Research On The Crime Of Insider Trading In Securities

The title of the dissertation is "Research on the Crime of Insider Trading in Securities". It uses the crime of insider trading and leaking inside information as centerpiece and analyzes some problems by the study about the crime in America, EU, Japan and China. The content includes the concept of securities and the crime of insider trading and leaking inside information, general situations about the legislation, legal interest, behavioral patterns, subjective elements, the judgment about the insider, the definition about inside information, the methods of punishment in countries, etc. The idea of the article is to be good for the legislation, justice and theoretical research in China about the crime. Apart from the preface, the dissertation is divided into seven chapters with the appendix of " the explanation about the classical cases of insider trading".In the preface, firstly, the author explains the current situations about the crime of insider trading and leaking inside information in China. And then it indicates the differences between China and America in the concept and mode of punishment. Meanwhile, it points out the solutions of Chinese legal. Secondly, the author introduces the changes on the crime in EU and Japanese laws and analyzes the reference to Chinese legal. The last section is about the motion and the significance of this article.Chapter one is about the fundamental theory about the crime of insider trading in Securities, and divided into two sections. Section one is about the fundamental questions about the crime of insider trading, and analyzes the basic concepts such as securities, the crime of insider trading in securities in order to lay the groundwork for the fellowing text. In a broad sense, securities can be classified into negotiable securities and priceless securities. But the securities in the crime are limited to the capital securities which belong to negotiable securities, and classified into stock securities and debt securities. Because of the differently developed degree, the range of the securities in various countries is diverse from each other. For example, in the Federal Securities Laws of USA, the range of securities is very extensive, while the range of "transferable securities" in EU Directive looks like narrow, but by being reinforced by other clauses, it’s applicable scope is wide than America,. In contrast, the range of securities in Japanese and Chinese laws is narrow. For example, in Japanese secirities law, the securities of the crime are just stock, bond and option. And in China, options trading market is still at the tentative stage, so the securities of the crime are only stock and bond. The formulation of the crime is different from each other in countries. In American cases, it is "the crime of insider trading", and until 1984, the legislation has used the terminology. In EU Directive, it is "the crime of insider dealing", and in Japanese law, it is called "インサイダ一取引罪(the crime of insider trading)", Chinese law calls it "the crime of insider trading and leaking inside information" from the angle of the means of act. Moreover, because there are some differences between the crime of insider trading in securities and the crime of insider trading in futures, this section explains this distinctions. And then the author expounds the stand that the dissertation will discuss the crime of insider trading in securities only. Section two is about the legislation of the crime. Firstly, the dissertation analyzes the emerging processes, guiding concepts, main items and models of investigation and prosecution about American laws in securities. Secondly, it comments the some problems about constitution, guiding concept, inside information, insider, the model of investigation and prosecution in EU Directive. Thirdly the substance are why Japan was called "insider’s heaven" in the late 1980’s, the revision about the securities law, supplement of the crime of insider trading, the reason of deficiency of the model of investigation and prosecution, the reason and process of revise and new name of the law, the increase of the penalty. The last part comments the establishment of Chinese securities exchange market, the formulation of provisional regulation and interim measure, the addition of the crime in crimal law in 1997, the formulation of securities exchange law in 1998, the provisions and problems about the crime in above-mentioned laws and regulations, the latest revision about the crime——rat trading——in March 2009.Chapter two is about the legal interests of the crime of insider trading in securities, and it’s divided into two sections. Section one is about the theories about opposing or approving insider trading, and the legal interest of the crime.In the securities field there are still two different viewpoints of whether to punish insider trading. Somebody advocates the legality of insider trading from the angles of Market Discipline, autonomy of will or the difficulty of control. In contrast, somebody thinks it is pernicious from the angle of the theory of market failure or principle of good faith. This section analyzes the opinions that oppose to punish the crime. And then it lodges the objections and expounds the rationality of the theory which approves to punish the crime in order to explain the reason why we should punish the crime. This part will analyze the legal interest. Section two