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        Assessing the Administrative Sanctions Regime for Insider Trading in China: An Empirical Approach
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Abstract

The Chinese Securities Regulatory Commission (CSRC) has significantly revised its overall market supervision framework over the last two decades. China’s insider trading laws, however, remain broad and abstract, while most enforcement measures take place inside a black box. These circumstances have led to an unpredictable and ineffective enforcement regime. This article examines all administrative sanctions cases from 2000 to 2013 in order to examine the CSRC’s actual enforcement practices. This data shows that the agency has a history of inconsistent enforcement, which stands as a warning against the consequences of unpredictable regulation. Moreover, it argues that the Commission’s current approach to recognizing illegal gains is both unreasonable and illegal, and that the CSRC has failed to adequately enforce actions for loss evasion cases. By adjusting enforcement policy to take these considerations into account, the CSRC would significantly improve the efficacy of the sanctions regime in China.

Footnotes

*

Associate Professor, Faculty of Law. An earlier version of this paper was presented at National Taiwan University School of Law for the 2014 Asian Law and Economics Annual Conference. In addition to the participants of the presentations, I would like to thank Professor Allan Horwich and Lawrence S. Liu for reading an earlier draft of this paper and their invaluable contribution and comments. Also, I am deeply indebted to Huang Yongsheng and Zhang Yuting, both LLM candidates at the KoGuan Law School, for their wonderful research assistance. All errors are mine.

**

Lawyer and investment banker. LLM, National University of Singapore.

The Chinese Securities Regulatory Commission (CSRC) has significantly revised its overall market supervision framework over the last two decades.1 These changes are no small matter. China’s capital markets have grown dramatically over the last two decades, expanding from an initial market with just a dozen issuers in 19912 to one in which the Shanghai and Shenzhen stock exchanges combined had more than 2,000 issuers and an aggregate market capitalization in excess of US$ 4.2 trillion by the first quarter of 2011.3 Moreover, China’s legislature tends to promulgate abstract commercial laws in order to avoid the uncertainty and costs associated with frequent modification, leaving the responsible enforcement agencies to fill in the terms by issuing regulations and developing working practices.4 This combination of factors has given the CSRC significant power over the shape of a crucial aspect of the Chinese market economy.5

One area over which the CSRC exercises significant influence is insider trading. The use of non-public information to trade public stock for gain represents a perennial problem for many jurisdictions.6 China is no exception to this norm.7 Indeed, while there is no convincing empirical evidence showing the exact extent of insider trading violations in China’s stock market, scholars generally believe that the issue is serious.8 The CSRC has also shown growing concern over the effects of insider trading in recent years, increasing the frequency of calls to “enhanc[e] the enforcement of insider trading”9 as well as the number of administrative actions taken against those suspected of insider trading.10 These efforts are most likely the result of the authorities’ need to show that they are actively doing something to stave off the wrath of investors and restore confidence in the market and the fact that they now have more resources available to them and are thus better equipped to uncover securities fraud.

These efforts also raise important questions about the quality of enforcement standards and practices in the administrative sanctions regime. The purpose of this article is to assess the quality of the CSRC’s administrative sanctions regime for insider trading to determine how it functions and how it might be improved. It does this by analysing all of the published administrative sanctions cases, which the CSRC has published since the end of the 1990s.11 In doing so, it raises a number of important questions about what constitutes a quality sanctions regime, whether the CSRC’s current regime meets these criteria, and, if not, what kinds of changes could be implemented to address any of its current shortcomings. After all, insider trading is unfair,12 and better enforcement of the insider trading laws will improve market fairness and regulatory legitimacy so that domestic and foreign financial consumers alike are more comfortable with investing in the Chinese market.

I. THE ADMINISTRATIVE SANCTIONS FRAMEWORK: CONTENT, VAGUENESS, AND THE PROBLEM OF PREDICTABILITY

Generally speaking, insiders who engage in prohibited transactions face the possibility of both criminal and administrative sanctions under Chinese law.13 The relationship between these two kinds of penalties is uncertain, with no clear standards for deciding which cases are subject to criminal sanctions and which are subject to administrative ones.14 However, because criminal cases are not publicly available and criminal sanctions are only remotely connected to the CSRC, our research focuses solely on the administrative sanctions regime.

