Insider trading seems to be closely related with securities markets and its manifestation is particularly serious in listed company acquisitions and restructurings, so they present a high criminal risk.
Due to such features as length of time from making the decision to the execution of a listed company acquisition/restructuring process, the complex structure of the act, insider information’s long information chain and multiple transmission hops, the numerous participating parties, and the huge number and complex composition of persons with knowledge of insider information, accurately grasping the scope of the subjects of the crime of insider trading, i.e., the scope of the persons with knowledge of securities trading-related insider information, or persons who illegally obtain securities trading-related insider information, is of utmost importance for a listed company to guard against relevant criminal risks during an acquisition/restructuring, and to carry out focused compliance.
Persons with knowledge of insider information. Pursuant to article 1 of the Interpretations of Several Issues Concerning the Specific Application of the Law in the Handling of Criminal Cases Involving Insider Trading and the Leaking of Insider Information, jointly formulated by the Supreme People’s Court and the Supreme People’s Procuratorate, the provision on “persons with knowledge of insider information” in criminal law is a “cited” provision which, for the specific criteria for determination, references seven types of persons set out in article 74 of the Securities Law:
- The directors, supervisors and senior officers of an issuer;
- Shareholders that hold at least 5% of the shares of the company and their directors, supervisors and senior officers, and the company’s actual controller and its directors, supervisors and senior officers;
- The companies in which an issuer has a controlling interest and their directors, supervisors and senior officers;
- Persons who have access to insider information of a company by virtue of their positions in the company;
- The working personnel of the securities regulator, and other persons who have a hand in the administration of the offering and trading of securities by virtue of their statutory duties;
- The relevant personnel of sponsors, securities companies acting as underwriters, stock exchanges, securities depository and clearing institutions and securities service institutions; and
- Other persons specified by the State Council’s securities regulator.
The “other persons” in item (7), as a catch-all clause, is different from the “insiders” in the administrative penalties and liability findings rendered by the China Securities Regulatory Commission (CSRC) in specific cases, with the former being a generalized legal provision with general applicability, whereas the latter is only a specific administrative act done by the CSRC, the contents of which are only evidence in a criminal trial and so not final, and still require cross-examination before they can operate as a basis for a verdict, and can also permit counter evidence for rebuttal.
Persons who illegally obtain securities trading-related insider information. In general, pursuant to article 2 of the interpretations, persons who illegally obtain insider information include three categories: (1) persons who obtain insider information by illegal means, namely the means itself by which the information is obtained is illegal (e.g., obtaining insider information by such means as theft or espionage); (2) persons who obtain insider information by virtue of their specific identity, that is that the means by which the information is obtained is not necessarily illegal but, as a person of a specific status, he or she should not be privy to such information (e.g., the spouse of an insider obtaining insider information from the insider); and (3) persons who obtain insider information through active pursuit of contact, that is that the act of active contact or interaction is not necessarily illegal, but, combined with an analysis of the objective of the act, the person obtains from the insider insider information that he or she should not be privy to, making the act of obtaining such information illegal.
During administrative law enforcement, for a determination of illegality for the “passive obtaining” of insider information, there is a certain degree of reasonable latitude, but, due to the special characteristic of criminal justice, it must be approached with great prudence. As there is a lack of evidence to show that a person who is privy to insider information simply passively or by chance was well aware that what he or she was privy to was insider information, his or her being privy to such information may not be deemed obtaining insider information by “illegal means” simply on the basis that he or she did not have the right to obtain such information.
For example, employees of company A are discussing in an elevator the decision by their company to acquire material assets and a senior officer of company B who has come to handle some matter overhears this information and buys or sells the stock in question, it would be difficult to deem such senior officer of company B an insider.
As to whether, with respect to information obtained second hand or obtained illegally after passing several hands, the person who obtained such information should still be penalized, laws of China remain silent. Looking elsewhere, there is no consistency in the way different countries approach this issue.
The EU does not pursue the criminal liability of persons who are second-hand recipients of information. Japan only penalizes the first recipients of insider information and requires that such first-hand recipient be expressly aware that the insider information is obtained from an internal person or quasi-internal person.
In the US, as long as there is an identifiable relationship between each giver and receiver along the line (e.g., relatives, friends, schoolmates and colleagues), and there is a clear information source or route, then the actor may be assumed to be well aware that the information is insider information and transmitted it nevertheless, and therefore demonstrates subjective bad faith. For example, in the acquisition of Lotus by IBM, criminal liability was still pursued after the insider information had passed through five or six hands.
However, considered from the perspective of the restrained nature of criminal law, where the laws of China are silent, a person who obtains information second hand is not a “person who illegally obtains insider information” for the purposes of criminal law.
Du Lianjun is a partner and Chu Zhilin is a trainee lawyer in the criminal defence department of East & Concord Partners
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