A lifetime ban on stock trading for two fund managers may be as far as Chinese regulators care to go in their effort to prevent and punish insider trading.
By staff reporter Qiao Xiaohui
What appeared to be a routine announcement of a personnel shuffle at Southern Fund Management Co. in mid-January was in fact a juicy tip-off that a high-ranking trader at the company had become the second market player nabbed by Chinese regulators for alleged insider trading in less than a year.
Wang Limin, a rising star well-known in the Shenzhen financial district, lost his position at Southern Fund after the China Securities Regulatory Commission (CSRC) banned him from the markets for life based on allegations of insider trading.
Last spring, a similar investigation targeted a fund manager at China International Fund Management Co. (CIFM) -- a partner of U.S. investment bank JP Morgan. The manager, Tang Jian, was later dismissed from his high-profile position.
Wang and Tang violated market rules by using the stock market accounts of close relatives and other third parties to trade shares, investigators claim. The alleged misdeeds were exposed during a CSRC investigation launched in early 2007 and have become common knowledge in the fund management sector. Both have had to forfeit their allegedly illegal profits.
Surprisingly, CSRC has yet to formally announce the decisions to punish Wang and Tang, whose cases were the first in which traders were banned for allegedly violating regulations in the rapidly growing fund management industry since China’s current bull market began in early 2006.
What’s even more surprising is that the disciplinary actions have been limited to this pair of fund managers. CSRC has yet to dig any deeper to probe insider trading on the Chinese stock markets. The fund management firms have been unscathed by the scandals, and neither Wang nor Tang are currently facing criminal charges.
Although some cite a legal gray zone for the regulatory behavior, others say CSRC’s handling of insider trading reflects a complex sense of “divine protection” for market traders and a protective tendency to treat “big problems as small ones.”
But how can the fund industry, which currently fails to set a high price to deter rule violators, prevent the emergence of future Wangs and Tangs?
Wang Limin Dances No More
The Wang investigation actually began last May after news of the Tang case started circulating among fund industry players. But Shenzhen’s fund managers first heard about the allegations against Wang in early January, after CSRC issued a notice describing Wang’s administrative punishment.
In addition to a lifelong ban from the market, Wang was forced to forfeit 1.5 million yuan in allegedly illicit gains -- considerably less than the 4 million yuan that, according to earlier rumors, he illegally pocketed.
Wang was known as a star manager during his seven years at Southern Securities, which he joined in 2000 at age 33 after earning a master’s degree from the People’s Bank of China Graduate School. He had been one of only six staffers at Southern Fund to earn Chartered Financial Analyst certification by June last year.
Information provided by Southern Fund showed that funds managed by Wang received awards on three separate occasions, and Wang himself was individually recognized twice.
However, the two funds Wang managed showed mediocre results in 2007. One was Southern Fund’s Baoyuan bonds-underwritten fund, which earlier this year sank to the bottom of a list of open funds ranked by Morningstar.
In the first half of 2007, industry reports alluded to problems with management at Southern Fund. But the company quickly refuted the allegations.
When discussing investment styles in a previous interview with Caijing, Wang professed to be an investment moderate with a slightly aggressive approach and strong activist style. He also said he saw his fund manager career as a long-term opportunity rather than a springboard to a private equity post or other ambitions.
“The fund industry is like dancing with strict choreography. Although everyone moves in unison, each dancer has his own charm,” Wang said.
Now it seems Wang is no longer a boogie master at the dance.
Steep Slide for Tang Jian
Tang’s suspected dabbling in insider trading came to light in early May last year and, like Wang, he fell from a prominent position in the industry.
Tang was born in 1974 and received a Master’s in Engineering from Shanghai Jiaotong University. In 1999, he began information systems development work at Orient Securities, and the next year took a position as an IT industry analyst at Shenyin Wanguo Securities. Tang was ranked by New Fortune as the No. 1 researcher in China’s IT industry in 2003, one year before joining CIFM.
After becoming a CIFM assistant manager, Tang used the stock accounts of his father and others to buy into a fund called Xinjiang Joinworld (SSE: 600888). He allegedly made the buy before CIFM’s purchase of the stock, and benefited from the rise of stock price. The father’s account was used to buy nearly 60,000 shares, which turned a profit of nearly 290,000 yuan. Another account was used to purchase 200,000 shares, earning more than 1.2 million yuan.
