This article was written by Chang Junfeng(partner), Gan Yulai(managing associate).
Is insider trading still under severe crackdown?
Insider trading had always been the closely focused subject of the China Securities Regulatory Commission (the “CSRC”) in the recent years. In 2017, it became the top priority of the CSRC. According to the Bulletin of the China Securities Regulatory Commission Regarding Cases Handled in H1 2017, in the first half of 2017, the CSRC launched a total of 302 preliminary/formal investigations, 140 of which were new insider trading cases, making up 46% of the total number of investigations. Among these new insider trading cases, the CSRC initiated preliminary investigations into 104 of them and filed formal investigations into 36. In addition, on 7 July 2017, the CSRC issued the third batch of cases under investigation, with a heavy focus placed on insider trading.
New features in recent insider trading cases
A summary of the insider trading cases handled by the CSRC in the first half of 2017 appears to all consist some of the following features in common:
- insiders mainly gain illegal profits from high bonus shares and turning capital reserve to share capital;
- major shareholders and executives of listed companies take advantage of early information access and mitigate their loss by reducing their stocks at a higher level prior to the release of any sensitive information which would influence the stock prices, and even go as far as postponing the disclosure of information;
- in banner acquisition of listed companies, a bidder conducts insider trading using the insider information of the relevant listed company;
- intermediary organizations conduct insider trading by taking advantage of their insider information gained from provision of services for merger and reorganization of listed companies;
- there are recidivists who repeatedly conduct insider trading or illegal transactions using multiple insider information sources.
Administrative penalty on insider trading cases in the first eight months of 2017
As of 22 August this year, the CSRC had issued 22 Decisions for Administrative Penalty against insider trading in 2017, and convicted 28 individuals and one company.
Among the punished individuals, nine individuals were insiders who had participated in the conduct of insider trading, and the other 19 conducted transactions using the insider information obtained from their insider sources. The punished company was convicted for its large-scale reduction of the stakes it held in a listed company after its legal representative having gained insider information by taking advantage of the identity as the listed company’s director. The company’s illegal gains of over RMB 60 million were confiscated and was fined the equal amount.
In all the cases above, regardless of the amount of RMB involved, violations were all punished, demonstrating the CSRC’s “zero tolerance” approach to insider trading.
In addition to confiscating illegal gains and imposing fines, the CSRC also banned the entry of six of those convicted individuals into the securities market for a period ranging from three to ten years.
Transfer to criminal prosecution and conviction of recent cases
After an analysis of some recently publicized insider trading cases that had undergone criminal prosecution and eventually convicted of, the following features were identified:
Firstly, the CSRC still plays a major role in the transition of inside trading cases to criminal prosecution, and as it current stands, its opinion is still influential for qualification of criminal cases. Out of the eight cases heard in 2016, four were transferred to judicial authorities by the CSRC, and the other four were issued letters of determination by the CSRC. In 2017, all three cases that were heard were transferred to judicial authorities by the CSRC. Therefore, it is clear that the CSRC’s opinion cannot be neglected for cases eventually convicted.
Secondly, judicial authorities are developing more independent judgment standards and knowledge in relation to insider trading. In some of the recent cases where opinion from the CSRC were absent, or where judicial authorities’ opinion differed from that of the CSRC, judicial authorities were able to apply laws and regulations on insider trading, and followed the principle of “presumption of innocence” to a greater extent. For example, out of the five non-prosecution cases determined by the prosecution authorities, three of which were issued letters of determination or imposed administrative penalty by the CSRC prior being heard by the authorities.
This judicial practice demonstrates that application of standards of proof is a key issue in such cases. In administrative penalty cases of insider trading, regulatory authorities apply the obvious preponderance standard of proof. However, in the above criminal cases, however, prosecution authorities adopted a stricter standards of proof approach where evidence must not just be obvious preponderance, but sufficient and concrete to support the facts.
Case study: a recent plea of innocence case
A public security authority placed a chairman (hereinafter “A”) of a listed company on file for investigation for alleged insider trading. After investigation, the public security authority determined that A obtained a series of significant insider information during its work at the listed company. Before the information was disclosed to the public, A purchased large numbers of social legal person shares of the company, gaining a revenue of over tens of millions of RMB. As a result, A was alleged to have conducted insider trading, and was transferred to prosecution authorities for examination and prosecution.
KWM accepted entrustment of A and provided criminal defense for A. Our team conducted in-depth theoretical and empirical analysis on standards of proof, determination of evidence, social harm and other legal issues based on the facts and the content of evidence of the case. Our team submitted multiple opinions to the prosecution authorities stating that the facts of the case were not clear and evidence were insufficient, which were eventually accepted by the prosecutor, leading to a formal decision of non-prosecution, finding that the conduct of A did not constitute insider trading.
This case indicates that for difficult cases where facts and evidences are less clear and ambiguous, judicial officials are extremely prudent, and will adhere to the principle of “presumption of innocence” in their consideration and determination of facts and nature of cases. This way, the judicial authorities are able to achieve cracking down of insider trading conducts whilst protecting legitimate rights and interests of the public.
Note: Special thanks to our intern Deng Zhe for his contribution to this article.