is about the object of the crime. There are the theory of single object, double objects and three objects. As same as section one, this section thinks that the objects of the crime have three styles, which are legitimate interests of real investor and coporation, order of securities exchange market and regulatory system of nation. The "real investors" are the persons who traded with the insider, whose interests include the right to know the information, the right to judge according to the information, the right to trade in public fairly and justly, the right to obtain the benefits by trading and the benefits which are obtained by using above-mentioned rights. The order of the securities exchange market includes fairness and viability.Chapter three is about the subject of the crime of insider trading in securities, and it’s divided into three sections. The content is plenty, because the subject of the crime is one of the most important problems. Section one is about the outline and analyzes the different provisions of the subject in Chinese and foreign countries’ laws. Securities Exchange Act in 1934 stipulates that the inners includes directors, officers, and principal stock-holders. Later the range of the insider was extended and many people were included, such as traditional insider, quasi-insider, tipper, tippee and misappropriator. In contrast, the classification in EU Directive is more systemic, including direct insider and indirect insider. The direct insider includes members in the administration department, the operating department or board of supervisors of the corporation, the persons who hold the securities, and the persons who can know the inside information by employment, position or responsibility, who probably equal to traditional insider and quasi-insider in America. Indirect insider is the person who knows about the inside information form direct insider or embezzles the information who equals to the tippee and misappropriator in Amrica. The assort in Japanese law is different from any one else. There are two types of insider:one refers to the person who has relations with corporation and the other refers to the accepters. It also makes a limit that the accepter is the first one so indirect accepter is not be investigated. Contrast to foreign laws, the insider in Chinese laws is a vague concept which is reflected by the specify of the general clerk, person who has contract with corporation or is making contract with corporation, person who has authority over corporation, the spouse or the lineal descent of insider. Because of the deletion of provision about the mate or lineal descent of insider, there are too many shills in the market. Section two is about the maintain of insider. The substance is how to judge insider in China with Classical Special Relationship Theory, because the provisions about insider in America and China are both based on the relation of good faith, and the persons who can know the inside information by employment, position, or responsibility also have the relation of good faith with coporation, so they can also be brung into insider. Therefore the theory not only can help to judge the range of insider but also can perfect the provision of Chinese law. Section three is about the mentain of misappropriator. The author thinks misappropriator can be divided into two types.One is mate or lineal descent of insider, who can know about the inside information more privily, so they should be judged by the special relationship with Tipper and Tippee Theory. The other is the else ones, we can use Misappropriator Theory with the view of invalidity of behavior. The three theory have corresponding objects, but they can handle other subject also, for example, Misappropriator Theory have been used to judge all insiders in American cases.Chapter four is about the behave of the crime of insider trading in securities and divided into two sections. Section one is a general overview, and analyzes different provisions about the behave of the crime. For example, American laws call it "securities fraud", so transaction, leaking conduct, or suggesting conduct all can constitute the crime. In EU Directive, it is different according to the subject, and the transaction, leaking behave, and suggesting behave of direct insider all can constitute the crime. But the transaction of indirect insider only can constitute the crime. The Directive apprizes definitely that member countries can stipulate that "the leaking behave", or "suggesting behave" can also constitute the crime. Japanese law only admit the transaction. In China, the provision about the conduct in criminal law is different from the securities exchange law and other statutes, so it induces many arguments. In the criminal law, transaction, leaking conduct, acto expresso or suggestion can constitute the crime, In contrast, according to the securities exchange law, transaction, leaking behave, or suggesting behave can constitute the crime. So, what are the difference between acto expresso, suggestion, and suggesting behave? Can suggesting behave constitute the crime? According to the criminal law, the article thinks the conduct of the crime includes transaction, leaking conduct, and acto expresso or suggestion. Section two is about the behavior pattern of the crime.As to the suggesting behave, the article thinks suggesting behave can be divided into leaking conduct, acto expresso or suggestion by the difference of the