Alert! Administrative punishment becomes a criminal offense！

In July 2021, the General Offices of the CPC Central Committee and the State Council released the Opinions on Strictly Cracking Down on Illegal Securities Activities in accordance with the Law. The introduction of the Opinions opened the prelude to strictly cracking down on securities illegal and criminal activities in China. On September 8, last year, the Supreme People’s Court, the Supreme People's Procuratorate, the Ministry of Public Security, and the China Securities Regulatory Commission jointly issued a number of typical cases of strictly cracking down on securities crimes in accordance with the law. These typical cases are the latest results of the Opinions issued in July 2021. 

Through these typical cases, the judicial authorities have conveyed to the market the firm attitude of "zero tolerance" for securities violations and crimes. With the spread of the "comprehensive registration system", in the foreseeable future, China will not change the trend of cracking down on securities crimes, and the incidence of security-related crimes will rise sharply in the future.

The crime of insider trading is the "king of crimes" in securities crimes. It is not only the highest rate of occurrence in securities crimes for a long time but also a huge number of difficult points in the identification of insider trading crimes in judicial practice. Under the background of severely cracking down on securities crimes, these difficult points in the identification of insider trading crimes are very likely to become "thunder points" in improperly expanding the scope of punishment for insider trading crimes. 

The time of the formation of insider information is one of the "thunder points" that are easy to "detonate". In recent years, there is a tendency to judge the time of the formation of insider information in advance. In judicial practice, even there are cases where the initial negotiation between the two parties in the initial stage of the acquisition plan is recognized as the judgment when the insider information is formed.

The second paragraph of Article 5 of the Interpretation of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues Concerning the Specific Application of Law in the Handling of Criminal Cases of Engaging in Insider Trading or Leaking Insider Information(hereinafter referred to as "the Interpretation of Insider Trading Crimes") stipulates the rules for determining the time of the formation of insider information, that is, "The time when a person, who makes a motion, plan, decision or action which affects the formation of insider information, begins to implement the motion, plan, decision or action shall be deemed as the time of the formation of the insider information. " The initial time in the rule has a tendency to be determined in advance in judicial practice. 

For example, company A plans to acquire company B, and there are two understandings about the time of the formation of the insider information. The traditional view holds that the time when the acquisition plan is formed is the time when the insider information is formed, while the advanced judgment in recent years holds that the insider information can be determined when the two parties to the acquisition transaction start the negotiation.

The logical thinking is that, according to the basic common sense of the capital market, this kind of acquisition negotiation can completely affect the stock trading price. Once the information about this negotiation is disclosed, the market value of Company A will inevitably fluctuate significantly. Therefore, as early as the initial stage of the acquisition negotiation, it can be determined that the formation of insider information. Our team believes that the trend of determining the time of the formation of insider information as "ahead of schedule" is not desirable. 

The biggest problem of this trend of determining "ahead of schedule" is that the content of insider information is highly uncertain. Taking the acquisition transaction as an example, at the beginning of the negotiation between the two parties, the acquisition transaction has great uncertainty, and its negotiation is far from involving the core issues, it is also likely that the acquisition transaction will fail in the subsequent negotiations. It is doubtful whether such uncertain information will really affect the stock price. To identify this time point as the formation time point of insider information will improperly expand the regulatory scope of the crime of insider trading.

In the past ten years, M&A and restructuring have become the hardest-hit areas of China's insider trading crimes. Almost all the insider trading cases that our team recently represented involve M&A and restructuring.

Ten years ago, the identification of securities crimes was still in the period of "modesty", and the identification of the time of the formation of insider information in merger and reorganization insider trading cases was relatively easy to grasp.

For example, in the famous "insider trading case of Yifa Securities", the unlisted company "Yifa Securities" intended to control the listed company by means of asset injection, and the time of the formation of the insider information determined by the CSRC and the subsequent judicial organ is the time when "Yifa Securities" proposed to take "Yifa Times" and "Yibian Road" as the alternative acquisition object, and formed the written "Backdoor Listing Plan of Yifa Securities Co., Ltd.".

For another example, in the case of insider trading and disclosure of insider information by Mr. Du and Mr. Liu (see the criminal judgment of Wuxi Intermediate People's Court of Jiangsu Province (2011) No. 0002 Xixing Erchu Zi), a research institute of China Power Group intended to carry out a major asset restructuring of a Chun ceramic company in Shanghai by means of asset replacement and non-public offering. The time when the Wuxi Intermediate People's Court recognized the cooperative framework for asset restructuring for the first time in written form as the date when the Institute was recognized as the transaction party of asset restructuring was the formation time of insider information.

