Presumed insider trading, with no direct evidence, claims to have a proper attitude. The CSRC first fined and confiscated 17 million yuan, then the court sentenced him to 6 years in prison, and later it was added to the People's Court case database, becoming a typical example.

Intro Statement

Insider trading crimes have strong concealment, few direct pieces of evidence, and high difficulty in proof, among other characteristics. In particular, when the defendant and the insiders both deny the transmission of insider information, how to determine whether a trading conduct is obviously abnormal is a difficult issue in judicial practice. Today, Jingdian Case (Issue 38) is pushing an insider trading case handled in the first instance by the Beijing Third Intermediate People’s Court and in the second instance by the Beijing High People’s Court: the case of insider trading by Ma Moumou (People’s Court Case Database filing number 2024-04-1-120-002). This case clarifies the relevant judgment standards for what constitutes “obviously abnormal trading conduct” in insider trading.

Case Drafting Author:

Liu Ze, Senior Judge at the Third Level, Criminal Division Two, Beijing Third Intermediate People’s Court

Bian Jie, First-Level Judge Assistant, Criminal Division Two, Beijing Third Intermediate People’s Court

Filing Number

2024-04-1-120-002

Ma Moumou Insider Trading Case

— Where a person actively contacts the insiders of insider information, and trades are obviously abnormal during the sensitive period for insider information without any reasonable explanation, it may be determined as insider trading in accordance with law

Key Words

Criminal insider trading; crime of disclosing insider information; obviously abnormal trading during the sensitive period of insider information; actively contacting

【Basic Case Facts】

The defendant, Ma Moumou, previously served as a director of Company A. Company A was registered and established in November 1997, and in February 2012 it was listed on the Shenzhen Stock Exchange (hereinafter referred to as the SZSE) on the ChiNext board. Shen Moumou was the then chairman of the board of directors of Company A, and Niu Moumou was the secretary of the board of directors and the director of the capital management center. At the end of 2013, Company A planned to use Company B and Company C as merger and acquisition targets and conducted preliminary screening and analysis. On December 18, 2013, Niu Moumou completed the “Preliminary Analysis Report on Investment Value.” After that, Company A communicated with the parent companies of the above M&A counterparties multiple times. From May 5 to May 9, 2014, Company A hired intermediary institutions to enter and learn about the situation of the target enterprises. On June 18, 2014, Company A held a telephone meeting with the parties participating in the reorganization to discuss matters such as the transaction structure and the submission time for binding offers, and a memorandum was formed. Shen Moumou, Niu Moumou, and others from Company A participated in this meeting. On July 2, 2014, Niu Moumou sent binding offer(s) regarding the reorganization to the parent company of the M&A counterparty. On August 6, 2014, Company A issued a “Trading Halt Announcement,” claiming that due to the preparation of a major asset restructuring, the company’s stock was suspended from trading. On September 15, 2014, Company A publicly announced the reorganization proposals. On October 17, 2014, Company A’s stock resumed trading. As determined by the China Securities Regulatory Commission (hereinafter referred to as the CSRC), the acquisition of equity in a certain company by Company A falls under insider information as stipulated in the Securities Law; the sensitive period for the insider information was from June 18, 2014 to September 15, 2014; Shen Moumou and Niu Moumou were both insiders who were aware of this insider information.

On June 19, 2014, the defendant Ma Moumou, as an external director then serving on Company A, participated in the 15th meeting of the second session of the board of directors of the company. Shen Moumou, Niu Moumou, and others also attended. On July 17 and July 24, Ma Moumou had multiple phone calls and contacts with Shen Moumou. From June 26 to August 5, within the sensitive period for the insider information, Ma Moumou controlled other persons’ securities accounts to repeatedly buy Company A’s shares, totaling more than 750,000 shares, with total transaction value of RMB 20.26 million (the same applies to currency denomination below). Then, between 2014 and 2017, he sold them successively, earning a total profit of RMB 4.90 million.

