-Caveat Lector- <A HREF="http://www.ctrl.org/"> </A> -Cui Bono?- >From http://www.security-policy.org/papers/2000/00-F17.html {{<Begin>}} Publications of the Center for Security Policy No. 00-F 17 SECURITY FORUM 17 March 2000 Senior Legislators Press S.E.C.'s Levitt on PetroChina IPO -- Missives from Reps. Oxley and Baucus Should be Wake-Up Call to S.E.C., U.S. Investors (Washington, D.C.): The rising crescendo of opposition to the bid by China National Petroleum Company (CNPC) to penetrate the U.S. capital markets reached new heights in recent days -- i.e., at senior levels on Capitol Hill. Specifically, two chairmen of relevant House subcommittees in letters to the Chairman of the Securities and Exchange Commission, Arthur Levitt, Jr., signaled serious concerns about the multi-billion dollar Initial Public Offering CNPC's wholly owned subsidiary, PetroChina, is expected to offer after listing next month on the New York Stock Exchange. The first missive to hit the SEC chairman's desk was sent on 7 March over the signatures of Representatives Michael Oxley (R-OH), Chairman of the House Commerce Subcommittee on Financial and Hazardous Materials -- which has direct oversight over the SEC -- and Spencer Bachus (R.-AL), Chairman of the House Banking Subcommittee on Domestic and International Monetary Policy. Noting that there is "considerable controversy surrounding this proposed IPO," the Oxley- Bachus letter laid down a clear marker for Chairman Levitt: "To ensure that investors have full and accurate information regarding this public offering, we request your assurance that all requirements under the Securities Act of 1933 have been met, in particular the required disclosure relating to the intended use of proceeds from the offering." (Emphasis added.) In order to amplify and reinforce the concerns that prompted the 7 March correspondence, Representative Bachus sent the following, more detailed communication to Chairman Levitt on 16 March. It raises questions about the lack of transparency associated with the draft prospectus now being circulated for the PetroChina IPO -- involving, among other things, both serious omissions and potentially problematic commissions concerning the use of the proceeds and their users. Rep. Baucus is to be commended for his call for a "thorough investigation" by the SEC of "the prospect that many other foreign companies utilizing the American capital markets to finance activities that are directly opposed to vital U.S. interests...in order to ensure that...SEC procedures ...are appropriate for guarding our vital national interests." March 16, 2000 Arthur Levitt Chairman U.S. Securities and Exchange Commission 450 Fifth Street, NW Washington, D.C. 20549 Dear Mr. Levitt: I am writing to express my serious concerns about the proposed PetroChina IPO that was registered with the SEC on Monday, February 28, 2000. My primary concern is that there has been insufficient disclosure of the potential risks to investors and of the intended use of the proceeds. The use of proceeds section does not provide meaningful disclosure of the actual use of the proceeds by PetroChina nor the extent and use of the proceeds that would accrue to CNPC. The PetroChina filing also fails to mention the widespread reports of a divestment campaign or the realistic possibility that future sanctions could materially affect the value of its shares. My second concern is that there may have been violations of the proper procedures for SEC filings based on the events that have already occurred during the processing of this proposed IPO. As a result of these two concerns, I am requesting that you require an extended three month period of review before the registration becomes effective and that you decline any request to accelerate the effective date. This delay is necessary so that the SEC will have enough time to determine whether sufficient disclosure has been provided to potential investors and that no irregularities occurred in the registration process for the PetroChina IPO. As you are aware, PetroChina is a subsidiary largely owned by the China National Petroleum Corporation (CNPC), which is itself a state-owned entity controlled by the government of the People's Republic of China (PRC). CNPC has extensive dealings in countries that are currently under United States sanctions, such as Sudan and Iran, and American companies or persons are legally prohibited from direct or indirect business dealings with these countries to protect vital U.S. national interests. In particular, CNPC is the largest investor in one of Sudan's most profitable enterprises, and provides vital hard currency for Sudan's government, the National Islamic Front (NIF). You should be aware that oil revenues largely support and finance NIF's egregious violations of human rights. There is no question that oil revenues are an integral part of NIF's genocidal war on its own population. The Khartoum regime has waged a relentless 17-year war killing over 2,000,000 residents, who are primarily innocent civilians. The connection between oil revenue and violations of law has been widely recognized in Sudan as well as other countries under U.S. sanctions. For instance, with respect to Iran in 1995, President Clinton's former Under Secretary of State for Policy said, ""A straight line links Iran's oil income and its ability to sponsor terrorism, build weapons of mass destruction, and acquire sophisticated armaments. Any government or private company that helps Iran to expand its oil must accept that it is contributing to this menace." Indeed, Sudan's government is using its oil revenue to prosecute a vicious genocidal war against Sudanese Christians living in the southern portion of that country, as well as sponsor acts of international terrorism. It appears that PetroChina's registration statement provides insufficient disclosure in several respects. In its filing, PetroChina proposes three separate, but relatively undefined uses for the proceeds: an unspecified amount for undisclosed "capital expenditures and investments," repayment of short and long-term borrowings to undisclosed "third party financial institutions," and "additional funds for general corporate purposes." In addition, CNPC will receive an undisclosed amount of funding and will use those funds to repay an unspecified amount of "borrowings" (the underlying activities which these borrowings funded is also unknown), and to "fund the employee retraining and severance plans established in connection with the restructuring of the CNPC group." It is obvious from these proposed uses of proceeds that CNPC stands to gain substantially from the PetroChina IPO. A recent news article stated that CNPC would receive payments between $1 billion and $1.5 billion from PetroChina. In addition, PetroChina is