1. What is a" follower "rat silo?

 

" rat warehouse "generally refers to the illegal and illegal behavior of trading with undisclosed information. the most typical" rat warehouse "behavior is that fund managers and other financial institutions use the information they know about institutional investment decisions to build positions before buying securities products with the customer funds they manage, in the use of client funds to trade to raise the price of securities and then take the lead in closing the position, from which to seek benefits, this" rat position "is often called" preemptive trading ". However, with the development of China's securities market, the concept of "rat warehouse" at the current regulatory level is no longer limited to the traditional "preemptive trading. At present, China's securities regulatory authorities mainly use the big data analysis system to investigate and deal with the "rat warehouse" behavior, The theory of" convergent trading "has also been gradually developed in practice, that is, as long as the securities regulatory department determines that a transaction is highly convergent with the transactions of related funds and other institutions through data comparison and analysis, it will generally investigate and deal with the transaction, and take the convergent transaction as an important basis for determining the existence of transactions using undisclosed information , as for the time standard of convergence trading, in practice, the identification standard of" the first five and the second two "is generally adopted, that is, the first five working days and the second two working days of the trading day of affiliated funds and other institutions.

 

in practice, the standard of" top five and top two "is generally adopted to identify convergence transactions, and transactions after the trading day of funds and other institutions are also included in the calculation scope. as a result, transactions that are later traded by funds and other institutions may also be identified as convergence transactions, which may eventually be identified as transactions using undisclosed information. When it comes to convergence trading after the trading day of institutions such as funds, one has to mention "follow-on" rat trading. The so-called "follow-up" rat trading, also known as "imitation trading" rat trading, refers to the use of follow-up strategies, imitating the trading strategy of funds and other institutions. In practice, people may imitate the trading strategies of institutions such as funds for a variety of motives, such as the pursuit of well-known funds or online red fund managers, or the trust in the decision-making level or investment vision of funds and other institutions, believing that the value of the stocks they choose is undervalued. The biggest difference between the "follow-up" rat trading and the aforementioned "pre-emptive trading" and other rat trading behavior is that although the "follow-up" rat trading also uses the undisclosed information of financial institutions such as funds, its trading is completely later than the trading time of financial institutions such as related funds.

 

according to the relevant provisions of article 180, paragraph 4, of the criminal law of our country on the crime of trading with undisclosed information, the perpetrator of the crime should be a special subject with the convenience of obtaining undisclosed information. Within the scope of special subjects, they can be divided into two types of subjects according to their directness of contact with undisclosed information. One type is "master subject", that is, personnel in relevant institutions who can directly contact and know undisclosed information; One type is "follow-up subject", that is, the above-mentioned "master subject" cannot directly contact or master undisclosed information, entities that need to know about the buying and selling of the market through other means, and the undisclosed information obtained by such entities is generally lagging, such as the existence of double-named fund managers in fund companies, or computer technicians in secret-related positions in the company. Take the case of Tu Xin and Tu Jian using undisclosed information transaction tried by Shenzhen Intermediate People's Court and Guangdong High People's Court successively as an example. Tu Jian is an employee of Shenzhen Branch of China Securities Depository and Clearing Co., Ltd., who uses the securities account inquiry authority in the company's securities account management position, after knowing the undisclosed information such as stock ownership and changes of relevant trust products and asset management products of financial institutions, convergence to buy stocks with another behavior, Tu Xin. In this case, as an employee of the Shenzhen branch of China Securities Depository and Clearing Co., Ltd., Tu Jian only used his position authority to inquire about the undisclosed information that has been formed and executed. He is a typical "follow-up subject" and he is also engaged in a typical "follow-up transaction".

