The stable and healthy development of the capital market is a matter of economic and financial security. How to effectively prevent and resolve financial risks, safeguard the construction of Shanghai international financial center by judicial ways and maintain national financial stability? What attempts has the Shanghai First Intermediate People¡¯s Court made as one of the eight people¡¯s courts in China set up by the Supreme People¡¯s Court for the trial of criminal cases involving securities and futures?

Shanghai First Intermediate People¡¯s Court held a press conference on May 16, 2024 to release the white papers on trial of criminal cases involving securities and futures. The four white papers are involving crimes committed with insider trading, false statements, market manipulation of securities and futures crimes, and illegal business operations related to securities and futures. Shanghai First Intermediate People¡¯s Court reported at the conference the situation of criminal cases involving securities and futures that the court has legally adjudicated over the past decade, released 15 typical cases and put forward countermeasures and suggestions on the governance issues of the securities and futures market that were reflected in them.

Xu Shiliang, member of the Party Leadership Group and vice president of the Shanghai First Intermediate People¡¯s Court, briefed the relevant situation. Representatives from Shanghai Regulatory Bureau of the China Securities Regulatory Commission (hereinafter referred to as the ¡°Shanghai Securities Regulatory Bureau¡±), Economic Investigation Department of the Shanghai Public Security Bureau, First Branch of the Shanghai People¡¯s Procuratorate, East China University of Political Science and Law, listed companies, securities companies, and fund companies attended the press conference.

This press conference is the 15th in the series of conferences on ¡°Grasping Justice and Efficiency, Further Promoting the Modernization of Shanghai Court¡¯s Work¡±.

The four White Papers presented three issues

The White Papers show that from January 1, 2014 to December 31, 2023, the Shanghai First Intermediate People¡¯s Court and grassroots courts within its jurisdiction have concluded 209 criminal cases involving securities and futures, among which there are 22 cases on crimes involving insider trading and divulging insider information, 41 cases on crimes of trading by using undisclosed information, 5 cases on crime of fraudulent bond offering, 2 cases on crimes of issuance of materially falsified supporting documentation, 14 cases on crime of manipulating the securities market, 1 case on crime of manipulating the futures market, and 124 cases on crime of illegal operating the business of securities and futures.

There are three characteristics for the type of crime mentioned the cases: The first is that the chain-oriented characteristics of crimes are very obvious; the second is that the means of crime are constantly updated; the third is that the technical characteristics of crime are becoming increasingly prominent.

The major issues presented in these cases include: Firstly, the internal control mechanism of listed companies is unsound. For example, real controllers of some listed companies colluded with professional stock trading gangs and willfully planned to manipulate their own company¡¯s stock prices in cases on crime of manipulating the securities, futures market. Secondly, intermediary agencies misconducted their duties as gatekeepers. For example, in some cases on crime of false statements on securities, some professional practitioners of intermediary agencies are deficient in professional ethics, issued audit reports that are inconsistent with the reality or issued falsified supporting documents, and take advantage of their professional advantages to actively provide advice for others to make false statements. Thirdly, mechanism for coordination between administrative and criminal enforcement needs to be improved. Taking the crime of manipulating the securities or futures market as an example, it will generally take more than 3 years to complete the procedure from administrative investigation to criminal trial, which leads to the delay of criminal punishment to some extent.

Shanghai First Intermediate People¡¯s Court proposes the following countermeasures and suggestions on the abovementioned issues: Firstly, it is necessary to further strengthen corporate compliance. It is necessary to lay equal stress on criminal punishment and governance, keenly identify loopholes in corporate governance, implement a regular mechanism for corporate compliance rectification, and promote the compliance of one industry by promoting compliance in individual case. Secondly, it is necessary to further increase the intensity of punishment. It is necessary to strictly penalize crimes involving securities and futures across the entire chain and in all aspects, strictly identify the conditions for probation, activate the securities practicing prohibition system, and release a clear strong signal of ¡°zero tolerance¡± to the market. Thirdly, it is necessary to further facilitate the coordination mechanism between administrative and criminal enforcement. It is necessary to strengthen cooperation with securities regulatory authorities, build a multi-party collaboration platform so as to realize the integration of information sharing, case reporting, and case transfer.

The 15 typical cases published involve the main types of current crimes involving securities and futures

It is informed at the press conference that, in the past 10 years, Shanghai First Intermediate People¡¯s Court has lawfully concluded a batch of criminal cases involving the new types of securities and futures with significant influence nationwide, of which 4 cases have been selected as typical cases involving securities and futures separately or jointly published by the Supreme People¡¯s Court.

The press conference informed the overall situation of 15 typical cases, covering the main types of current crimes involving securities and futures. In the selection of typical cases, it is necessary to pay attention to the overall importance of cases and adhere to the combination of criminal trial and serving the overall of guarantee center; to pay attention to the affinity to the people of the cases and adhere to the combination of cracking down on crime and strengthening protection on investor; to pay attention to the pioneering of cases and adhere to the combination of the principle of legally prescribed punishment for a specified crime and being guided by the rules of adjudication.

