I OVERVIEW

i Source of law
Primary source

The primary sources of securities law include the Securities Law,2 the Securities-Investing Funds Law, the Company Law, and the Criminal Law, which were approved by the National People’s Congress (NPC) or its Standing Committee.

The Securities Law provides that the securities regulatory department in the State Council, currently the China Securities Regulatory Commission (CSRC), oversees the securities market.

Other regulations

Ordinances by the State Council

The Regulation on the Supervision and Administration of Securities Companies and the Regulation on the Risk Disposal of Securities Companies regulate securities companies.

The Ordinance on the Regulation of Futures Trading is the primary regulation on the financial futures market, for which the main regulatory body is the CSRC as well.

Judicial interpretations by the Supreme People’s Court

The Supreme People’s Court (SPC) identifies the emerging issues that arise when the laws are applied in judicial practice, and it promulgates interpretations to unify the application of laws in the court system of the People’s Republic of China (PRC).

Relevant interpretations include the Interpretation on Several Issues in the Application of Law in Criminal Cases of Insider Trading and Disclosure of Inside Information (the Judicial Interpretation on Insider Trading),3 and Some Provisions of the SPC on Adjudicating Cases of Civil Compensation Arising from False Statement in Securities Market (the Judicial Interpretation on Claims for False Statement).

CSRC rules

The CSRC, the primary regulatory authority for the securities market under the Securities Law, publishes and amends various securities regulations.

Supplementary rules by stock exchanges and other regulators

The main securities exchanges in the PRC, the Shanghai Stock Exchange4 and the Shenzhen Stock Exchange,5 also publish transaction rules.

ii Regulatory authorities

The CSRC, a ministerial public institution directly supervised by the State Council, regulates China’s securities and futures market. Pursuant to Article 179 of the Securities Law, it has the following powers:

a formulating relevant rules and regulations on the supervision and administration of the securities market;

b formulating the qualification standards for securities practices and codes of conduct;

c implementing supervision and administration; and

d investigating and punishing violations of laws or regulations.

The CSRC has different departments for different functions, including the Enforcement Bureau for conducting investigations and the Administrative Penalty Committee for determining administrative penalties.

The CSRC has delegated a large portion of its regulatory power to its branches.

iii Judicial authorities

The Intermediate People’s Courts (IPCs) are the courts of first instance for civil or criminal cases related to securities fraud.6

According to the Administrative Litigation Law, administrative lawsuits against the CSRC as the body rendering the administrative decision are filed at the First IPC of Beijing, and those against branches of the CSRC are filed at the district courts where the branches are located.7

iv Common securities claims

Currently, common securities claims include claims related to false statement, insider trading, trading with misappropriation of non-public information, market manipulation, short-swing trading, defrauding clients, unauthorised issuance of securities, among which many may be prosecuted according to the Criminal Law.

False statement

Article 69 of the Securities Law stipulates the civil liabilities of false statement, with Article 181 dealing with the administrative liabilities.

‘False statement’ in the securities market refers to ‘any of the behaviours of the obligor regarding information disclosure in violation of the securities laws, such as making false records of major events contrary to the facts, making misleading statements, making major omissions when disclosing information, or disclosing information inappropriately, during the issuance or transaction of securities’.

For example, in Chen Lihua et al. v. Daqing Lianyi & Shenyin Securities Corporation,8 the issuer was held liable for the losses suffered by the investors as a result of false statements in the prospectus and its false statement of profits in an annual report; the sponsor and underwriter were held jointly and severally liable for false statement in the prospectus as a result of their failure to exercise due diligence and care.

Insider trading and trading with misappropriation of non-public information

Article 76 of the Securities Law stipulates the civil liabilities of insider trading, with Article 180 providing the administrative penalties.

Insider trading means any insider who has access to insider information or has unlawfully obtained any insider information on securities trading, purchases or sells the securities of the relevant company, or divulges such information, or advises any other person to purchase or sell such securities.

Insider trading should be differentiated from ‘trading with misappropriation of non-public information’ under Paragraph 4 of Article 180 of the Criminal Law, which refers to the use of non-public information related to securities transactions by employees of securities-investing funds, securities companies, other financial institutions, the stock exchanges and regulatory authorities, including front running by fund managers and stockbrokers. Administrative liability for this has not been specifically provided for in the Securities Law.

Market manipulation

Article 77 of the Securities Law provides a ground for civil action and Article 182 stipulates administrative penalties for market manipulation.

Market manipulation includes, but is not limited to:

a centralising advantages in funds, quantity of share or information to trade jointly or frequently;

b collaborating with others to trade securities at a time and price, and by a method, agreed upon in advance; and

c trading securities between the accounts under the trader’s own control.