In addition to banning Tang from the markets for life, regulators seized the 1.5 million yuan in illegal gains.
The process actually began in November 2006 when, at the end of one trading day, Tang’s shares of of Xinjiang Joinworld aroused suspicions among stock exchange officials. Soon after, the Shanghai Securities Regulatory Office began investigating CIFM’s internal management and temporarily suspended all business approvals for the company.
On February 8, 2007, the company placed restrictions on Tang’s investment limit as a fund manager. CIFM did not announce any changes in Tang’s status with the company, however, yet did announce that chief analyst Zhao Zifeng had been promoted to fund co-manager. Finally, as the scandal came to light, CIFM gave Tang the ax.
But Is It a Crime?
A CSRC official explained that, under the existing legal framework, it is unclear whether the actions of these two fund managers can be classified as insider trading. According to China’s securities law, insider trading involves players with non-public information or those who illegally obtain such information, trading securities related to said information before its public dissemination, leaking said information, or recommending others engage in trading related securities.
In early 2007, CSRC’s funds department issued its first circular announcing that fund companies would be required to report identification numbers and securities account numbers of employees and their close relatives. The circular noted that false reporting, non-reporting, or concealing of trades would result in severe punishment.
CSRC provisions do not prohibit fund managers’ immediate family members from securities trading, but managers themselves are prohibited from using their access to information for the personal profit of their relatives.
The regulatory circular was interpreted by outsiders as a pillar for a new monitoring system to prevent insider trading. And although the announcement received little attention inside the industry, Tang’s and Wang’s activities caught the attention of regulatory authorities against the backdrop of this CSRC decision.
Neither specifics of the cases nor the investigations themselves have been publicly released. This silence has raised some key questions. Did either Tang or Wang use the accounts of relatives and others to actually transfer benefits? And did either fund manager technically engage in insider trading?
Other questions involve whether Tang and Wang directly issued instructions related to the handling of these accounts. Was there an overlap between the stocks bought through personal accounts and those from funds under management? Were the private purchases of stocks made before the funds ordered their buys?
If the behavior of these fund managers did not damage company or investor interests, why were they barred from the market for life? And if misconduct was confirmed, what was the reason for only limited administrative punishment and no legal intervention?
Currently, a lack of legal framework cannot be used as an excuse for failing to nail down cases of insider trading. Existing laws that include provisions for insider trading and insider trading information can be found in China’s securities law, criminal law, and information disclosure rules for public companies. All these provide a basis for defining illegal insider activities, including use of information and trading behavior.
CSRC issued in March 2007 a draft version of its Guidelines for Determining Stock Market Insider Trading, which provided more detailed rules on identifying and punishing insider trading. The guidelines say insider trading involves “insiders with non-public information, or those who illegally obtain such information, trading related securities before the public dissemination of said information, leaking said information, or recommending others to engage in trading related securities.” This certainly filled in the blanks found in previously drafted regulations.
“If fund managers are allowed to know that a certain fund is going to buy a certain stock, it will certainly have a significant impact on the share prices,” one legal expert told Caijing. “If the CSRC finds this transaction to be insider trading, it will for sure transfer the case to the judiciary and begin a deeper investigation.”
Because China’s fund industry is relatively young, it has not established the self-regulation guidelines found in a mature industry. So the strength with which regulators punish violators will inevitably become an important corrective instrument.
“CSRC’s attitude toward this case demonstrates that regulators are too concerned with the stability of the index,” an industry source said. “Supposing regulators are worried that exceedingly harsh punishment will bring about market instability and even affect the overall reputation of the fund industry by triggering a wave of buyouts, and therefore the regulators embrace the concept of turning large issues into small ones, it will be difficult to achieve the desired effect of punishment, that is, killing one to warn one hundred.”
This source also said that the law could be fine-tuned endlessly, but clear regulatory objectives and meeting responsibilities are more important. “Even if the law is fuzzy, regulators could at least quicken the punishment, strengthen propagation, and speak out with a louder voice against this behavior. This is the best investor education.”
It is worth noting that the investigation into violations of these two fund managers ultimately boiled down to a probe of personal behavior completely separate from the operations of their fund management companies. The companies that dismissed them are still releasing new products, which are still receiving regulatory approval. Unlike Wang and Tang, management at the companies has yet to be punished.
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Slap on the Wrist for Insider Trading?
