two accounting standards that recognized derivatives at fair market value. Taking time value of money into consideration, losses and not profits as reported by CAO in its disclosures, were incurred for each of the quarters:

S$ Million 1Q** 2Q YTD*** June 04 3Q YTD September 04
Reported PBT* 19.00 19.30 38.30 11.30 49.60
Adjusted PBT* -6.40 -58.00 -64.40 -314.60 -379.00

*          PBT = Profit before tax
**        Q = Quarters
***      YTD = Yield to maturity


Following such heavy losses, on December 02, 2004, COA announced it would be seeking protection from creditors to avoid bankruptcy.


In August 2005, China Aviation Oil Holding, the parent company, paid an S$8 million penalty.  China Aviation Oil Holding breached Singapore’s insider trading laws by selling 15% shares of CAO to Deutsche Bank without informing the share holders.

In February 2006, CAO’s former finance chief, Peter Lim, was sentenced two years in prison for his part in the derivatives trading scandal. He was found guilty of conspiring to cheat adviser Deutsche Bank and fined S$150,000 (US$92,000) for releasing false information.

On March 15, 2006, former CEO of CAO, Mr. Chen Juilin, pleaded guilty to six criminal charges; he was fined S$330,000 and was sentenced to 51 months in jail. (Chan Sue Ling and Denise Kee)

Timeline of the Events

Dates March 2003 Last term of 2003 Throughout 2004 November 30, 2004 December 02, 2004 February & March 2006
Events Enters the speculative market with bullish strategy in jet fuel market Took a bearish view of the jet fuel market CAO facing significant mark-to-market losses because of jet fuel prices rising steeply Discloses losses of $550 million Announced it would be seeking protection from creditors Perpetrators punished

Why the collapsed happened

CAO had a risk management system in place since 2002. But neither the board nor the internal audit committee had the time and the expertise to understand the system. Additionally, the system was not prepared with speculative options derivative trading in mind but was designed for swaps and futures trading. Even then when mark-to-market losses were increasing, the system provided a loss-stop limit which was blatantly ignored by CAO. CEO restructured the options more than once in the period of crises which further increased risk exposure of CAO.

The accounting methods used were not meant for complex options. The accounting methods used looked at the intrinsic value of the option and ignored the time value component; the values of options differed significantly from those of the counter parties. Additionally, losses were not reported and accounting errors were made to show favorable financial statements. (Matulich, Serge, and David M. Currie)


The scandal provides another example in which: regulatory compliance, profit reporting and bending laws took precedence over the risk management and proper accounting reporting. There was a lack of oversight and inadequate knowledge of the market. Considering this, the lessons to take away from this case study are:

  1. Better control and enhancement of risk management is necessary in order to avoid sharp, unprecedented and unexpected losses.
  2. An independent risk management department which provides on the ground vigilance and responsiveness to ensure risk management policies are adhered to.
  3. A team which has the required expertise to manage risk.
  4. Build early-warning systems, which encourage employees to find potential risks and report them to management.
  5. The financial reporting must follow the best practice with frequent and detailed disclosures.
  6. In order to know the loss in different scenarios stress testing must be done.
  7. One should not indulge in a market one does not have good knowledge of.

Many of the factors contributing to the failure of CAO are similar and equally applicable to different business contexts so it is important to learn from it and not to repeat it.


Chan Sue Ling and Denise Kee – March 2, 2006 05:45 EST. “China Aviation Oil’s Chairman Jia, Directors Fined (Update2).” Bloomberg, 02 Mar. 2006.

Chan Sue Ling and Yoolim Lee – March 29, 2005 11:03 EST. “China Aviation Oil Lacked Risk Controls as Trade Losses Mounted.” Bloomberg, 29 Mar. 2005.

China Aviation Oil (Singapore) Corporation Ltd. China Aviation Oil (Singapore) Corporation Ltd To Propose Scheme Of Arrangement. N.p., 30 Nov. 2004.

Matulich, Serge, and David M. Currie. “The China Aviation Oil Scandal.” Handbook of Frauds, Scams, and Swindles: Failures of Ethics in Leadership. Boca Raton, FLA: CRC, 2009. 151-60.

PricewaterhouseCoopers (“PwC”). Statement of Findings. Bankrupt. N.p., 28-Mar. 2005. 14 Apr. 2014.

 [1] Started trading options in 2002