More market manipulation situations are provided for in the CSRC rules.

Short-swing trading

Article 47 and Article 195 of the Securities Law regulate short-swing trading by imposing a six-month period of prohibition of reverse trading, after any securities transaction, upon shareholders holding 5 per cent or more of the total shares of the listed company, as well as the directors, supervisors and senior officers of the listed company. Profits from short-swing trading will be disgorged for the benefit of the listed company.

Others

Article 79 of the Securities Law prohibits fraudulent conduct by securities companies and their employees and provides a civil cause of action for injured investors.

Unauthorised public offerings are prohibited by Article 188 of the Securities Law.

II PRIVATE ENFORCEMENT

i Forms of action

The forms of action against securities wrongdoings include individual actions and joint actions.

Representative action under Article 54 of the Civil Procedure Law (CPL) – one type of action allowing the joining of mass plaintiffs as a class after the case is registered and thus most similar to ‘class actions’ – is not permitted according to Article 4 of a 2002 Notice of the SPC and Article 12 of the Judicial Interpretation on Claims for False Statement.

However, under Article 13 of the Judicial Interpretation on Claims for False Statement, the court may consolidate proceedings arising out of the same securities-fraud activity to a joint action, and notify plaintiffs of individual lawsuits to join an existing joint action. Mass plaintiffs in a joint action may designate several representatives, to improve the efficiency of the proceedings.

Shareholder derivative actions on behalf of and for the interest of the listed company may arise in cases for (1) the disgorgement of profits for short-swing trading, and (2) for pursuing recourse against wrongdoers who cause losses and liabilities to the listed company, according to Article 151 of the Company Law.

Article 15 of the CPL permits social organisations to act on behalf of and for the benefit of public interests in court proceedings. In July 2016, the very first securities support litigation, Liu et al. v. P2P Financial Information Service Co, Ltd (P2P Co),9 was admitted by the Shanghai First Intermediate People’s Court for trial. In the case, China Securities Medium and Small Investors Service Center supported the individual plaintiffs and acted as their attorney.

ii Procedure

General procedural rules are laid down in the CPL and special rules are supplemented by the SPC through judicial interpretations.

There is no special judicial interpretation for private lawsuits in relation to short-swing trading, insider trading, market manipulation and defrauding clients. Therefore, in practice the courts will be likely to follow the procedural rules for civil claims against misstatements as provided in the Judicial Interpretation on Claims for False Statement.

As provided in the Judicial Interpretation on Some Particular Issues in Current Hearing of Commercial Disputes, for a private lawsuit of false statement to be admissible, the plaintiff no longer needs to rely on an administrative penalty decision rendered by a regulatory authority (e.g., the CSRC or its branches, or the Ministry of Finance) or a criminal conviction.10 This enables the plaintiffs to bring up private lawsuits against listed companies for false statement even if the CSRC or a criminal court has not made any finding on this regard.

However, this change also brought in various emergent issues, such as potential conflicts between the courts and the CSRC on whether the listed company made false statements, and the calculation of the statute of limitations in the event there is no penalty decision or criminal conviction, etc. Until now, the courts have not provided any answers.

Article 5 of a 2002 Notice of the SPC provides special rules on the jurisdiction of the courts to try private actions for false statement. Only the IPCs of one or two cities in each province are competent to hear securities disputes.

iii Settlement

According to Article 50 of the CPL, parties in civil matters may settle their disputes at any time. There is no prohibition against settlement in securities disputes. Further, under Article 4 of the Judicial Interpretation on Claims for False Statement the courts shall encourage the parties to settle. Some cases are even settled before any civil lawsuit has been filed.11

iv Damages and remedies
False statement

Article 30 of the Judicial Interpretation on Claims for False Statement provides that civil compensation is limited to the losses actually incurred as a result of the false statement, including for those who bought the affected securities in the period between the date of misstatement and that of the disclosure or correction of the false statement, and for those who continued to hold the securities and consequently incurred losses (Article 18).

For calculation of losses, a benchmark day should be set, which is in most cases the day when the accumulative trading volume of the securities reaches 100 per cent of all tradable affected securities, or the thirtieth transaction day after the date of the disclosure or correction of the misstatement (Article 33).

If the plaintiff-investor sells securities on or before the benchmark day, the plaintiff-investor’s loss shall be calculated by the margin between the price of the purchase and that of the sales (Article 31); if the plaintiff-investor sells securities or still holds securities after the benchmark day, the loss shall be the margin between the average price for buying the securities and the average of the closing prices during the period from the date of the disclosure or correction of the false statement to the benchmark day, multiplied by the quantity of securities (Article 32).