 

 

2. Current judicial practice for" follower "

Attitude to rat trading

 

As mentioned earlier, at present, China's securities regulatory authorities mainly investigate and deal with the trading behavior of undisclosed information through big data. As long as the trading behavior of the actor converges with that of affiliated funds and other institutions, it may be identified as trading with undisclosed information. In addition, in China's current practice, the time standard of "first five and second two" is widely used in the identification of convergence transactions, resulting in the suspicious transactions of related funds and other financial institutions before and after transactions may be identified as the use of undisclosed information transactions. From this point of view, China's regulatory practice does not seem to distinguish the specific types of rat warehouse, that is, under the current identification mode, "following" rat warehouse trading seems to be no different from "preemptive trading". In the case of meeting the relevant filing standards, both cases will be investigated for criminal responsibility, and the relevant cases retrieved by the author also confirm this judgment.

 

in addition to the above-mentioned crimes of tu Xin and tu Jian using undisclosed information to trade, the author also retrieved the following cases of" follow-up "rat trading being investigated for criminal responsibility.

 

1. Baiyun Transactions Using Undisclosed Information

in this case, Baiyun used the convenience of being a trader of century securities co., ltd. and being able to receive orders from the company's investment fund manager. after obtaining the company's trading orders, Baiyun violated the regulations to use relative accounts to conduct convergent transactions on the same day or on the second and third days. The public security organs calculate their convergent transactions and profits in accordance with the "first zero and second" calculation criteria. Shenzhen Intermediate People's Court determined that Baiyun constituted the crime of using undisclosed information to trade.

 

2. Du Changjiang's case of using undisclosed information to trade

in this case, du Changjiang took advantage of his position as investment manager of the financial management and investment department of China merchants securities asset management headquarters and used the non-public information of stock trading in 26 targeted asset management business accounts under his management to operate 8 accounts under his control to trade related stocks simultaneously or slightly later than the targeted asset management business accounts under his management. Du Changjiang said that the specific method of using undisclosed information to trade is "follow-up investment", that is, follow-up and follow-up. Both the Shenzhen Intermediate Court and the Guangdong High Court found that Du Changjiang constituted the crime of using undisclosed information to trade.

 

3. Wang Peng, Wang Huiqiang and others use undisclosed information to trade

in this case, Wang Peng used his convenience as a bond trader in the trading management department of Huaxia fund management co., ltd. to check the securities trading direction, investment category, securities code and other information through his personal account during his work, and informed Wang huiqiang and others to use the undisclosed information to engage in securities trading. The First Intermediate People's Court of Chongqing City found that Wang Peng and others constituted the crime of using undisclosed information to trade.

 

through the above several typical" following "rat warehouse trading cases, it can be seen that China's judicial practice still treats" following "rat warehouse trading as the crime of trading with undisclosed information, and as mentioned earlier, China's practice does not specifically distinguish the types of rat warehouse, as long as the relevant behavior meets the conditions of convergence trading, it will be found to constitute the crime of trading with undisclosed information. but in fact, as described later," follow-up "rat trading and" preemptive trading "and other typical rat trading in the behavior and social harm are obviously different, in practice do not consider the specific behavior of the social harm, the practice of conviction and punishment is questionable.

 

3. " follow-up "rat trading

not criminally punishable

 

Criminal Penalty Basis for (I) Rat Trading

to analyze whether the" following "rat warehouse transaction is criminally punishable, we must first clarify the social harmfulness of the" rat warehouse ", that is, why the criminal law should establish the crime of trading with undisclosed information. Huang taiyun, deputy director of the criminal law office of the law working committee of the standing committee of the national people's congress, pointed out in the article "& lt; criminal law amendment (VII) & gt; interpretation": "some employees of fund companies, securities, futures, insurance companies and other asset management institutions, mainly institutional managers and traders, before using clients' funds to buy securities or their derivatives, futures or option contracts and other financial products, in their own name or under the name of others, or inform their relatives, friends and related households to buy securities, futures and other financial products at low prices first, and then use the customer's funds to pull up to a high level and then take the lead in selling them for profit, so that individuals can make huge profits at a relatively low cost & hellip;& hellip; Most of its profit sources are actually the transfer of fund assets (that is, the funds of the basic people) & hellip;& hellip; it (rat warehouse) seriously damages the order of financial management, damages the fairness, justice and openness of the market, seriously damages the interests of customers and investors, seriously damages the reputation of the financial industry, thus affecting the trust of investors in financial institutions, and in the end, it also damages the interests of the units where employees work. If not severely punished, it will severely affect asset management and the healthy development of funds, securities and futures markets."