The major legal sources of administrative sanctions are the Securities Law of the People’s Republic of China (Securities Law) and the related regulations promulgated by the CSRC.15 The key provision of the Securities Law is Article 202, which stipulates that those who violate the insider trading rules are subject to a range of pecuniary punishments:

Where an insider who has access to inside information of securities trading or any person who has obtained any inside information purchases or sells the securities, divulges relevant information or advises any other person to purchase or sell securities before the information regarding the issuance or trading of securities or any other information that may have any big impact on the price of the securities is publicized, he shall be ordered to dispose of the securities he illegally holds according to law. The illegal proceeds shall be confiscated and a fine of 1 up to 5 times the illegal proceeds shall be imposed. Where there are no illegal proceeds or the illegal proceeds are less than 30,000 yuan, a fine of 30,000 yuan up to 600,000 yuan shall be imposed. Where an entity is involved in any insider trading, the person-in-charge and any other person as held to be directly responsible shall be given a warning and be imposed a fine of 30,000 yuan up to 300,000 yuan. Any functionary of the securities regulatory body that conducts any insider trading shall be given a heavier punishment.16

Although this part of the law has been in force for almost 16 years, it remains problematic in that it introduces at least three areas of vagueness and ambiguity into the administrative sanctions regime. The first is the issue of what constitutes “illegal proceeds” at the regulatory level. The CSRC has issued some internal guidance material on this question in the form of the Securities and Futures Law Enforcement Brochure (Enforcement Brochure), which includes an equation for calculating illegal gains.17 Nevertheless, reliance on this material can be problematic. This is true not only because the Enforcement Brochure is not available to the public and therefore does not help them understand the CSRC’s approach to the issue,18 but also because an analysis of past cases suggests that even the CSRC does not always follow its own internal guidance.19

More fundamentally, the very act of measuring illegal gains remains a controversial issue.20 Financial analysts currently recognize two distinct ways of measuring illegal gains: the Net Profit Approach, which considers the illegal gains to be the final profits or total increase in value and would be calculated by subtracting the purchase price of the shares from the total sale price of the shares, and the Market Absorption Approach, which considers an illegal gain to be the amount resulting from the offense and would be calculated by subtracting the purchase price of the shares from the stock price at the time the market (i.e. the public) absorbed the effects of the positive information.21 These approaches see the issue very differently and can yield very different results even when applied to the same set of circumstances.

Assume, for example, that Manager A receives inside information about a potential merger deal. He then purchases 1,000 shares on Day One at $1 per share. On Day Two, the merger deal is announced to the public and the price of the stock goes up to $2 per share. Manager A, however, holds the shares for two more weeks, selling all his shares on Day 16 at $3 per share to realize a $2,000 profit (1,000 shares×($3-$1)=$2,000). Taking the Net Profit Approach would yield an illegal gain of $2,000, as 1,000 shares×($3-$1)=$2,000. However, using the Market Absorption Approach would lead to a significantly lower result, as 1,000 shares×($2-$1)=$1,000. For obvious reasons, this difference could lead to extremely large inconsistencies in enforcement results if one standard is not consistently used across all cases. And while the example magnifies the difference between the two approaches because the stock price continues to increase after the information is released, the two approaches can in fact diverge significantly in cases where the actual share price is highly volatile.

The second murky area in the administrative sanctions regime concerns the CSRC’s approach to regulating actions taken to avoid a loss. Generally speaking, insider trading activities can be classified into four possible scenarios: (1) insiders with positive information, such as news of a possible merger deal, buy and sell shares in order to make a profit, and succeed; (2) insiders with positive information buy shares but fail to make a profit, whether as a result of bad timing or other factors; (3) insiders with negative information, such as a large potential law suit or poor earnings, sell shares and avoid even bigger losses; or (4) the expected fall in price expected in scenario 3 does not in fact occur, so that the insiders needlessly sold their shares. Article 202 of the Securities Law clearly addresses the first and second scenarios. However, it is unclear how the Commission should apply its terms to activities falling in the third and fourth scenarios.22

To be sure, making profits and avoiding losses are clearly analogous when considering one’s personal gains, and it follows that insiders who trade on positive information to gain profits and insiders who trade on negative information to avoid losses ought to be treated the same. Moreover, this equality of treatment should obtain even if the law uses the phrase “illegal proceeds” rather than “personal gains”. Viewed from this perspective, because the law requires the CSRC to confiscate the illegal profits and impose a fine of between one and five times the illegal proceeds in cases involving illegal gains,23 it should also require the CSRC to order the perpetrator both to disgorge the amount that would have been lost but for the illegal trade and to require the perpetrator to pay a fine of between one and five times the loss avoided in loss evasion cases.24 However, Article 202 only states that “[w]here there is no illegal proceeds or the illegal proceeds are less than 30,000 yuan, a fine of 30,000 yuan up to 600,000 yuan shall be imposed”. This raises the question of whether the term “illegal proceeds” includes losses avoided through insider trading. But while fairness suggests a positive answer, and the reasoning for extending the provisions to instances of loss evasion is theoretically sound, a number of actual loss evasion cases seem to contradict this reasoning by simply imposing a fine within the range of RMB 30,000 to RMB 600,000.