Article 19 excludes losses caused by ‘systematic risks of the securities market’, which is increasingly accepted by the courts.

Civil actions for insider trading and market manipulation

Private actions for compensation of loss resulting from market manipulation are rarely seen and investors lost the only two publicly known cases for failing to prove losses or causation.

As for private actions related to insider trading, Chen Wei, et al. v. Everbright Securities in 2015 is the first and the only case where the investors prevailed. For investors, the obstacle to winning such cases is largely the high evidential standard required for the investor to prove causation between the loss and the manipulative acts.

Others

Proceeds from short-swing trading will be disgorged for the benefits of the listed company.

Remedies for defrauding clients are determined according to principles and rules of contract law and tort law.

III PUBLIC ENFORCEMENT

i Forms of action

The CSRC, in addition to performing daily regulatory functions, takes charge of investigations into misconduct and violations of law in the securities market when evidence of any violation comes to its attention.

Non-punitive regulatory measures

Non-punitive regulatory measures refers to injunctive measures and restrictions the CSRC may impose on the subjects of an investigation when the investment is ongoing, or when the targeted non-compliance is not remedied, or where, after investigation, the CSRC finds the illegal behaviour does not need to be re-addressed by administrative sanctions.

The concept of non-punitive regulatory measures is first brought up in the CSRC’s Circulation on Further Completing the Administrative Penalty System of the CSRC.12 Thereafter, multiple non-punitive measures are named in the rules promulgated by the CSRC.13 There are currently dozens of non-punitive regulatory measures, ranging from public exposure, through the issuance of warning letters and recording on credit files, to materially adverse actions such as limitation of business activities, limitation on the payment of salaries or benefits to directors, supervisors or senior management, and decisions on a persons’ competence for certain positions.

Administrative penalties (including denial of access to the market)

Under the PRC Administrative Penalty Law, only laws and administrative regulations may prescribe administrative penalties. Most types of violation of securities law will lead to administrative penalties.

Criminal penalties

Criminal penalties may be imposed for the following acts: fraudulent issuance of stocks and bonds (Article 160 of the Criminal Law); non-compliant disclosure of or failure to disclose important information (Article 161); unauthorised public offering (Article 179); insider trading (Article 180); trading with misappropriation of non-public information (Article 181); faking and spreading false information in relation to transaction of securities (Article 181); inveigling clients into transactions of securities (Article 181); market manipulation (Article 182); and provision of false verifications (Article 229).

The prosecution and trial of insider-trading criminal cases is further governed by an SPC judicial interpretation.

ii Procedure
Investigation and regulatory measures

Investigations by the Enforcement Bureau of the CSRC normally commence with an informal investigation, where the Enforcement Bureau makes informal inquiries and collects information and documents. Based on the information obtained in the informal investigation, the Enforcement Bureau decides whether to initiate a formal investigation. Once the formal procedure commences, the Enforcement Bureau has the power to take administrative coercive measure, such as sealing up premises, facilities or properties; detaining properties; and cooperating with the Public Security Bureau (PSB) on restricting the personal freedom to leave the country.

Administrative penalty proceedings (including hearings) and administrative review

After the investigation is completed, case file is transferred to the Administrative Penalty Committee for review to decide the penalty to be imposed.

Except in cases with uncontested facts and light penalties, the Administrative Penalty Committee issues a prior Notice of Administrative Penalties to the subject of the investigation, stating the facts, reasoning, administrative decisions and the subject’s rights to start a hearing.

The subject of the investigation may submit statements, arguments for the case or apply for a hearing under the Rules on Administrative Penalty Hearings.14

The subject of an administrative penalty may request the CSRC to conduct an administrative review, or bring an administrative lawsuit against the CSRC to revoke the penalty decision under Article 6 of the Administrative Penalty Law.

Criminal proceedings

If the case under investigation involves potentially criminal acts, the CSRC shall notify the PSB and transfer the materials to the department for investigation of economic crimes of the PSB, for the latter to initiate a criminal investigation process according to the Criminal Procedure Law.

Given such a criminal case usually involves complex facts and calls for certain expertise, in most cases, the first instance court is the court of intermediate level; the procuratorate of that level prosecutes, and the PSB of the municipal level or above is responsible for the investigation.

iii Settlement

Article 2 of the Implementing Measures for the Pilot Programme for Administrative Reconciliation (the Reconciliation Measures) provides that during the investigation an administrative settlement agreement may be reached between the CSRC and investigation subjects upon an application filed by the latter, for the purpose of correcting the suspected illegal acts, eliminating the adverse consequences of the violation, making administrative reconciliation payment to compensate the losses of investors, and accordingly terminating the procedures for investigation and law enforcement.