For example, in the case on crime of manipulating the securities market by Beibadao Group, China Securities Regulatory Commission (CSRC) imposed the highest-ever fine on Beidadao Group, which sets a record for the highest fine imposed by the CSRC at that time. Shanghai First Intermediate People¡¯s Court sentenced Beibadao Group to a fine of CNY 300 million for the crime of manipulating the securities market after trial and sentenced respectively each defendant to imprisonment of eight years and six months to two years for the crime of manipulating the securities market. This reflects the determination of supervision, cracking down and punishment on securities-related crimes, as well as the implementation of the law enforcement concept of ¡°zero tolerance¡±.

For example, the case of Xian¡¯s breach of trust and causing damage to the interests of listed company, as well as manipulation of the securities market, is the first criminal case involving securities, from which the proceeds of criminal fines shall be preferred to satisfy relevant civil compensation liability. It is clearly stated in the case that for cases where investors file civil lawsuits against losses suffered from criminal acts such as false statements, insider trading, and market manipulation, the illegal gains and fines refunded by the defendant cannot be turned over to the national treasury temporarily, and may be transferred to the court that hears civil and commercial cases when necessary, so as to be preferred to compensate investors¡¯ losses. It will realize the effective coordination between criminal justice and civil accountability, and effectively protect the legal rights and interests of small and medium-sized investors.

Another example is the case of manipulating the futures market by Yishidun and others, which is the first criminal case of manipulating the futures market in China (the second case in the world) and involves the latest high-frequency programmatic trading methods in the securities and futures trading market. This case not only clarifies the application conditions of the fallback clause for the crime of manipulating the securities or futures market in the form of specific cases, but also show the attitude of strictly cracking down on and no tolerance on illegal acts that harm the interests of other compliant investors though unfair advantages obtained maliciously, which has guiding significance for future trials of such kind of cases.

Signed a Cooperation Memorandum for Strengthening Collaborative Governance of Violations and Crimes Involving Securities and Futures

Shanghai First Intermediate People¡¯s Court and Shanghai Securities Regulatory Bureau held a signing ceremony for the cooperation memorandum of strengthening the collaborative governance of violations and crimes involving securities and futures after the press conference. The memorandum defines the scope of cooperation between the two parties and states the agreement on multiple working mechanisms for joint meetings, information sharing, case-handling coordination, enforcement interaction, integrity supervision, expert support, law publicity, subject research and others.

Wu Jinshui, secretary of the Party Leadership Group and president of Shanghai First Intermediate People¡¯s Court, Lin Lin, secretary of the Party Committee and director of Shanghai Securities Regulatory Bureau, and other relevant officials from Shanghai High People¡¯s Court, Shanghai First Intermediate People¡¯s Court, and the Shanghai Securities Regulatory Bureau attended the signing ceremony.

The attendees conducted discussions and exchanges on ¡°How to strengthen joint efforts to promote the healthy development of the capital market at the current stage¡± prior to the signing of the memorandum.

Professor Mao Lingling from East China University of Political Science and Law noted that, it can be considered from the following aspects to improve the three-dimensional accountability in the securities market from administrative, civil and criminal perspective, and ensure the high-quality development of the capital market through the construction of a comprehensive punishment and prevention system: Firstly, it is necessary to take advantage of the governance from the source to make the regulatory punishment measures work like ¡°long teeth with thorns¡±, strengthen law-enforcement accountability, and build a three-dimensional accountability system from the front end. Secondly, it is necessary to clarify the boundaries of the legal basis for civil, administrative and criminal liability and increase the supply of legal provisions in the securities market that are in line with local characteristics. Thirdly, it is necessary to further identity the issues of the coordination between civil, administrative and criminal law enforcement.

Jiangsu, general manager of compliance and legal management department of Orient Securities Co., Ltd. noted that, it is necessary to conscientiously implement the central government's requirements for cracking down on illegal activities involving securities, and effectively protect the legal rights and interests of investors. It is necessary to consolidate and deepen the existing achievements next, intensify judicial cooperation, and contribute to maintaining the open, impartial and fair order of the market and creating a good market ecology.

Zhou Yonggang, Inspector General of Changxin Asset Management Co., Ltd. noted that, the release of the white papers has created a new benchmark for the entire society, especially the securities and futures industry. It is suggested that the people's court should increase the intensity of economic punishment for loss-making crimes, promote the parallel imposition of fines and penalties so as to increase the cost of crime and form a strong deterrent.

Cai Guanhua, Secretary of the Board of Directors of Koal Software Co., Ltd. noted that, Koal always adheres to the bottom line of compliance, strictly constrains the actual controllers and controlling shareholders from encroaching on or damaging the interests of the listed company; Strengthen internal management to ensure the legal benefits of the company and employees; Improve the quality of information disclosure and expand communication channels for investors; Strengthen internal control internally to ensure smooth exchange of information and orderly operation.

Typical Cases