assuming a large portion of the debts formerly owned by its parent, CNPC. There is no question that this will significantly increase CNPC's access to financing that would otherwise be unavailable to fund its foreign operations. Therefore, the direct transfer of funds and assumption of old CNPC debt will significantly and materially aid CNPC in that it will now be able to use its current or future revenues to finance its foreign operations. Because of the substantial revenue and debt sharing between the parent and its subsidiary, it is essential that the investor community be fully apprised of the growing controversy surrounding the activities of PetroChina's parent by a coalition of human rights, religious freedom, labor, and national security groups. There are numerous press reports about these activities that I would be pleased to share with you. In addition, there is a significant possibility that future sanctions could be imposed on PetroChina (or on its parent CNPC, which would materially affect the subsidiary) similar to those recently imposed on the joint oil venture Greater Nile Petroleum Operating Company Ltd. (GNPOC) or Sudapet Ltd. Currently, engaging in business with GNPOC or Sudapet carries criminal penalties for corporations and individuals, as well as the possibility of imprisonment for up to 10 years. As you are already aware, CNPC is the largest investor and partner in GNPOC. If these or other forms of sanctions were later extended to CNPC, there is no question that they could materially affect the value of PetroChina stock. All potential investors should be made aware of these possibilities and the ultimate use of the proceeds before you approve this transaction. A number of questions have also arisen from the process through which the IPO was created. First, this proposed issue was originally to be a $10 billion IPO for CNPC but has been changed several times to the current estimated $5 billion IPO for PetroChina, its newly created subsidiary. Goldman Sachs, the IPO's primary underwriter, submitted its registration statement for the new PetroChina subsidiary to the SEC on Tuesday, February 29, 2000, after which the "quiet" or "waiting period" officially began. As you are aware, while oral statements are permitted during the waiting period, it is clearly understood that no written OR oral statements or solicitations may be made before the registration statement is filed. Various sources have reported, however, that Goldman Sachs may have used "research groups" or other venues to discuss information about the IPO with potential investors. We request that you investigate whether any information has been provided to potential American investors that would dispose them to have a more favorable view of investing in the PetroChina offering. Using "research groups" or other techniques to educate potential investors before filing with the SEC, instead of the usual "road show" after an SEC filing, would not only skirt the law, but would also violate the spirit of proper disclosure policy. While these facts remain unsubstantiated at this time, various press reports and additional assertions made to my staff indicate that some disclosure may have occurred in violation of proper procedures. Furthermore, there is no record of any preliminary filings with the SEC, despite indications that various draft proposals were submitted to the SEC. In addition to various press reports, some evidence of this was obtained in the course of a congressional staff inquiry that occurred prior to PetroChina's February 28, 2000 filing with the SEC. Several days before the first recorded filing with the SEC, a spokeswoman for Goldman Sachs stated that the PetroChina documents had been filed with the SEC and that no questions could be answered because the quiet period had already begun. While we share your desire to have a free flow of information between SEC staff and attorneys preparing the IPO filings, it is important not to avoid disclosure requirements or the Freedom of Information Act. Therefore, it would be helpful if the SEC were to clarify the proper procedures for an "informal" waiting period during which drafts of SEC filings are reviewed by the SEC staff and changes made before any formal filing is submitted. At the minimum, there should be some record in the EDGAR database indicating that an initial filing has been made from the very first moment that documents are provided to SEC staff. Requiring electronic filing for foreign corporations in the same way that they are required for domestic filings would be a simple solution to this problem. One final but important concern regarding the PetroChina filing process is Goldman Sachs ability to freely disseminate information regarding the proposed IPO abroad, while being prohibited from doing so domestically. Given the multi- national nature of many of the IPO's potential corporate investors, it is virtually impossible to avoid having information provided widely in Hong Kong reach the desks of targeted investors here in the United States. In closing, my primary concern remains the question of whether proceeds from the PetroChina IPO will be used to benefit the activities of CNPC, which could compromise American national interests and possibly circumvent U.S. laws regarding sanctions against Sudan. By way of example, an earlier version of the proposal would have required PetroChina to pay a dividend to CNPC of $1 billion to $1.5 billion and to CNPC's retirement or worker retraining obligations. PetroChina's current registration statement indicates that an unspecified sum will be paid to CNPC, that an unspecified amount of CNPC debt will be assumed, as well as providing for payments to CNPC for other purposes. These facts eviscerate the assertion that a legal firewall has been created to segregate the funds generated by the IPO for PetroChina's purely domestic activities. It seems likely that the billions raised will either subsidize the overseas operations of the parent company or, due to the fungibility of money, at least indirectly finance CNPC's overseas operations by freeing it of debt or other obligations. With the prospect of many other foreign companies utilizing the American capital markets to finance activities that are directly opposed to vital U.S. national interests, it is imperative that you investigate this matter thoroughly in order to determine those SEC procedures that are appropriate for guarding our vital national interests. Sincerely, Spencer Bachus Chairman Monetary Policy Subcommittee NOTE: The Center's publications are intended to invigorate and enrich the debate on foreign policy and defense issues. The views expressed do not necessarily reflect those of all members of the Center's Board of Advisors. 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