Since the Reconciliation Measures were only promulgated by the CSRC on 17 February 2015 and are still relatively new, there have as yet been no reported cases resolved by administrative conciliation.

Plea bargaining in criminal cases is not permitted in China, but the cooperative attitude of the defendant in the criminal investigation and prosecution will be an alleviating factor for sentencing.

iv Sentencing and liabilities

The administrative penalties imposed on the offender vary according to the severity of the behaviour and its consequences, and administrative penalties include (1) orders of correction; (2) warnings; (3) confiscation of illegal gains, unlawful property or things of value; (4) administrative detention; (5) fines; (6) denial of access to the market; (7) suspension of production or business; and (8) temporary suspension or rescission of permit or business licence, etc. Criminal liabilities for securities-related crimes include fixed-term imprisonment, fines and confiscation.

Liabilities for insider trading and market manipulation

Offences

Administrative liabilities

Administrative liabilities of the responsible persons if committed by an entity

Criminal liabilities

Criminal liabilities of the responsible persons if committed by an entity

Insider trading

Disposition of the securities; confiscation of illegal gains; a fine of one to five times the illegal gains or, if no illegal gains, 30,000–600,000 yuan

A warning; a fine of 30,000–300,000 yuan

A fine; imprisonment of no more than five years or criminal detention, and, in particularly severe cases, no more than 10 years

Imprisonment of no more than five years or criminal detention

Market manipulation

Disposition of the securities; confiscation of illegal gains; a fine of one to five times the illegal gains or, if no illegal gains, 300,000–3 million yuan

A warning; a fine of 100,000–600,000 yuan

A fine; imprisonment of no more than five years or criminal detention, and, in particularly severe cases, no more than 10 years

Imprisonment of no more than five years or criminal detention, and, in particularly severe cases, no more than 10 years

IV CROSS-BORDER ISSUES

i Jurisdictional issues
Private actions

PRC courts have jurisdiction over disputes arising out of any acts conducted in the PRC securities market as the courts of the place where an allegedly tortious act was conducted. For example, in Nanning Sugar v. Martin Currie Ltd, the PRC court entertained a claim against an American investor, in relation to its short-swing trading of Nanning Sugar stocks.

Theoretically, PRC courts also have jurisdiction over disputes arising out of acts conducted outside China but having adverse consequences in China, as courts of the place where the injury occurred, and over disputes against Chinese companies or persons listed or engaged in transactions at overseas exchanges that have no other factor connecting them to China, as courts of the place where the defendants are based. However, there have been no such cases reported so far, and the court may refuse jurisdiction for forum non conveniens.

Public enforcement

Without a statute or ordinance indicating how broadly the CSRC’s regulatory powers extend in cross-border matters, the CSRC is clearly authorised by the Securities Law to regulate any acts conducted in the PRC securities market, including those conducted by qualified foreign institutional investors who enter the PRC securities market under the terms of the Administrative Measures on Investment in Domestic Securities by Qualified Foreign Institutional Investors.

It has yet to be tested whether CSCR’s jurisdiction may cover acts conducted offshore but having influence in China.

ii Conflict of law issues

Article 39 of the Law on the Application of Laws in Foreign-Related Civil Relations, determines that the law applicable to rights and obligations under valuable instruments is the law of the place where the rights under the instruments are realised or other laws that have a significant relation to the valuable instruments.

The dominant principle for determining applicable laws in relation to obligations, including contracts and torts, is party autonomy, and a selection of the governing law in transaction documents will be respected. Failing an agreement of the parties (as in most actions in tort), the ‘most significant relationship’ test applies. Therefore, the law of the PRC will apply in disputes arising out of securities-fraud activities conducted in the Chinese securities market.

iii Cross-border enforcement assistance

The CSRC signed the International Organization of Securities Commissions’ Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information regarding securities and futures in 2007.

As of February 2018, the CSRC has also signed 67 memoranda on mutual assistance on the regulation of securities activities with the authorities of 61 countries and regions, including the Securities and Exchange Commission of the United States.15

If there is no agreement between the Chinese authorities and the foreign jurisdiction, requests for assistance are decided on a case-by-case basis.