On December 19, 2016, the Beijing Regulatory Bureau of the CSRC issued an administrative penalty to Ma Moumou for insider trading and short-swing trading. On December 28, Ma Moumou returned the unlawful gains of RMB 4.28 million to the CSRC and fully paid the fine of RMB 12.84 million.

On July 29, 2022, the Beijing Third Intermediate People’s Court made the criminal judgment (2022) Jing 03 Xing Chu 48: I. Ma Moumou was found guilty of the crime of insider trading and sentenced to six years of fixed-term imprisonment, and was also fined RMB 13 million. II. An additional criminal confiscation and recovery: continuing to recover unlawful gains from Ma Moumou of RMB 626,505.75, which shall be confiscated. After the judgment, Ma Moumou was dissatisfied and filed an appeal.

On December 27, 2022, the Beijing High People’s Court issued the criminal ruling (2022) Jing Xing Zhong 77: it rejected the appeal and upheld the original judgment.

【Reasons for the Judgment】

The court’s effective ruling held: The evidence in the case can prove that during the sensitive period of insider information, the defendant Ma Moumou had contacts and communications with persons who were aware of the relevant insider information, which indicates a realistic possibility of illegally obtaining insider information. In order to evade regulatory oversight, Ma Moumou, in violation of regulations, borrowed other persons’ securities accounts and conducted securities trading during the sensitive period. The time when he borrowed the accounts, the trading time, and the time when the insider information was formed, identified, and publicly disclosed were basically the same. The trading was obviously abnormal, and no reasonable explanation could be provided, so it can be determined that Ma Moumou’s conduct constitutes the crime of insider trading. Given that Ma Moumou had already returned most of the unlawful gains and paid the fine, the court made the above ruling in accordance with law.

【Core Holding】

Insider trading crimes have the characteristics of strong concealment, few direct pieces of evidence, and great difficulty in proof. When both the defendant and the insiders deny the transmission of insider information, it is necessary to comprehensively determine whether the trading conduct is obviously abnormal through factors such as whether the defendant and the insiders had any contact during the sensitive period of insider information, the source of the securities accounts, the timing, quantity, and trading direction of securities transactions, and the defendant’s trading habits, among others. For trading that is obviously abnormal, if the defendant also cannot produce a proper source of information or cannot provide a reasonable explanation, it may be determined that the conduct constitutes the crime of insider trading.

【Related Index】

Article 180 of the Criminal Law of the People’s Republic of China

Article 2 and Article 3 of the Supreme People’s Court and the Supreme People’s Procuratorate’s Interpretation on Several Issues Concerning the Specific Application of Law in Handling Criminal Cases of Insider Trading and the Disclosure of Insider Information (Fa Shi〔2012〕6)

Submitted by: Beijing High Court Research Office

Editor: Wang Xi

Review: Li Ze

Beijing Regulatory Bureau of the China Securities Regulatory Commission

Administrative Penalty Decision Letter

No. 〔2016〕5

Party concerned: Ma Yanwen, male, born in October 1967, then served as a director of Beijing LIDEMAN Biochemical Co., Ltd. (hereinafter referred to as LIDEMAN). Address: Shijingshan District, Beijing.

Pursuant to the relevant provisions of the Securities Law of the People’s Republic of China (hereinafter referred to as the “Securities Law”), this bureau conducted a case-filing investigation and examination of the conduct of party concerned Ma Yanwen in insider trading of the “LIDEMAN” shares. This bureau has, in accordance with law, informed the party concerned of the facts, reasons, and basis for the administrative penalty, as well as the rights the party concerned enjoys under law to which they are entitled. The party concerned submitted statements and defense opinions and did not apply for a hearing. The investigation and examination in this case have now been concluded.