The third murky area of the administrative sanctions regime concerns the factors used to set fines within the statutory range. Of course, setting fines almost inevitably involves a measure of regulatory discretion, and indeed some discretion is needed for the law to function effectively. Nevertheless, there also clearly needs to be some relationship between the illegal action and the penalty imposed. Professor Stephen Bainbridge opines that fairness arguments and intangible property rights arguments do the most to illuminate the reasons for insider trading prohibitions.25 From this observation it is safe to conclude that the amount of gain or loss actually received should serve as the major parameter for determining the sanction for insider trading.

There is currently very little literature that articulates a general framework for the qualitative assessment of sanctions regimes across jurisdictions for the simple reason that differences in their respective political economies have meant that there can be no one-size-fits-all standard for evaluating regulatory quality.26 Nevertheless, it is possible to identify and measure whether specific regulations achieve some common objectives. Clearly one of the most important goals of any sanctions regime is deterrence. And according to rule of law theory, deterrence is always associated with predictability.27 Predictability requires a number of things, including a clearly-defined set of parameters so that the actions which trigger sanctions, the factors used to judge the severity of such actions (such as the quantum of illegal gains or losses avoided or the blatancy of the action), and the sanctions themselves are easily understood. It also requires that the parameters in place be sufficiently, yet not unreasonably, severe and consistently applied to similar cases. Unfortunately, however, the lack of clarity provided by Article 202 ultimately degrades the predictability of the penalties imposed on those involved in insider trading, and has made clarifying these ambiguities the primary issue for improving China’s insider trading laws. Of course, clarity is not the only issue with the insider trading laws; a handful of scholars have even argued that the major normative shortcoming of Article 202 at present is that the fines are too light to usefully deter insiders from illegal action.28 However, these arguments seem to ignore the fact that the sanctions imposed must also be clearly understood for the law to be efficacious. Indeed, if the legal consequences of insider trading are unclear, the profitability of such ventures will certainly lure many people to take their chances.

II. ENFORCEMENT PRACTICES AND THEIR IMPLICATIONS FOR PREDICTABLE AND EFFECTIVE REGULATION

These issues also raise important questions about whether the Commission’s actual enforcement practices result in an effective and predictable administrative sanctions regime.29 In this section, we analyse a large volume of data taken from the cases published by the CSRC in order to assess whether enforcement practices work to clarify the law or leave it unclear, unpredictable, and underdeveloped.30 This data represents a statistically significant – and almost complete – record of all reported enforcement actions, with more than 95 percent of reported decisions generating enough data to use in our study.31 Moreover, the trend has been towards issuing longer, more specific, and more sophisticated judgments (see Chart 1).32

Chart 1 Average Words Per Decision Source: Compiled by Authors.

A. The Net Profit Approach v. The Market Absorption Approach

The first issue we approach here is whether the CSRC has adopted an optimal approach to calculating illegal proceeds. According to the explanations in the CSRC’s sanctions decisions and outlined in the internal guidance contained in its Enforcement Brochure, it would appear that the CSRC takes an approach very similar to the Net Profit Approach.33 The first analysis we did, then, was to compare the approach used by the CSRC with the Market Absorption Approach to identify which differences affect enforcement and to determine whether the approach taken is actually superior to the Market Absorption Approach.

To do this, we gathered information related to illegal gains from 49 cases going back six years,34 choosing to omit cases before 2007 due to deficiencies in data. We then used financial software to find out the specific prices of each share on the day the relevant information was released.35 Finally, we determined the differences between the CSRC’s approach, which is similar to, if not perfectly aligned with, the Net Profit Approach, and the Market Absorption Approach.

It is not exactly clear why the CSRC has chosen to use the Net Profit Approach. The choice is particularly curious given that it appears to contradict the theory applied to penalties in Chinese administrative penalty theory.36 Article 4 of the Administrative Penalty Law of the People’s Republic of China (Administrative Penalty Law) stipulates that:

Administrative punishments shall abide by the principles of being fair and just and open to the public.