Under the mechanism of the Shanghai-Hong Kong Stock Connect launched in 2014, and Shenzhen-Hong Kong Stock Connect 2016, which enables investors in the Shanghai, Shenzhen or Hong Kong stock markets to trade securities listed in the other markets, the CSRC and the Securities and Futures Commission of Hong Kong (SFC) aim to further improve the mechanism for identification and notification of suspected misconduct and initiate effective investigatory cooperation to combat cross-border misconduct, including misleading disclosure, insider trading, market manipulation and other fraudulent activities. The CSRC and SFC have been cooperating in more than 300 occasions since 2014. The Tang et al. administrative penalty case, the very first case concerning cross-border market manipulation through the Shanghai-Hong Kong Stock Connect, has seen pursued based on the joint efforts made by the CSRC and the SFC16 in 2016. Total forfeiture and fines by the CSRC at more than 1 billion yuan for market manipulation were imposed in March 2017,17 after which Tang filed a petition with the Hong Kong Court of First Instance, claiming the SFC held back the real purpose of the search, thus the court should revoke the search warrant and the decision to transfer files collected in the search to the CSRC. On 8 December 2017, Hong Kong Court of First Instance dismissed Tang’s petition and found Tang failed to prove that the SFC had intentionally held back the purpose of the search and the SFC had the power to cooperate with the CSRC in investigating alleged violations.

V YEAR IN REVIEW

i Laws and regulations

The NPC had a second reading of a draft amendment to the Securities Law in April 2017, but there was no further progress after that. The highlight of the draft is the transition from the approval system to a registration system for public listing. The draft amendment also touched on other issues, such as the construction of a multilayer capital market system, further capital market supervision and the protection of investors’ legitimate interests.18

A large number of laws and regulations related to security litigation were revised, including the Administrative Measures for Stock Exchanges, which reinforced the stock exchanges’ forefront regulatory functions, and the Several Provisions on Reduction in Shareholding by Substantial Shareholders, Directors, Supervisors and Senior Management Personnel of Listed Companies, which expanded the regulatory scope from majority shareholders to all shareholders.

New regulations were passed, including the Administrative Measures on the Suitability of Securities and Futures Investors; Measures for the Compliance Management of Securities Companies and Securities Investment Fund Management Companies; and the Decision on Revision of the Implementation Regulations for Private Offering of Shares of Listed Companies.

ii CSRC sanctions

2017 witnessed a steady, relatively high number of securities cases investigated by the CSRC, and a more stringent level of enforcement. Both the number of new cases and the number of administrative penalty decisions have been increasing. According to CSRC statistics, the CSRC started investigation in 478 occasions and filed 312 new cases, 90 of which were cases of significant influence, doubling the number in 2016, and 157 of which were foreign-related cases. In 2017, 335 cases were closed, a 43 per cent rise. In addition, 31 cases were transferred to the PSB to further pursue criminal liabilities, among them, 20 cases have been officially registered by the PSB. The CSRC issued 224 administrative penalty decisions, and imposed fines totalling 7.48 billion yuan, a 74.74 per cent rise. Furthermore, 44 persons were banned from entering the capital market, an 18.91 per cent rise compared to 2016. The numbers of administrative penalty decisions, fines, persons banned from entering the capital market all hit a new historic record high. Among all the administrative penalty decisions in 2017, 60 cases were related to information disclosure; another 60 cases related to insider trading, 21 cases related to market manipulation and 17 cases related to violations by securities intermediaries. The CSRC also issued administrative penalty decisions in eight cases related to violations by private equity funds, three cases related to violations in the futures market and five cases related to violations in National Equities Exchange and Quotations.

The traditional types of cases continued to dominate the majority of the cases filed, with a decrease in the number of market manipulation and rat trading cases. As for traditional types of violations, namely false statement, insider trading and market manipulation, the CSRC filed 203 new cases and issued 141 administrative penalty decisions, accounting for 65 per cent and 63 per cent of the total number of new cases and penalty decisions respectively. Among them, insider trading was still the focus of the CSRC’s enforcement. In 2017, the CSRC filed 101 new cases of insider trading, a 54 per cent rise compared to 2016; and issued 60 administrative penalty decisions. This speaks to the fact that the level of enforcement has been strengthened comprehensively at all stages of insider trading. Because of the CSRC’s strong enforcement on violations by securities professionals, there was a decrease in the number of rat trading cases, which resulted in a drop from 29 cases in 2016 to 13 cases in 2017. Several types of violations became the CSRC’s new focus of enforcement efforts, such as violations by private equity funds, violations in National Equities Exchange and Quotations and violations by security intermediaries.

Area

Number

Percentage

False statement

60

27%

Insider trading

60

27%

Market manipulation

21

9%

Violations by security intermediaries

17

8%

Violations by private equity funds

8

4%

Violations in futures market

3

1%

Violations in National Equities Exchange and Quotations

5

2%

Short-swing trading, violations by security professionals, rat trading, legal persons’ illegal use of others’ accounts to carry out securities trading

25

11%

Other types

25

11%

Total

224

100%

Furthermore, the CSRC has released the following details of 20 typical law-violating cases from 2017.19

Case details

Highlights

Area

False statement and stock manipulation by Xian Yan, et al.