After investigation, the following unlawful facts exist with regard to Ma Yanwen:

I. Insider Trading

(1) Formation and public disclosure process of the insider information

After prior efforts to find M&A targets and preliminary screening and analysis of the Dexai Diagnostic System (Shanghai) Co., Ltd., on December 18, 2013, LIDEMAN’s director and secretary of the board Niu Mouhui completed the “Dexai Diagnostic System Preliminary Analysis Report on Investment Value.” After that, LIDEMAN communicated with Diagnostic Systems GmbH (hereinafter referred to as German Dexai). From May 5 to May 9, 2014, LIDEMAN hired intermediary institutions to enter and conduct preliminary research on German Dexai, to understand the basic situation of the target company. On June 18, 2014, LIDEMAN held a telephone meeting with the reorganization participants such as German Dexai and HuaTai Joint Securities Co., Ltd., to discuss matters such as the transaction structure and the arrangements for the next steps, and a memorandum was formed. On July 2, 2014, Niu Mouhui issued a “Binding Offer” (binding offer) to German Dexai by email. On August 6, 2014, LIDEMAN issued a “Trading Halt Announcement” (announcement number 2014—049), stating that due to the preparation of a major asset restructuring, the company’s stock was halted from trading.

On September 11, 2014, LIDEMAN held business negotiations with the shareholders of German Dexai and signed the relevant agreements and documents. On September 12, 2014, LIDEMAN held the 19th meeting of the second session of the board of directors, deliberated and approved the motion on “Acquiring 25% equity interest in Dexai Diagnostic System (Shanghai) Co., Ltd. and 31% equity interest in Dexai Diagnostic Products (Shanghai) Co., Ltd. through a cash acquisition,” and publicly announced it on September 15, 2014. On October 17, 2014, the company’s stock resumed trading. On November 24, 2014, LIDEMAN held the 2014 fourth extraordinary general meeting of shareholders, and deliberated and approved matters related to this major asset restructuring.

The acquisition of assets disclosed in the announcement issued by LIDEMAN on September 15, 2014 falls under Item (2) of Paragraph 2 of Article 67 of the Securities Law and constitutes insider information as stipulated in Item (1) of Paragraph 2 of Article 75 of the Securities Law. The time when the insider information was formed is no later than June 18, 2014, and the public disclosure time is September 15, 2014. Insiders who were aware of the insider information include LIDEMAN’s chairman of the board Shen Mouqian, Niu Mouhui, and others.

(2) Circumstances of insider trading

Ma Yanwen served as a director of LIDEMAN. On June 19, 2014, Ma Yanwen attended the 15th meeting of the second session of the board of directors of LIDEMAN. The meeting was held on the second day after the start date of the sensitive period for this major asset restructuring. The participants included insiders such as Shen Mouqian and Niu Mouhui. On July 17, July 24, and July 28, Ma Yanwen and the insiders Shen Mouqian had multiple phone calls and contacts.

During the sensitive period for the insider information, Ma Yanwen actually controlled and operated the securities account of “Zhang Mouyan” to purchase “LIDEMAN” shares in an accumulated amount of 158,956 shares. The purchase amount was RMB 4,364,337.45, and the actual profit was RMB 901,967.79. He actually controlled and operated the securities account of “Ma Mouhua” to purchase “LIDEMAN” shares in an accumulated amount of 597,981 shares. The purchase amount was RMB 15,903,681.93, and the account profit was RMB 3,380,560.02.

The above trading conduct was obviously abnormal:

First, the funds raised by Ma Yanwen were mainly used to buy “LIDEMAN” shares. The funds in the securities account of “Zhang Mouyan” mainly originated from Ma Yanwen and loans Ma Yanwen made to others. On July 4, 2014, after Ma Yanwen raised RMB 1.2 million, he bought “LIDEMAN” shares on the same day for RMB 1,389,848 (including other funds in the account), and throughout the whole day he only concentrated on buying one stock, “LIDEMAN.” On July 7 and July 8, after Ma Yanwen raised RMB 3.58 million, on July 8 he purchased “LIDEMAN” shares for RMB 2,723,446. On July 9 and July 10, after Ma Yanwen raised RMB 650,000, on July 11 he purchased “LIDEMAN” shares for RMB 259,359. On July 30, after Ma Yanwen transferred RMB 15 million into the securities account of “Ma Mouhua,” he began to buy “LIDEMAN” shares: he bought for RMB 3,436,895 on July 30, for RMB 2,189,919 on July 31, for RMB 542,610 on August 1, and for RMB 885,643 on August 5.