The establishment and implementation of administrative punishments must take facts as the base and correspond to the facts, nature and seriousness of the illegal acts as well as to the extent of the harm thereby caused to the society…

Academics and practitioners generally point to Article 4 as an example of the application of the “proportionality principle”, which requires penalties set by administrative agencies to be based on the harm done to society,37 in administrative law.38 The problem with the Net Profit Approach is that it may exaggerate or underestimate illegal gains and thus fall foul of the proportionality principle. To be sure, it is trading on insider information, rather than other factors, that results in the illegal gain. The Efficient Market Hypothesis, for example, reflects this approach by calculating the benefit received from such a trade as the spread between the purchase price and the price at the time the information is released and incorporated into the market price.39 For many reasons, however, those who violate the law often choose not sell their shares immediately after the information is released, and it seems unfair to put the volatility risk on the violator after the value of the information has been completely incorporated into the share price. Because the Net Profit Approach incorporates subsequent volatility risk into its calculations, it does not appear to accord with the proportionality principle and would therefore be illegal under the Administrative Penalty Law.

Some might argue that the Market Absorption Approach is more lenient than the Net Profit Approach. Indeed, many cases support such a proposition.40 The research outlined in this article, however, proves that this worry is unwarranted in China. Of the 49 cases analysed, 23 show a positive difference (see Table 1), meaning that using a Market Absorption Approach would have resulted in the CSRC finding a higher illegal gain than by using Net Profit Approach almost half of the time. Moreover, the average illegal gain under the Market Absorption Approach was around 176,000 RMB, which is 17,000 RMB – or roughly 10 percent – more than the average gain under the CSRC’s current approach.41 These statistical figures clearly show that the CSRC’s current approach is not necessarily stricter than the Market Absorption Approach, and that it is incorrect to presume that one approach is necessarily more lenient than the other.

Table 1 Comparison of Profits by Case

Source: Compiled by Authors.

Furthermore, we also found that in the cases where those engaged in violating the prohibitions against insider trading did not sell all the shares purchased using inside information, the CSRC usually ignored any shares still held at the time of the enforcement action.42 This absence is also present in the CSRC’s Enforcement Brochure, which does not mention how to calculate illegal gains related to unsold shares that result in unrealized profit.43 Under the Market Absorption Approach, however, this issue is irrelevant, as all illegal proceeds are calculated at the point where the share price absorbs the relevant information. As a result, the Market Absorption Approach might provide a clearer basis that ensures that the entire transaction is taken into account.

B. Assessing CSRC Action in Loss Evasion Cases

The second issue we address is the CSRC’s approach to loss evasion cases. Generally speaking, CSRC action on this issue has been rather weak. Indeed, out of the 100 violations of the insider trading laws in the past decade, only three involved recognized instances of actions designed to evade losses.44 Moreover, the losses actually recognized in each case were nominal.45 This low enforcement record is particularly striking given the fact that the Chinese equity market has been in decline since 2007, with the index shrinking by more than 60 percent over this period (see Chart 2).46 This is true, moreover, even if some may argue that loss evasion cases may be less relevant to the broader market situation and should always be dealt with on a company-by-company basis.

Chart 2 Index of Market Changes, 2007-2013 Source: Compiled by Authors.

There are two possible explanations as to why actions against efforts designed to avoid losses have been so weak. The first is that the CSRC might have incorrectly categorized some loss evasion cases as other kinds of cases. This seems to have occurred, as a portion of the regular insider trading cases after 2008 show that those prosecuted had actually realized a negative gain (see Chart 3).47 That the CSRC mischaracterized these cases is further demonstrated by the fact that taking the arithmetic mean of the price within 10 days after the sale in the cases where the CSRC reported that the trader lost money from the trade reveals that in fact nine out of the 12 cases actually evaded a significantly larger loss, the largest amounting to 1.7 million RMB.48 The second possibility is that the CSRC simply has trouble discovering and prosecuting instances of loss evasion. While it would be practically, if not theoretically, impossible to prove this hypothesis, the paucity of CSRC cases suggests that there is at least some truth to it.

Chart 3 Breakdown of Cases Involving Negative Gains Source: Compiled by Authors.

Ultimately, the CSRC’s failure to strictly enforce the law where insiders act illegally to evade losses, whether because it does not require violators to disgorge the “gain” in an amount equal to the loss avoided or because it misses or miscategorizes many loss evasion cases, has meant that some illegal traders receive less punishment than they should, while others receive no punishment at all. Of course, the Commission is likely to excuse the unequal application of the law with claims that the Securities Law only gives it limited power to fine sellers who act to avoid losses. And this raises the issue of whether Article 202 of the Securities Law needs to be revised in order to equalize the punishments for illegal gains and loss evasion cases.49 This is a question we believe should be answered in the affirmative

Chart 4 Correlation Between Fine Imposed and Illegal Gain, 2008-2013 Source: Compiled by Authors.

