China's Regulators Take On Insider Trading
July 11, 2019 | BY
Marilyn RomeroNew court interpretations and a series of court cases with stiff sentences reflect Chinese authorities' determination to bring insider trading to heel.
On June 28, China's Supreme People's Court and Supreme People's Procuratorate jointly issued a judicial interpretation to protect investors' rights and ensure a healthy market. Securities and law professionals have generally welcomed the new judicial interpretation that eliminates gray areas in Chinese criminal law regarding insider trading, as part of its efforts to address the growing occurrence of such trading malpractices.
The judicial interpretation makes specific stipulations on what qualifies as “other undisclosed information” in insider trading, as regulators seek to end the malaise of trading on undisclosed information, particularly the practice known as “rat trading”, also known as front-running in the U.S. and European markets.
In a typical case of rat trading, fund managers buy stocks via their own accounts before the financial institutions for which they work make large deals that can boost a company's share price, and then sell the stocks to make personal gains after the prices rally. Normal insider trading mainly involves taking advantage of undisclosed information about a public firm. The new interpretation clarifies that any such “messages” that may influence securities or futures trading activities should also be identified as “undisclosed investment information”.
The interpretation, which took effect from July 1, 2019, also lowered the threshold for criminal punishment to include cases involving illegal gains in excess of Rmb500,000, or $73,529. Those making illegal gains over Rmb1 million will be considered as having committed a “severe” offense, with commensurate penalties.
According to Li Yong, presiding judge of the Supreme People's Court 's No 3 Criminal Division, the interpretation aims to offer more protection for investors, ensure a healthy securities and futures market and further prevent financial risks. He also said that although Chinese law has rules against securities-related crimes, these rules sometimes lack the details that enable a judges to apply them to new securities-related cases, such as those receiving gains from using undisclosed investment-related messages.
Court statistics have identified 112 cases of rat trading and securities and futures market manipulation over the past four years, reflecting a rapid rise in the number of rat trading cases. In the first half of this year, the China Securities Regulatory Commission, or CSRC, has adopted a more muscular approach to market malpractice. It has imposed eight bans on market entry and 63 administrative penalties, involving 27 companies and 181 individuals, with total fines of Rmb985 million. There were also 26 insider trading cases that led to Rmb553 million in penalties and accounted for 56% of the total amount of financial penalties, according to a Global Times report, which also noted that many of the penalties, and more than half of the bans, were related to insider trading.
The new policy has also resulted in some landmark rulings. In December 2018, a former provincial vice governor in southern China pleaded guilty to engaging in insider trading and making Rmb160 million on illegal trades over the course of more than six years. He was sentenced to 20 years in prison and ordered to pay a fine of Rmb173.5 million in April this year.
In June this year, a former banker from UBS's Shanghai office was sentenced to nine years in prison in a case involving leaks about a $6.3 billion takeover by Cosco Shipping Holdings Co. The verdicts against the man and two associates were the first criminal convictions in China linked to the Hong Kong stock connect programs, a trading system that connects the city's market to mainland exchanges in Shanghai and Shenzhen.
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