 

from the above legislative background materials, it can be seen that the crime of using undisclosed information to trade was originally aimed at" preemptive trading "rat warehouse in China's criminal law, while the legal benefits of using undisclosed information to trade are mainly divided into two parts, one is to damage the interests of investors and the other is to damage the credibility of the financial industry. Therefore, to determine whether the "follow-up" rat warehouse transaction has criminal punishability, it is necessary to analyze whether it is like the "preemptive trading" rat warehouse, whether it also damages the interests of investors and the credibility of the financial industry.

 

(II)" follow-up "rat warehouse trading is different from ordinary" rat warehouse "trading behavior, which is less harmful to society and lacks criminal punishability

the reason why the traditional" preemptive trading "rat warehouse harms the interests of investors is that the actor buys the financial product before the customer funds buy the financial product, which may increase the price of the financial product, increase the cost of subsequent customer funds to buy the financial product, and transfer the profits that should belong to the customer to the actor in disguise, the act of raising the price of the financial product with customer funds and then taking the lead in selling it for a profit transfers the risk of investment to the customer investor. As far as "follow-up" rat trading is concerned, since the relevant transactions are carried out after the completion of institutional transactions such as funds, no matter how large the size of the rat trading and how it affects the stock price, it has nothing to do with the fund. At this time, the "rat trading" may even raise the stock price, which is beneficial to fund property and fund share holders. Therefore, from this point of view, the "follow-up" rat trading will not harm the interests of other investors, and it is unreasonable to regard the damage to the interests of investors as the criminal punishable basis of the "follow-up" rat trading.

 

since the view that" following "rat trading directly harms the interests of investors is not valid, what needs to be examined is whether" following "rat trading damages the credibility of the financial industry. It must be affirmed that as long as fund managers and other financial institution practitioners use their positions to facilitate access to undisclosed information to engage in related transactions, regardless of whether they actually harm the interests of investors, their actions will endanger investors' trust in financial institutions and their practitioners., Damage the credibility of the financial industry. However, when studying the issue of criminal punishability, it is necessary to further explore the essence behind the so-called credibility of the financial industry and the trust of investors in financial institutions or financial practitioners.

 

for investors, they expect themselves to be in a fair and just market environment and the assets entrusted to financial institutions such as funds can be diligently managed by professionals. For financial institutions such as funds and their employees, their greatest responsibility is to manage the assets entrusted to them by their customers, and through their own professional ability to strive to make value-added. However, due to the huge information asymmetry between investors and financial institution practitioners, financial institution practitioners may act to harm the interests of customers in the process of managing customer funds, resulting in moral hazard. Therefore, the so-called credibility of the financial industry is not an empty concept. The essence behind it is actually to require financial institutions and their employees to perform their duties of loyalty and diligence, and not to harm the interests of investors. If the specific behavior of financial institutions and their employees has been proved impossible to harm the interests of investors, even if their behavior makes investors or the public shake their trust and damage the credibility of the financial industry, the shaking of trust and the so-called damage to the credibility of the industry still lack substantive basis, and the behavior of relevant employees still lacks criminal punishability due to the lack of substantial social harm.

 

