Case 12

Disclosure Errors and Omissions Spark Market Volatility; Standardized Disclosure Ensures Fairness

In response to the municipal government’s overarching “phase-out of secondary industries and promotion of tertiary industries” plan for the city’s central district, Listed Company B has gradually relocated its production lines from the old factory site in the city center to development zones in the suburbs and other provinces. In July 2012, following the completion of the relocation, the company entered into a state-owned land expropriation and compensation agreement with the land administration authority, under which the former factory site was acquired, redeveloped, and compensated through an open land auction model that leverages revenue to support the process.

Company B completed the land transfer in accordance with the agreement by the end of 2012 and issued an announcement in December of the same year summarizing the signing and implementation of the agreement; however, it did not disclose key information such as the specific compensation standards. At the time, the real estate market was booming, with auction prices for commercial and residential land in urban areas repeatedly hitting new highs, leading all market participants to believe that the company’s disclosure of the land acquisition and storage project for its former industrial site would substantially boost the company’s profits and have a significant impact on its stock price. Due to the lack of clarity in the company’s disclosures regarding the land transfer price and other relevant terms, various speculations arose among investors and the media: some estimated that the transaction would increase the company’s net profit by only several hundred million yuan, while others projected a figure as high as three to four billion yuan. This sparked speculative trading by a segment of investors, causing the company’s stock price to fluctuate sharply between RMB 5.50 and RMB 9.50.

Just how much revenue can land acquisition and storage actually generate for Company B? With this question in mind, the Guangdong Securities Regulatory Bureau conducted an inspection of the company’s disclosures regarding its land acquisition and storage activities. The review revealed that, in previous announcements, the company had omitted several key provisions in the relevant agreement that significantly affect the land price—such as the provision that no compensation will be paid for any portion of the plot’s floor area ratio exceeding a specified threshold; the stipulation that the company will bear the costs of municipal public infrastructure配套; the clause providing an additional reward for transferring the land before the agreed-upon deadline; and the possibility that any advance compensation payments received ahead of schedule may ultimately be refunded to the municipal government upon final settlement. This information alone is sufficient to influence investors’ ability to make informed and rational investment decisions. Upon identifying these issues, the Guangdong Securities Regulatory Bureau required the company to immediately and comprehensively disclose all material terms of the land acquisition and storage agreement.

Subsequently, in September 2013, Company B issued a special interim announcement that provided a detailed disclosure of all material terms of the land acquisition and storage agreement and supplemented and corrected the relevant content in the company’s 2012 annual report. Thereafter, in its subsequent disclosures regarding this land acquisition and storage matter, the company heeded the lessons learned from the earlier experience: it not only disclosed the progress of the agreement’s performance in a timely and comprehensive manner but also suspended trading at key milestones in the agreement’s implementation, thereby ensuring that all investors have fair access to information that has a material impact on the company. As reflected in the stock price trend, following the company’s full disclosure of the material terms of the land acquisition and storage agreement, stock price volatility markedly diminished, and the share price exhibited a steady upward trajectory, indicating that, with adequate information disclosure, investors’ assessments of the company’s stock value have become increasingly aligned.

 

 

Case 13

A promised dividend should be honored.

Company E, within its jurisdiction, committed in its prospectus that from 2011 to 2013 it would distribute 30% of its annual distributable profits in cash. The company went public in March 2012; however, just two months later, it announced that, due to project and working-capital needs, it would neither distribute profits nor capitalize its capital reserve to increase share capital.

Following the release of the announcement, investors and the media expressed widespread concern and questioned the company’s failure to honor the commitments it made during its IPO. The announcement also failed to provide a detailed explanation for why no profits were distributed in 2011. In response, the company explained that when it made the cash dividend commitment, it had assumed that profit distribution would be based on the consolidated financial statements; however, under applicable regulations, profit distribution is calculated on the basis of the parent company’s profits. If 30% of the parent company’s 2011 profit of just over RMB 14 million were used as the basis for distribution, the amount available for shareholders would be only slightly more than RMB 4 million—far too little to deliver any meaningful benefit to investors and likely to harm the company’s reputation. Nevertheless, the market rejected the company’s explanation, viewing it as a breach of trust and an attempt to mislead investors.

Upon learning of the relevant circumstances, the Guangdong Securities Regulatory Bureau promptly summoned the company’s controlling shareholder and its directors, supervisors, and senior management for discussions, clearly stating that, although cash dividends are a matter of the company’s independent business decision-making, the company has failed to honor the cash-dividend commitment set forth in its prospectus, thereby breaching its fiduciary duty of good faith toward small and medium-sized investors. In response, the Guangdong Securities Regulatory Bureau issued regulatory opinion letters to both the company and its ongoing supervisory institution, requiring the company to promptly formulate a concrete plan for fulfilling its cash-dividend commitment and to make such plan publicly disclosed.