Caijing Magazine
A lifetime ban on stock trading for two fund managers may be as far as Chinese regulators care to go in their effort to prevent and punish insider trading.
By staff reporter Qiao Xiaohui
What appeared to be a routine announcement of a personnel shuffle at Southern Fund Management Co. in mid-January was in fact a juicy tip-off that a high-ranking trader at the company had become the second market player nabbed by Chinese regulators for alleged insider trading in less than a year.
Wang Limin, a rising star well-known in the Shenzhen financial district, lost his position at Southern Fund after the China Securities Regulatory Commission (CSRC) banned him from the markets for life based on allegations of insider trading.
Last spring, a similar investigation targeted a fund manager at China International Fund Management Co. (CIFM) -- a partner of U.S. investment bank JP Morgan. The manager, Tang Jian, was later dismissed from his high-profile position.
Wang and Tang violated market rules by using the stock market accounts of close relatives and other third parties to trade shares, investigators claim. The alleged misdeeds were exposed during a CSRC investigation launched in early 2007 and have become common knowledge in the fund management sector. Both have had to forfeit their allegedly illegal profits.
Surprisingly, CSRC has yet to formally announce the decisions to punish Wang and Tang, whose cases were the first in which traders were banned for allegedly violating regulations in the rapidly growing fund management industry since China’s current bull market began in early 2006.
What’s even more surprising is that the disciplinary actions have been limited to this pair of fund managers. CSRC has yet to dig any deeper to probe insider trading on the Chinese stock markets. The fund management firms have been unscathed by the scandals, and neither Wang nor Tang are currently facing criminal charges.
Although some cite a legal gray zone for the regulatory behavior, others say CSRC’s handling of insider trading reflects a complex sense of “divine protection” for market traders and a protective tendency to treat “big problems as small ones.”
But how can the fund industry, which currently fails to set a high price to deter rule violators, prevent the emergence of future Wangs and Tangs?
Wang Limin Dances No More
The Wang investigation actually began last May after news of the Tang case started circulating among fund industry players. But Shenzhen’s fund managers first heard about the allegations against Wang in early January, after CSRC issued a notice describing Wang’s administrative punishment.
In addition to a lifelong ban from the market, Wang was forced to forfeit 1.5 million yuan in allegedly illicit gains -- considerably less than the 4 million yuan that, according to earlier rumors, he illegally pocketed.
Wang was known as a star manager during his seven years at Southern Securities, which he joined in 2000 at age 33 after earning a master’s degree from the People’s Bank of China Graduate School. He had been one of only six staffers at Southern Fund to earn Chartered Financial Analyst certification by June last year.
Information provided by Southern Fund showed that funds managed by Wang received awards on three separate occasions, and Wang himself was individually recognized twice.
However, the two funds Wang managed showed mediocre results in 2007. One was Southern Fund’s Baoyuan bonds-underwritten fund, which earlier this year sank to the bottom of a list of open funds ranked by Morningstar.
In the first half of 2007, industry reports alluded to problems with management at Southern Fund. But the company quickly refuted the allegations.
When discussing investment styles in a previous interview with Caijing, Wang professed to be an investment moderate with a slightly aggressive approach and strong activist style. He also said he saw his fund manager career as a long-term opportunity rather than a springboard to a private equity post or other ambitions.
“The fund industry is like dancing with strict choreography. Although everyone moves in unison, each dancer has his own charm,” Wang said.
Now it seems Wang is no longer a boogie master at the dance.
Steep Slide for Tang Jian
Tang’s suspected dabbling in insider trading came to light in early May last year and, like Wang, he fell from a prominent position in the industry.
Tang was born in 1974 and received a Master’s in Engineering from Shanghai Jiaotong University. In 1999, he began information systems development work at Orient Securities, and the next year took a position as an IT industry analyst at Shenyin Wanguo Securities. Tang was ranked by New Fortune as the No. 1 researcher in China’s IT industry in 2003, one year before joining CIFM.
After becoming a CIFM assistant manager, Tang used the stock accounts of his father and others to buy into a fund called Xinjiang Joinworld (SSE: 600888). He allegedly made the buy before CIFM’s purchase of the stock, and benefited from the rise of stock price. The father’s account was used to buy nearly 60,000 shares, which turned a profit of nearly 290,000 yuan. Another account was used to purchase 200,000 shares, earning more than 1.2 million yuan.