.

C. The Relationship Between the Illegal Gain and the Fine Imposed

The third issue we address concerns the factors used to set fines within the statutory range. As mentioned in the previous section, the most important consideration in setting fines should be the amount of the illegal gain. Therefore, the best way to determine whether the CSRC is enforcing the insider trading law in a principled manner is to find out whether its decisions show a correlation between the amount of illegal gains and the amount of the fine imposed. To do this, we first removed all the loss evasion and zero gain cases from the data. We then ran a regression analysis in order to determine whether a correlation actually exists. Chart 4 indicates that sanctions imposed over a six year period are in fact highly correlated with the amount of illegal proceeds made from the trade under investigation. In other words, the CSRC mainly looks at the amount of the illegal gain when deciding what penalty to impose.

In order to examine whether the CSRC was consistent in its approach over the years, we also ran separate regressions across each of the six years considered here. In contrast to the overall trend, our findings, which are presented in Charts 5 through 10, indicate that the CSRC has not always followed the same approach.50 Whereas the fines issued in 2008, 2012, and 2013 all demonstrate a significant correlation between the illegal gain made and the fine imposed, there was no such correlation in 2009, 2010, and 2011. Indeed, the CSRC consistently issued only nominal penalties throughout the latter period, in most cases around the minimum 30,000 RMB, even where those cases involved rather large gains.51 These findings suggest that the CSRC valued the number of sanctions cases over the effects of the punishment during that period.52 This approach, however, appears to have ended with the appointment of a new CSRC chairman in 2012.53 Today, the Commission now attempts to catch more “tigers” than “flies”.54 Indeed, the chart for 2013 shows a nearly perfect relationship between fines and illegal gains, indicating that illegal gains are the major factor in setting punishments.

Chart 5 Correlation Between Fine Imposed and Illegal Gain, 2008 Source: Compiled by Authors.

Chart 6 Correlation Between Fine Imposed and Illegal Gain, 2009 Source: Compiled by Authors.

Chart 7 Correlation Between Fine Imposed and Illegal Gain, 2010 Source: Compiled by Authors.

Chart 8 Correlation Between Fine Imposed and Illegal Gain, 2011 Source: Compiled by Authors.

Chart 9 Correlation Between Illegal Gain and Fine, 2012 Source: Compiled by Authors.

Chart 10 Correlation Between Fine Imposed and Illegal Gain, 2013 Source: Compiled by Authors.

III. CONCLUSION

To achieve optimal effectiveness, the rule of law requires that the law on the books and actual enforcement practices be consistent. Our research, however, clearly demonstrates that this harmony is lacking with respect to the CSRC’s enforcement of insider trading rules, including some of the Commission’s own self-prescribed regulations. While some cases clearly follow the standards laid out in the Enforcement Brochure, others clearly violate them. These discrepancies likely stem from a mix of insufficient resources and interference from both the public and private spheres;55 whatever the reason, they have resulted in a lack of predictability when it comes to the enforcement of the insider trading regulations. Other aspects of the administrative sanctions regime have also limited its efficacy. The CSRC’s stated approach to calculating illegal proceeds from insider trading activity contains several flaws, including the fact that it is of questionable legality when viewed from the perspective of Chinese administrative law56 and the fact that the authorities have had demonstrable difficulties using this approach in cases where the trader involved chooses to hold onto the purchased shares. Moreover, the CSRC’s enforcement record in loss evasion cases has proven to be far from satisfactory, especially in light of years of bearishness.

Ultimately, the lack of predictability in the relevant enforcement standards and practices has significantly reduced the deterrence effect of China’s insider trading laws. And while the judgments ultimately fail to reflect the ultimate reasons for the CSRC’s choice or inconsistent application of the rules identified in the administrative sanctions regime,57 our study has suggested a few ways to improve the regime as it stands today. An initial recommendation is to “cage” the CSRC’s discretion by making the sanctions regime more specific,58 as an intervention at an appropriately high level (e.g. legislative) would work to narrow, if not cure, some of the deviations currently seen in the CSRC’s approach to administrative sanctions. Another improvement, given the fact that China’s current, Net Profit-like approach to calculating penalties for illegal trades is neither optimal nor legal, is to consider the Market Absorption Approach as an alternative to calculating the penalties for sanctioned conduct. Finally, given the fact that prosecutions for loss-evading actions are extremely rare in a period where such conduct would be expected to occur with some frequency, the CSRC should increase its efforts to enforce the sanctions regime in such cases.