Stock manipulation by improperly disclosing 1,001 proposals and speculating political topics; the total forfeiture and fines exceeded more than 3.47 billion yuan, setting a highest record in terms of CSRC administrative monetary penalties.

False statement and violation of due diligence duty

Faking of financial information by Jiu Hao Group and violation of due diligence duty by security intermediaries

First case extending administrative penalties to acquiring party, shareholders of acquiring party, concerted actors with acquiring party, acquiree and four security intermediaries, namely independent financial adviser, accounting firm, law firm and evaluation firm.

False statement by Shandong Molong Petroleum Machinery Co, Ltd; insider trading and illegal security reduction by its actual controlling party

The CSRC’s focused case in the first round of special enforcement action in 2017, which involved false statement, insider trading and illegal shareholding reduction issues.

False statement by Jiangsu Baoli International Investment Co, Ltd

First case imposing administrative penalties to violations happened in a listed company’s voluntary information disclosure.

False statement by Jiangsu Yabaite Technology Co, Ltd

The CSRC successfully investigated the case through cross-border cooperation with security regulatory authorities in Pakistan, the US and Hong Kong.

Faking of financial information by Harbin Electric Corporation Jiamusi Electric Machine Co, Ltd

The CSRC clearly expressed that directors, supervisors and senior management personnel could not be exempted from administrative liabilities by claiming they were not aware of, did not know and did not take part in illegal actions.

False statement by Zhejiang Chenlong Sawing Machine Co, Ltd

False statement by the company listed in the National Equities Exchange and Quotations.

Insider trading by Zhen Jiantao, the actual controlling party of Beijing Honggao Creative Architectural Design Co, Ltd

Insider trading by using the listed company’s information related to high stock dividends, and the case was transferred to PSB to further pursue criminal liabilities.

Insider trading and trading on non-public information

Insider trading by Li Yinan

The CSRC transferred the case to PSB to pursue criminal liabilities and Li Yinan was finally sentenced to imprisonment for two and half years.

Insider trading by Zhou Jihe

The CSRC imposed fines on Zhou Jihe for insider trading, who later filed an administrative lawsuit against the CSRC by claiming the CSRC had reached a wrong finding, since, in another related case, the criminal court did not find him conducting insider trading. Beijing High People’s Court finally maintained the CSRC’s decision.

Insider trading by Liu Min, et al.

Insider trading by state functionaries and their close relatives.

Rat trading by Li Xue, an investment manager trading with insurance assets

Li Xue was sentenced to imprisonment for five and a half years and a fine of 5 million yuan, given the very severe circumstances of the crime, namely trading 73 stocks with the accumulated transaction amount at 766 million yuan.

Rat trading by Wu Gang, an investment consultant of a private equity fund

The CSRC’s Fujian branch imposed a fine at five times the illegal gains for his illegal use of information obtained during performing his duty.

Market manipulation by Ma Yongwei et al.

Market manipulation case by trading securities on a ‘fast in and fast out’ strategy.

Market manipulation

Market manipulation by Diecai Assets Management Co, Ltd, Xie Fenghua, et al.

First case involving market manipulation by manoeuvring information disclosure in the name of market value management.

Market manipulation by Liao Guopei

Market manipulation case by faking a market in active trading and lifting the stock price to the raising limit, which enabled Liao Guopei to sell stocks at a high price the next day.

Dissemination of misleading information by RoyalFlush

First case involving dissemination of misleading information by an online media, which reposted information originally published in December 2015 and caused a 0.95 per cent decrease of SSE Health Care Index.

Fabrication and dissemination of fraudulent information

Fabrication and dissemination of fraudulent information by Shanghai Metal Exchange Co, Ltd

First case involving fabrication and dissemination of fraudulent information in the futures market.

Illegal operation by Guangzhou Suifu Investment Management Co, Ltd

The CSRC’s focused case in the first round of special enforcement action in 2017, in which the private equity fund was in lack of compliance principle and had been imposed various fines since 2014.

Violations by private equity funds

Illegal trading by Lin Qingyi

The CSRC imposed a fine at 141 million yuan on Lin Qingyi for his illegal trading of 154 securities as a security professional.

Violations by security professionals

iii Court decisions

In 2017, PRC courts issued several influential decisions and heard some unprecedented cases relating to securities law.