substance of conduct and the relationship of subjects, and sometimes it would not constitute the crime. As to the element of "using inside information", from the view of strict punishment, we could use doctrine of presumption, in other words, prosecution uses the factors about insider’s identity and trading condition to deduce that actor used inside information, then actor can disprove it. About the leaking behave, indirect behave should be punished, but because the prove is difficult, so we should aim at direct conduct in fact. Pure leakage is illegal, but can’t constitute the crime. leakage by intermediary agent should take the reaching time as the time when leakage is completed. General statement or suggestion may constitute the crime. Considering the nature of negative crime, nonfeasance can’t constitute the crime of insider trading, in other words, when actor knows the inside information and stops the trading that he wanted to do before, it will not constitute the crime.Chapter five is about inside information, and it’s divided into six sections. Section one is summarization about inside information, such as the concepts, characters of inside information in China and foreign countries. American law calls it "material information", and accentuates the characters of "materiality" and "non-public". EU Directive calls it "inside information", and indicates that it has characters of "pricesensitivity", "non-public", "correlation" and "precision". Japanese law emphasizes the character of "importance", and divides the inside information into four styles:decisive information, happening information, final accounting information, and supplementary provision. Though the provision and view are different, but we can summarize that inside information has four characters from foreign law, they are "importance", "non-public", "correlation", and "precision". In order to lay the groundwork for the fellowing sections. Section two analyzes the argument about the characters of the inside information in China. At the same time, it analyzes the comprehension and deficiency in Chinese law. Section three is about the importance character, this part analyzes the method of judgment about the importance character in foreign laws, and the limitations in Chinese law, then deduces the effectual method:in the view of the general rational investor, if a information would probably have influence on his judgment of investment, then the information is important. And Chinese law may imitate Japanese law and set up different importance standard according to the characteristic of inside information. Section four is about the non-public character of inside information and the differences between Form Public Standard and Substance Public Standard about the problem, Form Public Standard thinks when the information is disclosed by the methods in law and legislation, it’s non-public disappears. In contrast, Substance Public Standard advocates that disclosing time and market’s digesting time are not identical, so it should take market’s digesting time as the time when non-public disappears. According to the practice of securities exchange in China, the author thinks Form Public Standard is appropriate. Section five is about the correlation character. There are argument between interior limited style, kind limited style, and range wide style. The article indicates that interior limited style is too narrow, range wide style takes the elements that effects the whole market order into it, so it’s too wide, the best way is according to EU Directive, and to stipulate that inside information is involving one or some securities. So Chinese law should absord above-mentioned "Market Based Theory", and revise or delete competition-related provisions. Section six is about the precision character. The reason that the character is added is to integrate with correlation character, and to differentiate it from other crime in securities.Chapter six is about subjective elements of the crime of insider trading in securities, and it’s divided into two sections. Section one is summarization and analyzes provisions about subjective elements of the crime in Chinese and foreign laws. American law stipulates the crime may also be constituted by "recklessly", but cases regard it as indirect intention popularly. So we can say that American laws think the crime is constituted by intentions in fact. IDD emphasizes that "knowingly" is the necessary elements of the crime, and indicates "knowingly" is "full knowledge of the facts". But the provision is too harsh to bring about so many illegal acts likely. So Market Abuse Directive revised it. From then on, "full knowledge of the facts" is not necessary for direct insider any more. As long as trading facts are proved, the crime should be constituted. For indirect insider, first, the count must prove that the information that indirect insider has known or ought to know is inside information, and then the crime can be constituted by being added with the trading facts. About the subjective elements of the crime, there are arguments among theory of intention and negligence, theory of intention, and theory of direct intention. The author agrees with theory of intention. In other words, the crime of insider trading can be constituted by direct intention only, and the crime of leaking inside information can be constituted by direct or indirect intention. Negligence can’t constitute the crime, and purpose is not the