Under the supervision of the Guangdong Securities Regulatory Bureau, the company reconvened its board of directors, which approved and disclosed an annual profit distribution plan to distribute RMB 0.35 in cash dividends for every 10 shares held. In 2012, the company also implemented an interim dividend payout, resulting in a dividend payout ratio exceeding 50% for that year. Since its listing, the company has carried out a total of five cash dividend distributions, with cumulative cash dividends amounting to RMB 130 million. Each year, the dividend payout ratio has remained above 30%, demonstrating the company’s faithful fulfillment of the cash dividend commitments set forth in its prospectus and its consistent practice of distributing cash dividends for four consecutive years.

 

 

Case 14

Return a peach for a plum.

In 2011, F Listed Company in the Guangdong jurisdiction turned around from losses to profitability following a major asset restructuring, posting after-tax profits of nearly RMB 700 million for the year. The company’s robust performance growth and strong cash flow came as a pleasant surprise to small and medium-sized investors, who had been looking forward to substantial cash dividends as a way to share in the tangible benefits of this earnings expansion. However, along with the annual report, the company disclosed a proposal not to distribute profits, leaving investors deeply disappointed and sparking widespread skepticism in the market.

Is the company’s profitability overstated, with no actual funds available for distribution? If it is genuine, what are the underlying reasons for not declaring a dividend? With these questions in mind, the Guangdong Securities Regulatory Bureau conducted an on-site inspection of Company F, focusing on verifying the company’s profitability and financial condition to ensure the authenticity and reliability of the basis for dividend distribution. The inspection revealed that the company’s management viewed a major asset restructuring as support from the controlling shareholder for the listed company, while cash dividends were perceived as distributing the company’s funds to minority shareholders—a practice deemed detrimental to the company’s future development. In response to this misperception, the Guangdong Securities Regulatory Bureau formally held a regulatory interview with the company’s chairman.

During the regulatory meeting, supervisors noted that, following the completion of the company’s major asset restructuring, its financial performance has improved substantially, laying a solid foundation for the distribution of cash dividends. Proactively and actively rewarding investors would not only enhance the company’s market image and exert a positive influence on share price appreciation, but also increase the acceptance of future refinancing efforts among small and medium-sized investors. Overall, implementing cash dividends would generate favorable positive feedback for the execution of the company’s business development strategy. It is hoped that, in conjunction with the revised Articles of Association, dividend policy framework, and shareholder return plan, the company will carefully assess the feasibility of declaring an interim cash dividend when reviewing its 2012 semi-annual report.

Meanwhile, in accordance with the “Notice on Further Implementing Matters Related to Cash Dividends by Listed Companies,” the regulatory authorities issued a letter outlining a series of corrective measures, including detailed disclosure of the reasons for not declaring cash dividends, the plan for the use of retained earnings and the expected returns therefrom, as well as the refinement of the company’s articles of association and the formulation of a shareholder return plan for the next three years.

Well-reasoned, evidence-based analysis and specific corrective measures not only rectified the decision-makers’ misperceptions but also provided a clear roadmap for subsequent implementation. Following the review, the company re-evaluated its capital allocation plan in light of future investment opportunities and earnings prospects. Concurrent with the disclosure of the 2012 interim report, the Board of Directors proposed a dividend distribution plan of RMB 10 per share, together with a bonus issue of 10 shares for every 10 held, resulting in cash dividends totaling over RMB 500 million and a dividend payout ratio of 78.59%, both of which set new records for interim dividends in China’s capital market. Backed by widespread market acclaim, the company’s stock price continued to rise, reaching a new all-time high.

 

 

Case 15

Acting as a proxy trader leads to endless future problems.

Mr. Xu is the general manager of the D Securities Branch and, through an introduction, met a client named Ms. Cai. Mr. Xu boasted that he had extensive experience in stock trading, guaranteed steady profits with no risk of loss, and could manage Ms. Cai’s stock portfolio while assuring both the return of her principal and a fixed monthly income. Ms. Cai reasoned that, as the branch’s general manager, Mr. Xu must be highly competent. Accordingly, the two entered into a verbal agreement under which Mr. Xu would act on Ms. Cai’s behalf to trade in her securities account; Ms. Cai would receive a fixed monthly return of 5% of the account’s value, with any excess above that fixed return serving as Mr. Xu’s compensation. In the event that the actual returns fell short of the fixed return or resulted in a loss, Mr. Xu would make up the difference by covering the shortfall out of the principal and the fixed return. The term of the arrangement was one year.

Subsequently, Cai deposited RMB 330,000 into his securities account and disclosed the account password to Xu. Xu then managed Cai’s securities account and paid Cai a fixed monthly return of 5%, with the two parties enjoying a highly satisfactory collaboration.

After the cooperation period expired, Mr. Xu contacted Ms. Cai again to inquire whether she was willing to continue working together. Having already tasted some success, Ms. Cai believed that Mr. Xu’s performance in their previous collaboration was reasonably trustworthy, so the two once more reached a verbal agreement: Mr. Xu would continue managing Ms. Cai’s account, and the profit-sharing arrangement would remain unchanged. However, as the stock market continued to decline, the account managed by Mr. Xu incurred substantial losses, prompting him to cease replenishing Ms. Cai’s principal and paying the agreed-upon fixed return.