Second, the trading conduct was obviously abnormal. After April 18, 2014, the securities account of “Zhang Mouyan” did not trade any shares. On June 30, it was used by Ma Yanwen, and on July 4 it concentrated, single-handedly, and extensively bought “LIDEMAN” shares of 51,300 shares. After November 19, 2013, the securities account of “Ma Mouhua” did not trade any shares. Starting in March 2014, it was used by Ma Yanwen, and on June 26 he bought “LIDEMAN” shares of 335,836 shares for a transaction amount of RMB 8,848,606. During the sensitive period for insider information, there was extensive trading of “LIDEMAN” shares. Neither of the two accounts had previously traded “LIDEMAN” shares before the sensitive period for the insider information. Between June 26, 2014 and August 5, 2014, there was extensive buying of “LIDEMAN” shares. The timing of the transactions was basically consistent with the formation and public disclosure process of the insider information of LIDEMAN, and the transaction volume was amplified, showing obvious abnormality.

Ma Yanwen did not provide a reasonable explanation for the above abnormal trading conduct.

II. Short-Swing Trading

During Ma Yanwen’s tenure as a director of LIDEMAN, he actually controlled the “Ma Mouhua” securities account and a margin account. From August 1, 2014 to February 2, 2015, he sold “LIDEMAN” shares of 514,263 shares and bought “LIDEMAN” shares of 165,300 shares.

The above circumstances are evidenced by records such as opening of relevant accounts, trading records, fund flow records, the trading IP and MAC addresses of the accounts, as well as interrogation transcripts, relevant announcements, and other evidence.

Ma Yanwen’s above conduct violated the provisions of Articles 73, Article 76(1), and Article 47(1) of the Securities Law of the People’s Republic of China, respectively, and constitutes insider trading and short-swing trading conduct as described in Article 202 and Article 195 of the Securities Law of the People’s Republic of China.

In his statements and defenses, Ma Yanwen mainly put forward the following opinions: he does not understand the Securities Law, but his attitude is earnest, and he hopes for a lighter penalty.

This bureau holds that the reasons stated by Ma Yanwen do not fall under the circumstances for mitigating or reducing an administrative penalty as set out in Article 27(1) of the Administrative Penalty Law of the People’s Republic of China. This bureau does not adopt Ma Yanwen’s statements and defense opinions.

Based on the facts, nature, circumstances, and the degree of social harm of the party concerned’s unlawful conduct, and in accordance with the provisions of Article 202 and Article 195 of the Securities Law, this bureau has decided:

First, confiscate the unlawful gains from Ma Yanwen’s insider trading of RMB 4,282,527.81, and impose a fine of RMB 12,847,583.43.

Second, issue a warning to Ma Yanwen for his short-swing trading and impose a fine of RMB 70,000.

The above party concerned shall, within 15 days from the date of receipt of this administrative penalty decision letter, remit the forfeited sums and the fine to the China Securities Regulatory Commission (opening bank: CITIC Bank, Head Office, General Department; account number: 7111010189800000162; remitted directly by the bank to the national treasury), and shall submit copies of the payment vouchers with the party concerned’s name indicated to the China Securities Regulatory Commission’s Inspection Bureau and to record with the Beijing Securities Regulatory Bureau. If the party concerned is dissatisfied with this administrative penalty decision, they may apply for administrative reconsideration to the China Securities Regulatory Commission within 60 days from the date of receipt of this administrative penalty decision letter, or may file an administrative lawsuit with the people’s court having jurisdiction within 6 months from the date of receipt of this administrative penalty decision letter. During the period of reconsideration and litigation, the above decision does not stop being enforced.

Beijing Regulatory Bureau of the China Securities Regulatory Commission

December 19, 2016

A massive amount of information and precise interpretation—find it all in the Sina Finance APP