Despite these issues, our research also suggests some positive developments in recent years. Most importantly, although it is hard to tease out the principles that the CSRC uses to set fines, it would seem that, since 2012, the Commission has begun to consider the amount involved in an illegal gains transaction as the primary factor in determining the penalty issued. This movement suggests that those considering engaging in prohibited activities should still pay attention to the enforcement of insider trading laws, because both the quality and quantity of the enforcement proceedings are improving. With the small changes to enforcement methodology and focus suggested here, it is hoped that the enforcement of Chinese insider trading laws will become even more reasonable and predictable.

1. PENG, Bing, “Neimu Jiaoyi Xingzheng Chufa Anli Chubu Yanjiu (内幕交易行政处罚初步研究) [A Preliminary Case Study of Insider Trading Administrative Sanctions]” (2010) 3 Zhengquan Fayuan (证券法苑) [Securities Law Review] 86.

2. YUAN, Jian, Zhongguo Zhengquan Shichang Pipan (中国证券市场批判) [A Criticism of China’s Capital Market] (Beijing: China Social Science Press, 2004).

3. See KPMG and FTSE Group, “China’s Capital Markets: The Changing Landscape” (June 2011), online: KPMG <http://www.kpmg.com/cn/en/IssuesAndInsights/ArticlesPublications/Documents/China-Capital-Markets-FTSE-201106.pdf>.

4. WENG, Charlie Xiao-chuan, “Who Is an Insider? A Case Study on Chinese Insider Trading Enforcement Principles” (2014) 85 Asia Pacific Law Review 22 [Weng, “Who Is an Insider?”].

5. E.g. Zhonghua Renmin Gongheguo Zhengquan Fa (中华人民共和国证券法) [Securities Law of the People’s Republic of China] (2005), art. 108 [Securities Law 2005].

6. STEINBERG, Marc I., “Insider Trading Regulation—A Comparative Analysis” (2003) 37 The International Lawyer 153.

7. E.g. HOWSON, Nicolas C., “Enforcement Without Foundation? Insider Trading and Chinese Administrative Law Crisis” (2012) 60 American Journal of Comparative Law 955.

8. HUANG, Hui, “An Empirical Study of the Incidence of Insider Trading in China” (12 May 2007) SSRN Manuscript, online: SSRN <http://papers.ssrn.com/sol3/papers.cfm?abstrct_id=993341>.

9. “Wu Bumen Jiang Zhankai Neimu Jiaoyi Zhuanxiang Jiancha (五部门将展开内幕交易专项检查) [Five Departments are Initiating Insider Trading Inspections]” Zhongguo Zhengquan Bao (中国证券报) [China Security News] (24 November 2010), online: China Economy <http://finance.ce.cn/rolling/201011/24/t20101124_16455476.shtml>.

10. ZHANG, Jia, “Neimu Jiaoyi Anjian Zhunian Dizeng (内幕交易案件逐年递增) [Insider Trading Case Numbers Increase Year By Year]” Zhengquan Shibao (证券时报) [Securities Times] (23 May 2012), online: China Economy <http://finance.ifeng.com/roll/20120523/6501373.shtml>.

11. The CSRC does not publicize all of its sanctions cases. The reason for not disclosing a particular case or category of cases is unknown to the public. However, there is a discrepancy between the figures published in the CSRC’s annual report and the actual decisions available on its website.

12. BAINBRIDGE, Stephen, Securities Law: Insider Trading (New York: Foundation Press, 2007) at 157.

13. For administrative sanctions, see Securities Law 2005, supra note 5, arts. 73-76; for criminal sanctions, see Zhonghua Renmin Gongheguo Xingfa (中华人民共和国刑法) [Criminal Law of the People’s Republic of China] (1997), art. 180.

14. MA, Yun, “Guanyu Woguo Xian Jieduan Zhengquan Shichang Neimu Jiaoyi Jianguan de Sikao (关于我国现阶段证券市场内幕交易的思考) [Thoughts on Insider Trading Supervision in China’s Current Securities Market]” (2011) 5 Touzi Yanjiu (投资研究) [Investment Research] 50.

15. Securities Law 2005, supra note 5. See e.g. Shangshi Gongsi Dongshi, Jianshihe Gaoji Guanli Renyuan Suo Chi Ben Gongsi Gufen Jiqi Biandong Guanli Guize (上市公司董事、监事、高级管理人员所持本公司股份及其变动管理规则) [Notice on Issuing the Rules on the Management of Shares Held by the Directors, Supervisors and Senior Management Officers of Listed Companies and the Changes Thereof] (Promulgated by the CSRC, 5 April 2007, effective 5 April 2007) [Notice on Rules].

