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The Impairment of Insider Trading on Market Accountability and Investor Interests

The securities market has been always accompanied by insider trading of various forms. Currently, insider trading exists mainly in two forms: traditional or specific to current sponsorship systems.

Traditional insider trading has moved from the securities companies to fund companies, due to rigid regulations and numerous fluctuations of the securities trade. Insider trading within fund companies is also known as "rat trading," a practice that has never ceased to exist. Since 2011, the regulation authorities have campaigned against such acts. Many individuals and fund companies supported the campaign, including Li Xuli, the former investment director of Chongyang, and Huang Lin, the former fund manager of Franklin Templeton Sealand Fund Management Co. Ltd.

In the securities industry, insider trading tends to happen to the sponsor representatives because they are the insiders of the related project. Two major cases—the Xie Fanghua and An Xuemei case (CITIC Securities, May 2011) and the Li Shaowu case[1] (Guosen Securities, June-July 2011)—fell like a bombshell in the capital market, unveiling the corruption in investment banking and under-the-table aspects of the sponsoring practice. According to officials of CSRC, 29 criminal cases involving insider trading have been brought to the public security authority by CSRC since 2008, including the

Huang Guangyu, Liu Baochun, ZPUG, Shanghai Zulong, Hongpu, Guan Yawei, and Gao Yangcai cases. Between January and October 2011, 114 reports of insider trading were received by CSRC. Of these, 42 were filed for investigation. Through the investigation, 16 individuals and two organizations were penalized administratively, and 12 cases of insider trading were brought to the public security authority. All of these cases indicate the unprecedented severity of CSRC's struggle against insider trading.

Obviously, there must be great incentive behind rule breaking. For insider trading, the incentive is huge fortunes. When the investment bank has the ability to influence the listing, the few sponsors involved who hold signing authority tend to solicit the equity from the company to be listed. There is great potential profit for investing before the equity is listed. Venture investors attempt to canvas the sponsors for the opportunity to invest in the Pre-IPO company during the tutoring. This creates a "golden triangle" involving the sponsor (or team), middleman, and venture investor to reap high IPO benefits.

  • [1] An Xuemei was found guilty of insider trading and unjust enrichment of more than CNY 1.67 million in the Fujian Tianbao Mining Group's RTO of Wanhao Wanjia Hotels (stock symbol: 600576) and the Changzhou EGING PV's RTO of Haitong Group (stock symbol: 600537). See english.caixin.com/2010-08-20/ 100172499.html.
 
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