China Aviation Oil Scandal Case Study

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



YTD*** June 04


YTD September 04

Reported PBT*






Adjusted PBT*






*          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


March, 2003

Last term of 2003

Throughout 2004

November 30, 2004

December 02, 2004

February and March, 2006


Enters into speculative market with bullish strategy in jet fuel marketTook a bearish view of the jet fuel marketCAO facing significant mark-to-market losses because of jet fuel prices rising steeplyDiscloses losses of $550 millionAnnounced it would be seeking protection from creditorsPerpetrators 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 lack of oversight and inadequate knowledge of 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 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

Tagged with:Case Study, China Aviation Oil, Derivative disasters, Derivative losses, Fuel Hedging Scandals

Case details

About the authors

Professor Stewart Hamilton, Dean of Finance and Administration at IMD, Switzerland and Research Associate Jinxuan (Ann) Zhang discuss the case series China Aviation Oil.

Why China Aviation Oil?

Stewart Hamilton: Although I have written a book1 and cases on corporate failure (Enron2, Parmalat, WorldCom, Swissair), my only Asia Pacific case was Barings Bank3. A former student wrote to me when the China Aviation Oil (CAO) scandal broke in 2004, and I realised that this was an opportunity to fill that gap.

The near-collapse of CAO was the second largest corporate scandal after Barings in Singapore. CAO was an overseas listed subsidiary of a Chinese state-owned company, which I thought could make it a good case to illustrate risk management issues, corporate governance, approaches to restructuring, and the implications for Chinese state-owned companies expanding overseas. I did not write the case immediately because it was too early with the investigation still underway. I also did not have the right resources to be able to work on it, including someone who could understand the Chinese context and materials, and speak Mandarin.

Managing field research

Our process of creating a case involves initial research based on publicly available information, followed, where possible, by meetings with the parties involved in order to get as broad and balanced a picture as we can. IMD cases are non-judgmental, as we prefer to let the facts speak for themselves. Investigating CAO was not a smooth process, since we were talking about a failure case in the Asian context - a sensitive issue. An MBA student of mine from Singapore made the initial introduction to meet one of the advisors on the restructuring of the company. However, we then needed to contact the majority of the interviewees for the case series directly.

I had foreseen difficulties including my lack of understanding of the language and culture. Fortunately Ann4 came on board at the right time. Another difficulty would prove to be how to get at the true story - a balanced story, given the massive publicity around the case in Asia: the media may not tell what really happens. Differentiating facts from opinions also became a huge challenge as did the timing. At the time of writing, restructuring the company was still in progress and we were not sure whether the parties we interviewed would be open with us (even if we could secure the interviews) since some of the questions might relate to commercially sensitive information.

Jinxuan (Ann) Zhang: Knowing the language, culture and Chinese context did help, but the other challenges remained. We had our initial draft before we began interviewing. The interviews allowed us to flesh out the publicly available information, which we came to realise was not only too dry, but also not necessarily balanced. We managed to interview more than 30 of the main stakeholders in Singapore and China. We also had several rounds of interviews with the key people, who were more open to us, once we had earned their trust. This was especially challenging, as we were talking about failures, and most wished to remain anonymous.

We have a lot of information that we will never be able to disclose, but which helped us better understand what happened, and allowed us to put together a balanced, non-judgmental case series. I remember that only after seeing one of the key players for the third time, I was told, 'Now we have the trust.' We then had to reflect the facts without breaching confidentiality. In the end, we received positive feedback on our case drafts from all interviewees from whom we had asked for comments.

Why a case series?

Stewart Hamilton: Initially, we intended to write a failure case to examine what went wrong, and then a follow-up case on the subsequent restructuring. However, while interviewing, we realised that there were intriguing stories about how the initial crisis was handled and we already had too much information. To achieve the best results for teaching and learning, we decided to structure the series in three: (1) the near collapse, (2) crisis management, and (3) successful restructuring. This is the first case series on a successful restructuring overseas for a Chinese stateowned company and we would expect participants to gain a clear understanding of some broad issues:

  • strategic considerations for a Chinese company wishing to expand overseas, and key success factors
  • many of the factors contributing to failure are similar and equally applicable to different business contexts, though the types of failure may differ
  • the need to be open-minded: the 'rules of the game' are different inside and outside China
  • the need for increased awareness and a better understanding of differences: financial, legal, cultural and even moral
  • the need to work with differences, rather than avoid them.

I always test a case in class before I finalise it. We tested the CAO case series with volunteers from the MBA class and invited their feedback on how to improve it, including identifying ambiguities we may have overlooked because we had been working on it for so long. It really worked well. We also sought feedback from more than ten key stakeholders, colleagues with knowledge of China, and IMD's outstanding team of editors.

Any advice?

When writing a case, let the facts speak for themselves and separate facts and opinions. Don't take anything for granted: part of the challenge came from the fact that all our interviewees were doing us a favour. In contrast to a normal business setting, we had nothing to offer or trade, and it takes time to build trust. Be persistent. Don't give up just because people respond negatively at the beginning. Do your homework first, and know what you are talking about.

For teaching CAO, we have prepared a comprehensive teaching note, accompanied by a detailed PowerPoint presentation. Teaching colleagues in other organisations should be able to extract quite easily the materials that they need to conduct a good class session. We also believe that this case series can be taught from many angles including finance, cultural issues and governance.

1 Greed and Corporate Failure: The Lessons from Recent Disasters, Stewart Hamilton and Alicia Micklethwait, (Palgrave Macmillan, 2006).
2 The Enron Collapse (IMD-1-0195) won the Finance category at the ecch European Case Awards 2004.
3 The Barings Collapse (IMD-1-0155) won the Finance category at the ecch European Case Awards 1999.
4 Jinxuan (Ann) Zhang, IMD MBA 2002.

Case details

Click on the case title to view further details and, where available, an inspection copy.

China Aviation Oil (A): All at Sea
Stewart Hamilton and Jinxuan (Ann) Zhang
IMD - International Institute for Management Development
Ref IMD-3-1888
Also available:
Simplified Chinese translation
Ref IMD-3-1888-ZH

China Aviation Oil (B): Stormy Waters
Ref IMD-3-1889
Also available:
Simplified Chinese translation
Ref IMD-3-1889-ZH

China Aviation Oil (C): Oil on Troubled Waters
Ref IMD-3-1890
Also available:
Simplified Chinese translation
Ref IMD-3-1890-ZH
Teaching note
Ref IMD-3-1888-T
Teaching note supplement software
Ref IMD-3-1888-S

About the authors

Professor Stewart Hamilton is Professor of Accounting and Finance and Dean of Finance and Administration at IMD, Switzerland.

Jinxuan (Ann) Zhang is a Research Associate at IMD, Switzerland.

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