16. Securities Law 2005, supra note 5, art. 202. See also Notice on Rules, supra note 15, arts. 73-76.

17. CSRC, Zhengquan Qihuo Zhifa Shouce (证券期货执法手册) [Securities and Futures Law Enforcement Brochure] [CSRC, Enforcement Brochure]. Chapter 6, article 23 of the Brochure provides two equations for calculating illegal proceeds. The approaches in the guideline are very similar to the Net Profit Approach. Therefore, the agencies only look to the profits actually realized. See Howson, supra note 7.

18. Ibid.

19. See below at II.C.

20. CHATTIN, Danielle DeMasi, “The More You Gain, the More You Lose: Sentencing Insider Trading under the U.S. Sentencing Guidelines” (2011) 79 Fordham Law Review 154.

21. Ibid.

22. Of course, while the prohibition refers to selling as well as buying, the penalty provisions only apply to purchases when applied literally. The provisions seem to come in where there is a loss avoided, but do not require the loss avoided to be disgorged.

23. Securities Law 2005, supra note 5, art. 202.

24. And thus results in a broad interpretation of Article 202.

25. Bainbridge, supra note 12 at 157-172. This appears to be equally true of business secrets cases where the amount of damages is not readily apparent. SUN, Hailong and YAO, Jianjun, “Shangye Mimi Qinquan Peichang Shu’e de Rending (商业秘密侵权赔偿数额的认定) [Deciding the Compensation in Business Secrets Case]” (2009) 4 Zhishi Chanquan (知识产权) [Intellectual Property] 38.

26. BENY, Laura Nyantung, “Do Insider Trading Laws Matter? Some Preliminary Comparative Evidence” (2005) 7 American Law and Economy Review 144.

27. BAILEY, George, “Predictability of the Law” (1963) 66 West Virginia Law Review 1 at 1-8.

28. E.g. Feng, GUO, “Goujian Zhongguo Tese de Fan Neimu Jiaoyi Zhidu (构建中国特色的反内幕交易制度) [The Improvement of Insider Trading Sanctions Institution]” (2011) 4 Zhengquan Fayuan (证券法苑) [Securities Law Review] at 44-47.

29. PISTOR, Katharina, RAISER, Martin, and GELFER, Stanislaw, “Law and Finance in Transition Economies” (2000) 8 The Economy of Transition 325.

30. Securities Law 2005, supra note 5, art. 184 (“The regulations, rules as well as the working system of supervision and administration as formulated by the securities regulatory authority under the State Council according to law shall be publicized to the general public. The securities regulatory authority under the State Council shall, according to the results of investigation, decide the punishment on any securities irregularity, which shall be publicized to the general public)”. A searchable database can be found online at CSRC, “Xinxi Gongkai (信息公开) [Information Publication]”, online: CSRC <http://www.csrc.gov.cn/pub/zjhpublic/>.

31. Very few cases have needed to be discarded. Where they have, it has been, for example, for failing to clarify the purchase price of the stock. See [2009] CSRC 24; [2013] CSRC 29. Nevertheless, we have been able to account for nearly every case since 2004, and to examine the complete record of decisions from 2007.

32. Chart 1 is based on the cases publicized by the CSRC on its website from 2000 to 2012. For the details of the cases, see, online: CRSC <http://www.csrc.gov.cn/pub/newsite/>. Generally speaking, the case provides very little information when the word count is below 1,500 words. About half of the words in the cases introduce the defendant’s background. The increase in length not only provides more information for research purposes, but also demonstrates that the agency is applying more sophisticated reasoning and willing to be increasingly transparent about punishing traders who commit offences.

33. CSRC, Enforcement Brochure, supra note 17, art. 23 (illegal gain = market value of shares in stock + gain realized + dividends - purchase cost - rationed share cost - transaction cost).

34. To be clear, the case mentioned here is an individual sanction case. In one judgment, there may be several people being punished. In order to find out the illegal gain recognition method, going into the details of individual sanctions makes more sense than looking into judgments.

35. We do not purport to discuss the issue of when the inside information is incorporated into the price, which is also known as the equilibrium price; we presume that the efficient market incorporates the information into the price on the day once it is released. This, of course, may run the risk of oversimplifying the issue. However, given the fact that in different markets the equilibrium price varies due to the extent of information asymmetry, the use of the price when the information is made public as the equilibrium price should not be a problem.