necessary element of the crime. Then the article summarizes the subjective elements of the crime. To judge the crime, the most complicated elements are "knowingly" and "intention of using inside information", so section two will discusse this. About the "knowingly", the infering mode in American cases is of great importance. It infers actor’s "knowingly" according to actor’s identity and trading tradition, then actor can prove that he don’t know the inside information to get out of punishment, but if he can’t prove it, he must shoulder the responsibility. "intention of using inside information" is also the same, first the "knowingly" must be proved, then by adding the facts of trading to prove that "intention of using inside information" should set up. The article refers to the important cases in Chinese securities market in the past few years, and analyzes the benefits of using the inferring mode in American cases to the crime of insider trading or leaking inside information in China. In addition, in order to explain the superiority of the mode, this chapter has a appendix to analyze the prove about trust elements——trading counterparts trusted defendant’s fraud and buyed or selled securities.Chapter seven is about regulation of the crime of insider trading in securities and divided into two sections. Section one is about penalty, and analyzes establishment of punishment and guiding theory in home and abroad. American laws are the strictest, and make different grades for the crime. The main elements that can raise the grade include income generated in violation of the regulations, defendant’s abusing his trust position. The strictest "shall upon conviction be fined not more than$5,000,000, or imprisoned not more than 20 years, or both". But in fact, penalty have been used very rarely, and the major function of penalty is deterrence. In order to build a uniform securities market, EU Directives take administrative sanction as a major method, and take penalty as auxiliary method to punish insider dealing. Although after several being revised, the penalty in Japanese changed strictly, but servitude has been condemned very rarely, and fine is too low, so the effects are not good. The penalty in Chinese law isn’t strict, and has some careless mistakes:judicial interpretations about "serious circumstances" and "circumstances are particularly serious" are not comprehensive; the basis of fine is "income generated in violation of the regulations", so it’s difficult to count situation that actor uses trading to avoid loss; there is also leck of distinction about the crime committed by organizations. These problems are going to be resovled. Section two is about the mode of total regulation, and it ought to be a solid which includes penalty, administrative sanction, civil liability, and prevention by economic system. Considering the theme of the thesis is the crime of insider trading, so this section only analyzes the framework of the mode of total regulation. It’s major idea is to use administrative sanction as major method,to unleash the deterrent force of penalty, to use report system and civil liability to provoke investor’s passion of impeachment, and to complete awareness programs.The appendix is analyzation about classic cases of inside trading in securities, and it’s divided into three parts. Part one is American cases, such as Cady,Roberts & CO. Case, TSC Industries.In v. Northway, Inc. Case, Chiarella v. United States Case, Dirks v. SEC Case, United States v. O’Hagan Case. Cady, Roberts & CO. Case is the first case about the subject’s range in SEC regulation 10(b)5, and it extended insider’s range. And it also indicated that the duty of "disclose or abstain" was the base of insider’s duty, and analyzed the case by "Classical Special Relationship Theory". So the case is ground-breaking. TSC Industries.In v.Northway, Inc.Case established the principle by the general rational investor’s judgement to judge the importance of inside information. Chiarella v. United States Case confirmed "Classical Special Relationship Theory", extracted "Tipper-Tippee Theory", and created "Misappropriation Theory". Dirks v. SEC Case laterally confirmed "Misappropriation Theory". United States v. O’Hagan Case confirmed "Misappropriation Theory" directly. Part two is about Japanese cases, and it introduces Nisin Kisen Kabu Case, Makurosu Kabu Case, Nihon Syoji Kabu Case, Nihon Orimono Kaku Kabu Case. Nisin Kisen Kabu Case is the frst case of insider trading in Japan, and the other cases all touched upon the provision about the importance of inside information. Research circle thinked the provision was indefinite, and discussed it warmly. Nihon Syoji Kabu Case discussed judgment about tippee, and all of the cases are useful to Chinese law. Part three is about Chinese cases, and introduces the insider trading cases and doubtful insider trading cases in the past. In the Hangxiao Ganggou Case, the article points out the harm of the "shills" that generaly exit in the market, and analyzes the problems. For example, penalty is not strict; and coordination with penalty and other sanction measure are not enough; Regulation system has deficiency. By analyzing the Most Powerful Retail Case and the Most Powerful Professor Case, it shows the benefits of using the mode of presumption of guilty in American securities cases. By analyzing the first case about Rat Trading, it points out the benefits of the total regulation mode.