In this article, Siwen Li will discuss possible new judicial guidelines for insider trading cases that are expected to be promulgated by the Supreme Court in due course.
Insider trading in China
Insider trading generally refers to securities trading in breach of a fiduciary duty or other trust relationship by misappropriation of any material, nonpublic information about the securities market. As it will undermine investors’ confidence in the fairness and integrity of the securities market, countries all over the world – including China – have placed the prosecution of insider trading high on their political agenda’s.
In the past few decades, insider trading in the Chinese A Share Market has been bursting due to the low crime cost and inadequate deterrent force of judicial system. Recent developments have shown us however that this situation might change in the near future. An insider official in CSRC (the China Securities Regulatory Commission) revealed that a new judicial guideline will be promulgated by the Supreme People’s Court regarding the investigation of insider trading, burden of proof and rules of indemnification.
New Supreme Court Guideline
The essence of this new guideline shall be on admittance of circumstantial evidence in the judicial practice which was disallowed and disagreed by the judges in the past. For example, phone records or short messages during the course of securities trading between the suspects could be deemed as circumstantial evidence of disclosure of confidential and nonpublic information unless the suspects could prove the legitimacy and rationality of these communications in between. This means that certain part of the burden of proof which previously rested on the shoulder of prosecutors will be conveyed to the defendants, the traders and the insiders.
In fact, the tendency that more stringent measures would be carried out by the Chinese court system against insider trading can be traced back to 2011. The new guideline is just an extension of this trend. According to publicly available data, CSRC acquired crime clues / evidence provided by anonymous informants on 108 cases in the course of 2011, only 30% of which could meet the requirements of valid evidence / exhibit acceptable by the Chinese court as a ground of prosecution. As for the other 70%, CRSC only has two options: 1) to launch an informal and internal investigation against the suspects, or 2) to disclose the fact to the Stock Exchange which will consequently conduct a follow-up supervision against suspicious traders / insiders.
Presumption of Guilt
Upon persistent request of CRSC, the Supreme Court finally made the decision to materially change the “negative” position of the authorities (both administrative and judicial) in the securities market. Therefore, in July 2011, the Supreme Court organized a seminar regarding the evidence / exhibits rules applicable to cases of administrative proceedings of insider trading. The minutes from that seminar, which are meant as a foundation for further stringent measures, provide that in the course of administrative proceedings of certain “special” cases relating to the administrative sanctions of insider trading, the burden of proof shall be conveyed to the suspicious traders and/or the third related party by the application of the rule of “Presumption of Guilt” in criminal law.
Legal experts expect that following this breakthrough in the field of administrative proceedings, the division of the burden of proof applicable to the criminal trial of insider trading could be more distinct and favorable to the procuratorate. The defendant, traders and/or insiders, shall encounter an unprecedented pressure of failure in the criminal lawsuit.