36. See e.g. Zhonghua Renmin Gongheguo Xingzheng Chufa Fa (中华人民共和国行政处罚法) [Administrative Penalty Law of the People’s Republic of China] (1996), art. 3 (explaining the relationship between article 3 and the securities laws: “Article 3 Administrative punishments which shall be imposed on citizens, legal persons or other organizations for the acts committed in violation of administrative order shall be stipulated by laws, regulations or rules in accordance with this law, and shall be implemented by administrative organs in accordance with the procedure stipulated by this Law. Administrative punishments shall be null and void if they are inflicted without legal basis or without the observation of the legal procedure”).

37. Ibid.

38. ZHOU, Yongyou, “Cailiang Jizhun de Zhengdangxing Wenti Yanjiu (裁量基准的正当性问题研究) [A Study of the Justification of Discretionary Facts]” (2007) 6 Zhongguo Faxue (中国法学) [China Legal Science] 22.

39. See e.g. FOX, Justin, Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street (New York: Harper Business, 2009).

40. The cases are referring to the sanction decisions being thoroughly studied in the research.

41. Ibid.

42. [2007] CSRC 15; [2010] CSRC 16; [2010] CSRC 44; [2013] CSRC 22.

43. CSRC, Enforcement Brochure, supra note 17.

44. [2004] CSRC 17; [2008] CSRC 12; [2010] CSRC 23.

45. The first involved a 20,000 RMB fine in 2004. [2004] CSRC 17 (this would have been allowed by the Securities Law in force at the time. Zhonghua Renmin Gongheguo Zhengquan Fa (中华人民共和国证券法) [Securities Law of the People’s Republic of China] (1998), art. 183). The second involved a 30,000 RMB fine in 2008 for evading just 7,600 RMB in losses. [2008] CSRC 12. The third involved less than 3,000 RMB in evaded losses, and the director received an 80,000 RMB fine. [2010] CSRC 23.

46. Yuan, supra note 2. The figures given in the chart are taken from the authors’ own quantitative measurements, which were conducted as part of this project.

47. These cases are [2008] CSRC 49; [2009] CSRC 17; [2010] CSRC 22; [2011] CSRC 57; [2012] CSRC 14; [2012] CSRC 23; [2012] CSRC 37; [2012] CSRC 54; [2013] CSRC 2; [2013] CSRC 14; [2013] CSRC 29. The CSRC generally recognizes the possibility of a “negative gain”, which refers to instances where individuals seek to profit from insider trading but fail to do so.

48. Ibid.

49. This matter has not yet come up during revisions of the Securities Law. See e.g. Zhonghua Renmin Gongheguo Zhengquan Fa (中华人民共和国证券法) [Securities Law of the People’s Republic of China] (2013).

50. The correlation across the six year period is explained by the greater number of cases in the former period.

51. See infra Charts 6 through 8.

52. Ibid.

53. At the end of 2011, the chairman of the CSRC changed. See “Guo Shuqing Churen Zhengjianhui Zhuxi (郭树清出任证监会主席) [Guo Shuqing Was Nominated as CSRC President]” Teng Xun Cai Jing (腾讯财经) [China Business News] (23 May 2014), online: China Economy <http://finance.qq.com/zt2011/jgrsbd/>. The change of the administrative leader may cause some change of policy orientation. WENG, Charlie Xiao-chuan, “Lifting the Veil of Words: An Analysis of the Efficacy of Chinese Takeover Laws and the Road to the Harmonious Society” (2012) 25 Columbia Journal of Asian Law 180.

54. Actually, this was incumbent president Xi Jinping’s major political propaganda in 2012. See “Fanfu Yao Laohu Cangying Yiqi Da (反腐要老虎苍蝇一起打) [Anti-Corruption Needs to Fight not only Flies but also Tigers]” Yangshi Wang (央视网) [CCTV News] (23 May 2014) online: cctv.com <http://news.cntv.cn/2013/01/22/ARTI1358835841806906.shtml>.

55. Weng, “Who Is an Insider?”, supra note 4.

56. Howson, supra note 7.

57. XIAO, Gang, “Jiaqiang Zhifa: Ziben Shichang Jiankang Fazhan De Jishi (加强执法:资本市场健康发展的基石) [Enhancing Enforcement: The Conner Stone of Healthy Development of Capital Market]” (2013) 15 Qiu Shi (求是) [Searching for Truth] 1 (Gang, the incumbent chairman of CSRC, discusses the challenges the CSRC has with enforcing the rules, but without saying why.).

58. XI, Jinping, “Ba Quanli Guanjin Longzi Li (把权力关进笼子里) [Keep the Power in the Cage of Institutions]” Wangyi Xinwen (网易新闻) [NetEase News] (23 May 2014), online: NetEase News <http://news.163.com/13/0122/15/8LR5TGCH0001124J.html>.