In addition to banning Tang from the markets for life, regulators seized the 1.5 million yuan in illegal gains.
The process actually began in November 2006 when, at the end of one trading day, Tang’s shares of of Xinjiang Joinworld aroused suspicions among stock exchange officials. Soon after, the Shanghai Securities Regulatory Office began investigating CIFM’s internal management and temporarily suspended all business approvals for the company.
On February 8, 2007, the company placed restrictions on Tang’s investment limit as a fund manager. CIFM did not announce any changes in Tang’s status with the company, however, yet did announce that chief analyst Zhao Zifeng had been promoted to fund co-manager. Finally, as the scandal came to light, CIFM gave Tang the ax.
But Is It a Crime?
A CSRC official explained that, under the existing legal framework, it is unclear whether the actions of these two fund managers can be classified as insider trading. According to China’s securities law, insider trading involves players with non-public information or those who illegally obtain such information, trading securities related to said information before its public dissemination, leaking said information, or recommending others engage in trading related securities.
In early 2007, CSRC’s funds department issued its first circular announcing that fund companies would be required to report identification numbers and securities account numbers of employees and their close relatives. The circular noted that false reporting, non-reporting, or concealing of trades would result in severe punishment.
CSRC provisions do not prohibit fund managers’ immediate family members from securities trading, but managers themselves are prohibited from using their access to information for the personal profit of their relatives.
The regulatory circular was interpreted by outsiders as a pillar for a new monitoring system to prevent insider trading. And although the announcement received little attention inside the industry, Tang’s and Wang’s activities caught the attention of regulatory authorities against the backdrop of this CSRC decision.
Neither specifics of the cases nor the investigations themselves have been publicly released. This silence has raised some key questions. Did either Tang or Wang use the accounts of relatives and others to actually transfer benefits? And did either fund manager technically engage in insider trading?
Other questions involve whether Tang and Wang directly issued instructions related to the handling of these accounts. Was there an overlap between the stocks bought through personal accounts and those from funds under management? Were the private purchases of stocks made before the funds ordered their buys?
If the behavior of these fund managers did not damage company or investor interests, why were they barred from the market for life? And if misconduct was confirmed, what was the reason for only limited administrative punishment and no legal intervention?
Currently, a lack of legal framework cannot be used as an excuse for failing to nail down cases of insider trading. Existing laws that include provisions for insider trading and insider trading information can be found in China’s securities law, criminal law, and information disclosure rules for public companies. All these provide a basis for defining illegal insider activities, including use of information and trading behavior.
CSRC issued in March 2007 a draft version of its Guidelines for Determining Stock Market Insider Trading, which provided more detailed rules on identifying and punishing insider trading. The guidelines say insider trading involves “insiders with non-public information, or those who illegally obtain such information, trading related securities before the public dissemination of said information, leaking said information, or recommending others to engage in trading related securities.” This certainly filled in the blanks found in previously drafted regulations.
“If fund managers are allowed to know that a certain fund is going to buy a certain stock, it will certainly have a significant impact on the share prices,” one legal expert told Caijing. “If the CSRC finds this transaction to be insider trading, it will for sure transfer the case to the judiciary and begin a deeper investigation.”
Because China’s fund industry is relatively young, it has not established the self-regulation guidelines found in a mature industry. So the strength with which regulators punish violators will inevitably become an important corrective instrument.
“CSRC’s attitude toward this case demonstrates that regulators are too concerned with the stability of the index,” an industry source said. “Supposing regulators are worried that exceedingly harsh punishment will bring about market instability and even affect the overall reputation of the fund industry by triggering a wave of buyouts, and therefore the regulators embrace the concept of turning large issues into small ones, it will be difficult to achieve the desired effect of punishment, that is, killing one to warn one hundred.”
This source also said that the law could be fine-tuned endlessly, but clear regulatory objectives and meeting responsibilities are more important. “Even if the law is fuzzy, regulators could at least quicken the punishment, strengthen propagation, and speak out with a louder voice against this behavior. This is the best investor education.”
It is worth noting that the investigation into violations of these two fund managers ultimately boiled down to a probe of personal behavior completely separate from the operations of their fund management companies. The companies that dismissed them are still releasing new products, which are still receiving regulatory approval. Unlike Wang and Tang, management at the companies has yet to be punished.
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