In addition to the above-mentioned judgment that the date of the formation of the written merger and reorganization plan document is the time of the formation of the insider information, there are also a few judgments that the date of the first proposed merger and reorganization at the informal meeting is the time of the formation of the insider transaction. Similar judgments, such as the famous "YaoMou insider transaction case", in which the defendant YaoMou is the general manager of the company, Moody's plans to carry out the asset reorganization of the listed company "Moushan Textile", In this case, the CSRC and the subsequent judicial organs determined that the date when the SASAC and the financial office of an autonomous region held an informal meeting to draft the restructuring of a certain mountain textile industry was determined as the date when the insider information was formed.

With the formation of the situation of severely cracking down on securities violations and crimes, the formation time of insider information has a tendency to be significantly ahead of schedule. As the previous example, the date of the formation of the written merger and acquisition plan was mostly used as the formation time of the insider information in the merger and reorganization insider trading cases ten years ago, while the date of the first negotiation between the merger and reorganization parties was mostly used as the formation time of the insider information in recent cases.

In addition to the substantial advancement of the formation time of insider information, judging from the criminal judgment documents of the crimes involving mergers and acquisitions and reorganization, the judicial organ's judgment on the formation time of insider information is basically consistent with the opinions of the CSRC. It is no exaggeration to say that the judicial organ has no own judgment on the formation time of insider information, some cases even directly use the Administrative Punishment Decision as evidence to determine the formation time of insider information. For example, in the case of "insider trading and disclosure of insider information by Mr. Wang and others" (see Shanghai First Intermediate People's Court (2020) Hu 01 Xing Chu No. 8 Criminal Judgment), the Shanghai First Intermediate People's Court directly stated in the criminal judgment that "the decision on administrative punishment proves that on June 12, 2018, the Shaanxi Regulatory Bureau of the China Securities Regulatory Commission determined that the information on the major asset restructuring of XX Co., Ltd. was insider information before it was made public, and that the information was formed no later than February 13, 2016, and was made public on May 9, 2016".

There are fundamental differences between administrative punishment and criminal cases in the nature of the case and in the standard of proof. It is not advisable for the judicial organ to directly take the time of the formation of insider information specified in the opinions issued by the CSRC and the administrative punishment decision as the time of the formation of insider information in criminal cases.

According to the statistical data in recent years, insider trading cases, especially those involving mergers and acquisitions, originate from the administrative law enforcement activities of the CSRC. As mentioned above, in practice, the judicial authorities highly rely on the identification opinions and even the penalty decision issued by the CSRC to judge and determine the start and end time of the sensitive period of insider information. The Opinions on Strictly Cracking down on Securities Illegal Activities in accordance with the Law clearly point out that it is necessary to strengthen the coordination between various departments, give full play to the institutional advantages of the Securities Crime Investigation Bureau of the Ministry of Public Security stationed in the CSRC, and improve the administrative and criminal law enforcement cooperation mechanism in terms of clue research and judgment, data sharing, intelligence guidance and investigation, and cooperative case handling.

Under the guidance of this mechanism, the public security organs and procuratorial organs can intervene in the administrative punishment stage of illegal acts of insider trading in advance, giving play to the advantages of the execution link, and greatly improving the efficiency of handling cases. However, this mechanism may put the investees of insider trading cases at a disadvantage. This is because the determination of the nature of the behavior of the investigated person by the administrative organ will greatly affect the conviction and sentencing of subsequent criminal cases. As mentioned above, the determination of the formation time of the insider information by the administrative organ will even be directly adopted by the judicial organ. In the administrative law enforcement stage, the investigated person in the insider trading case is likely to have a compromise confession, which is extremely unfavorable for the subsequent criminal stage.

Therefore, our team suggested that the respondents of insider trading cases or other similar securities cases should contact the criminal defense lawyer in time. The criminal defense lawyer's early intervention can provide considerable legal assistance to the respondents of securities crime cases. At the stage of administrative punishment, criminal defense lawyers can participate in the administrative law enforcement activities of insider trading cases as agents or professional consultants. 

In accordance with the provisions of Article 28 of the Lawyers Law and Article 32 of the Administrative Litigation Law of the People's Republic of China, lawyers at this time have the right to consult evidence in advance and the right to consult and advise. The above two rights can greatly help the investigated in administrative violation cases, At the same time, it also plays a huge role in the follow-up implementation of the right to defense.