In addition, there is also a view that after financial institutions buy or sell stocks, the impact of the transaction on the trading price of securities has a certain duration, and the account involved in the case can also achieve the effect of profit or loss avoidance by engaging in relevant transactions during this period. The logic of this view is consistent with the conviction logic of insider trading, that is, it is believed that the perpetrator uses his position to facilitate the acquisition of undisclosed information before the disclosure of undisclosed information that has a significant impact on the price of securities transactions. The behavior of related transactions has gained improper advantages in the capital market and harmed the normal market order. However, the author believes that from the actual situation of the use of undisclosed information trading cases, it is not feasible to use this reason as the criminal penalty basis for "follow-up" rat warehouse trading. Although the theory generally regards "price sensitivity" as the characteristic of undisclosed information, unlike insider trading cases, in practice, it is extremely rare for securities regulatory authorities and judicial organs to demonstrate the impact of undisclosed information on securities prices in such cases. As some commentators pointed out, "we have to admit that due to the difficulty of proof, the judgment value of this feature (price sensitivity) in judicial practice has actually been weakened". In addition, even institutional investors may in fact find it difficult to influence the price of securities for a variety of reasons, such as the small size of institutional transactions and the large volume of stocks traded that are large-cap stocks. Therefore, if it is believed that the "follow-up" rat trading is similar to insider trading, and the perpetrator has obtained an improper advantage over ordinary investors, and this is the basis of its penalty, it will face judicial proof in practice. Difficulties, that is, it is difficult to prove that the undisclosed information involved in the case has an impact on the prices of securities and futures, or even if the causal relationship can be proved, this reason also does not provide a basis for criminal penalties for all "follower" rat trading.

 

therefore, the author thinks that there is an obvious difference between" following "rat warehouse trading and general" rat warehouse "behavior. the former has no obvious social harm. at present, judicial practice does not make a specific distinction between the types of rat warehouse, and it is questionable to investigate the criminal responsibility of" following "rat warehouse trading.

 

(III) can regulate" follower "rat trading through administrative penalties

as mentioned earlier, even if" follow-up "rat trading will not cause damage to investors, it is completely reasonable for investors to put forward certain moral requirements for professionals managing their own assets, and professional financial practitioners should also have their own professional ethics. Although the "follow-up" rat trading did not actually cause damage to investors, it did shake the trust of investors in financial institutions and their employees, damaged the credibility of the financial industry, and ultimately had a negative impact on the entire industry in which the perpetrators themselves were located.

 

therefore, the author thinks that although it does not have obvious social harm and only has a negative impact on the actor's own industry, it is not enough to be used as the basis for investigating the criminal responsibility of the actor engaged in" following "rat trading, it is also necessary to regulate this behavior in order to maintain the healthy development of the financial industry. in fact, in addition to the criminal law, article 54 of China's securities law also explicitly prohibits employees of securities companies and other financial institutions, staff of relevant regulatory departments or trade associations from using undisclosed information to trade. article 191 of the securities law also stipulates the corresponding legal consequences. Article 54 of the Securities Law is basically consistent with the provisions of paragraph 4 of Article 180 of the Criminal Law on the use of undisclosed information in the securities market, which is sufficient to effectively regulate "follow-up" rat trading.

 

Above all , I think the most essential feature of crime is its social harmfulness . as the department law with the most severe legal consequences, criminal law should sanction those behaviors with obvious social harmfulness. however, the" following "rat warehouse trading behavior does not reflect obvious social harmfulness and lacks criminal punishability. under normal circumstances, it should not be treated as a crime. Under China's current legal system, the administrative responsibility of those engaged in" follow-up "rat trading is sufficient to achieve the purpose of regulation.

 

 

comment

1 Lu bian:" accurately judge the convergence trading time point and crack down on the "rat warehouse" crime ", in procuratorial daily, February 23, 2021, 7th edition.

case no 2:(2018) yue xing zong no 479.

case no 3:(2018) yue 03 xing chu no 681.

case no 4:(2020) yue xing zhong no 436.

case no 5:(2015) Yu yi yi fa xing Chu zi no 00162.

6 Huang taiyun:" & lt; (VII) to the amendment to the criminal law & gt; Interpretation, in People's Procuratorate, No. 6, 2009.

7 Peng bing: redefining the" rat warehouse "& mdash;& mdash; Reflections on Sports Securities Supervision, Tsinghua Law, No. 6, 2018.

8 Wang Tao and Tang Linlin:" Criteria for Determining the Crime of Trading with Undisclosed Information ", in Law, No. 2, 2013.

9 pan yonglu:" judging rules and evidence standards for the crime of trading with undisclosed information ", in people's justice in early August 2021 (total no 933).

 

(this article has been published in the 98th issue of Shenzhen lawyer magazine)

 

 

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