Guiyang People’s Procuratorate v. Zhang Aimin and Hu Hong

In Guiyang People’s Procuratorate v. Zhang Aimin and Hu Hong, a criminal case, Guiyang Intermediate People’s Court found Zhang Aimin, the legal representative of Xiamen Sheng Da Wei Clothing Co, Ltd (SDW Co) and Hu Hong, the CFO of SDW Co, guilty for the SDW Co’s fraudulent issuance of the private small and medium enterprises’ bonds (Private SME Bonds). SDW Co, issued Private SME Bonds by faking financial reports and concealing debts and then misappropriated most of the raised funds and failed to repay the investors of Private SME Bonds in time. Zhang Aimin and Hu Hong were then personally charged and convicted of the fraudulent issuance of company bonds under Article 160 of the Criminal Law on 1 December 2016. The conviction ruling was sustained by High People’s Court of Guizhou in November 2017.

It is the first case on fraudulent issuance of Private SME Bonds and also the first case where a criminal penalty was applied for the fraudulent issuance of Private SME Bonds. Previously, the judiciary was hesitant about applying Article 160 of the Criminal Law to fraudulent issuance of Private SME Bonds because that article dealing with the fraudulent issuance of company bonds does not explicitly list Private SME Bonds as a category of company bonds. This case clarified the issue.

Yang Jianbo v. CSRC

In Yang Jianbo v. CSRC, the High People’s Court of Beijing sustained the CSRC’s decision of an administrative penalty for Yang Jianbo’s role in Everbright Securities’ ‘insider trading’ in short selling index futures and exchange-traded funds (ETFs) to hedge risks, within hours of their programme trading system mistakenly placing 23.4 billion yuan’s worth (US$3.84 billion) of purchase orders for 180 ETFs, which caused an abnormal rise of prices of dozens of weighted stocks and the index (the ‘Everbright Fat Finger’ incident), without publicly announcing or confirming the incident.

The judgment held, inter alia, that (1) ‘insider information’ may include information not coming from and not directly related to the issuer or listed company; (2) ‘insider information’ did not become public because of a single, unconfirmed, internet media report; (3) ‘utilisation’ could be presumed if the accused was aware of the information at the time of trading; (4) the preexisting market-neutral strategy of Everbright Securities in dealing with uncommon transactions caused by system bugs, was not a ‘scheduled arrangement’ to defeat ‘utilisation’ because the strategy was not specific enough, and Everbright took advantage of the insider information in the course of executing the strategy; and (5) imposing sanctions in the case was a deviation from prior regulatory practice, but it was justified by the exceptional nature of the incident and the ‘public, equitable and fair’ principle of the Securities Law.

Yang Jianbo filed a petition for retrial before the SPC, which sustained the original judgment on 24 August 2017. The SPC’s decision confirmed the extensive interpretation of the ‘insider information’ and its ‘utilisation’ by courts and, therefore, will be the guideline for future CSRC enforcement and judicial practice on insider trading.

Shanghai Xing Sheng Shi Ye Development (Group) Co, Ltd v. Shanghai Kainan Investment Holdings Group Co, Ltd et al. (with Shinmay Property Co, Ltd as a third party)

This lawsuit is the first case where the shareholder of a listed company has sued the ‘barbarians at the gate’. The original largest shareholder of Shinmay (a listed company), Xing Sheng Co, Ltd, sued the new largest shareholder group, the barbarians at the gate trying to take over corporate control. During the shareholding filing process, the defendants concealed the fact that they held multiple trading accounts on behalf of persons acting in concert, which violates the disclosure rules promulgated by the CSRC. By buying in a large number of shares and climbing to a 16.53 per cent shareholding position in the listed company, they subsequently became Shinmay’s largest shareholder.

Xing Sheng Co, Ltd. prayed, in the complaint, for the relief of the deprivation and restriction of the shareholder’s rights of the defendants, including but not limited to voting rights. In June 2016, the First Intermediate People’s Court of Shanghai ruled against Xing Sheng Co, Ltd’s claims because it failed to prove that it suffered damage as a result of the defendants’ non-disclosure and, therefore, lacked the factual and legal basis to support its claim. The court held, inter alia, that even though the defendants became shareholders of Shinmay through buying shares in violation of CSRC disclosure rules, there is no legal basis under the Securities Law to support the deprivation and restriction of the shareholder’s rights. The court branded the case as a ‘new type of securities fraud liabilities case’. Xing Sheng Co, Ltd lodged an appeal with the High People’s Court of Shanghai, but its later withdrawal of the appeal rendered the ruling of the First Intermediate People’s Court of Shanghai legally effective. The ruling is likely to have persuasive power to other courts for numerous similar ongoing cases.

Beijing Dong Yi Law Firm v. CSRC

This lawsuit is the first case where a law firm sued the CSRC for disputing the CSRC’s enforcement standard on a law firm’s duty of care and diligence for filing a client’s IPO documents. Dandong Xintai Electric Co, Ltd (Xintai) was sanctioned by the CSRC and delisted in August 2017 for its fraudulent issuance of stocks. Beijing Dong Yi Law Firm (Dong Yi), as the legal counsel for Xintai’s IPO was sanctioned by the CSRC as well for its alleged failure on fulfilling the duty of care and diligence in providing IPO legal services and on false statements in Xintai IPO documents. Dong Yi disagreed with the CSRC’s sanction and brought the lawsuit to the First Intermediate People’s Court of Beijing.

The issues in the case, among others, are: (1) whether the law firm is a securities services institution that is subject to stricter regulation under Securities Law, which only explicitly lists the investment consultancy institution, financial advisory institution, credit rating institution, asset valuation institution and accounting firm as the securities services institution; (2) whether or to what extent the law firm is legally obligated to verify the audited report issued by the qualified accounting firm; and (3) whether the lack of seal or signature on working paper reserved by the law firm amounts to a breach of duty of care and diligence.

The case has the first open hearing on 15 March 2018 and is to be decided.

Ni Lijuan, et al. v. GCL System Integration Technology Co, Ltd

This is the first case in which the court clearly ruled that corporate bonds were also covered by the cause of action of false statement, based on which the plaintiffs could bring up lawsuits and claim damages. As further explained by the court, the ruling was based on three reasons: first, corporate bonds were also traded in stock exchanges, and were regulated by the Securities Law and the Judiciary Interpretation of Trial of Civil Compensation Cases Arising from False Representation in the Securities Market Several Provisions. Second, the market price of the corporate bonds also fluctuated, the same as securities, and a false statement could cause deviation from the price and resulted in investment damages. Third, the bondholders already suffered losses and there was no evidence showing the company paid off all corporate bonds.

VI OUTLOOK AND CONCLUSIONS

Following the increasingly stringent enforcement in capital markets in 2016 and 2017, false statement, insider trading and market manipulation (and particularly those in new forms) will remain the focus of the CSRC’s regulatory efforts. It is expected that the CSRC will be emphatically watching out for cases concerning severe damages to listed companies’ and minority shareholders’ legitimate interests, cases that accumulate market risks and endanger the smooth operation of capital market; cases that seriously violate fair trading principle and obscure market-adjusted function; and cases that disturb the order of information dissemination and create fear and panic in bad faith.

Besides the crackdown efforts, there is plenty to look out for in 2018.

a The CSRC will follow national strategy, concentrate its support to companies in innovative and leading industries, reform IPO rules, introduce service measures and support mergers and acquisitions between companies of new economics.

b The expected structural changes to the stock market, including a transition from the approval system to a registration system, are still under discussion. Remarkably, the once prevalent share-issuance registration system for the Chinese stock market will be gradually replaced by a more relaxed system.

c The financial regulatory system will be further improved, and stock exchanges will be given full play as front line regulators. The CSRC will strengthen its efforts to prevent risks and reinforce the enforcement function to crackdown various types of violations.

d Following the Shanghai–Hong Kong Stock Connect, Shenzhen–Hong Kong Stock Connect and the incorporation of MSCI into A-share, the capital market will be further opened to offshore investors, while trading rules and regulations will be further reformed to support the opening up.

e Bond market and futures market are likely to be new focuses in 2018 for the building of a multilayer market system. There are likely to be new developments and reforms of laws and regulations related to the bond market and futures market.

f The delisting mechanism will be put into force in 2018, and stock exchanges will be given powers to suspend listing and delist companies.


1 Peng Xuejun, Sun Shiqi and Liu Siyuan are partners at Jingtian & Gongcheng.

10 Article 2, Judicial Interpretation on Some Particular Issues in Current Hearing of Commercial Disputes.

11 Article 6, Judicial Interpretation on Claims for False Statement.

12 Wanfu Bio-Tech case: http://finance.eastmoney.com/news/1349,20141110443762435.html.

13 The CSRC’s Circulation on Further Completing the Administrative Penalty System of the CSRC, Zheng Jian Fa [2002] No. 31, 04/25/2002.

14 For example, Article 64 of Measures for the Administration of Issuance of Securities by Listed Companies issued by the CSRC, CSRC Order No. 30, 5 June 2006, provides such measures as regulatory interview, decisions on competence for certain positions, and recording on credit files.

15 http://news.xinhuanet.com/fortune/2016-06/27/c_1119121984.htm.

16 www.csrc.gov.cn/pub/newsite/zjhxwfb/xwdd/201702/t20170224_312641.html.

17 www.csrc.gov.cn/pub/zjhpublic/G00306212/201703/t20170310_313478.htm.

18 www.sohu.com/a/225356950_260616.

19 http://www.csrc.gov.cn/pub/newsite/zjhxwfb/xwdd/201801/t20180119_332880.html.