As the principal steadily dwindled, Mr. Cai had no choice but to liquidate his entire position at a loss. By the time he regained control of his account, only RMB 110,000 remained. After unsuccessful negotiations with Mr. Xu over compensation, Mr. Cai filed a complaint with the Guangdong Securities Regulatory Bureau, alleging that Mr. Xu was involved in securities fraud and demanding reimbursement of the principal loss as well as payment of a fixed return. Upon receipt of the complaint, the Guangdong Bureau conducted an investigation into the allegations and preliminarily determined that, as a securities professional, Mr. Xu’s acceptance of client mandates to buy and sell securities constituted a violation of relevant provisions of the Securities Law, prompting the Bureau to initiate a formal investigation against him.

In May 2011, the Guangdong Securities Regulatory Bureau formally issued an administrative penalty decision, finding that Xu had, in violation of Article 145 of the Securities Law—which stipulates that “securities firms and their employees shall not, without going through their legally established business premises, privately accept clients’ mandates to buy or sell securities”—illegally accepted clients’ mandates for securities trading on a private basis. This conduct constituted the offense described in Article 215 of the Securities Law, namely “a securities firm or its employees violating the provisions of this Law by privately accepting clients’ mandates to buy or sell securities.” Accordingly, Xu was issued a warning and fined RMB 100,000.

Meanwhile, the securities firm where Mr. Xu works has also terminated his employment as general manager of the branch office and dismissed him for violating securities laws and regulations.

In addition, Cai filed a civil lawsuit with the court, seeking compensation from Xu for a total of RMB 510,000, covering both the principal loss and the loss of fixed returns. In July 2011, the relevant court rendered a judgment holding that the agency contract between Xu and Cai was invalid due to its violation of mandatory statutory provisions. The court found that both parties were at fault; however, as a securities professional, Xu bore the primary responsibility—80%—for Cai’s principal loss, while Cai himself was held responsible for the remaining 20%. Consequently, Xu was ordered to compensate Cai RMB 180,000 for the losses. With regard to Cai’s claim for the fixed-return component, the court dismissed it on the ground that the relevant agreement contravened statutory provisions.

 

 

Case 16

False Advertising Reaps Its Own Bitter Consequences

In August 2012, the Guangdong Securities Regulatory Bureau received a real-name complaint from an investor alleging that a sales representative at H Securities Company within its jurisdiction, despite knowing that the junior tranche of a certain index-based tiered fund was a non-principal-protected product, nevertheless marketed it as principal-protected, resulting in substantial losses for the investor after purchase.

Upon reviewing the relevant documents, the Guangdong Bureau found that the junior shares of the structured fund distributed by H Securities are subject to limited liability for compensating the principal of the senior shares of the fund. After its establishment, the fund operates in a closed-end structure and is listed for trading, exhibiting high-return, high-risk characteristics and thus not being a principal-protected product.

Some clients have reported that sales personnel at product promotion events claimed the product was a capital-protected fund that would never result in losses, prompting them to invest their life savings. During an inspection conducted by the Guangdong Bureau, the relevant sales staff initially denied these claims; however, faced with evidence such as on-site audio recordings provided by the complainant, they ultimately admitted to the violation.

The regulatory authority notified H Securities of the findings of its investigation. The firm acknowledged that, in conducting its fund distribution business, it had placed excessive emphasis on performance targets while neglecting adequate oversight and management of the marketing activities of its sales personnel. This oversight resulted in some sales staff engaging in practices such as concealing risks and even misrepresenting non-guaranteed funds as guaranteed funds in order to promote and sell products, thereby inducing clients to make purchases. In light of the facts and evidence, H Securities, in accordance with its internal policies, imposed disciplinary measures on the relevant departments, heads of branch offices, and individual sales personnel, including warnings, public reprimands, and deductions from performance bonuses.

To compensate investors for their losses and avert potential disputes, H Securities has implemented a range of remedial measures, including providing direct or indirect financial compensation totaling more than RMB 200,000 to over ten clients, conducting follow-up visits and offering reassurance to other clients who purchased the relevant fund product in collaboration with the fund’s issuer, and establishing a dedicated compensation fund to cover any future losses that may arise for clients due to similar circumstances.

 

 

Case 17

Unrealistic Promised Returns Are Unacceptable; Regulatory Penalties Are Strict

J Securities Investment Consulting Company, operating within the Guangdong jurisdiction, developed stock-picking software and used it to provide securities investment advisory services to investors. Since 2014, the Guangdong Securities Regulatory Bureau has received multiple named complaints from investors alleging that, in the course of its business operations, J Company engaged in exaggerated promotion of its past performance and promised investors returns of up to 20% over a specified service period—only to result in substantial losses for those investors.

Upon receiving the complaint, the Guangdong Bureau conducted a thorough investigation into the matter through undercover investigations, surprise spot checks, and comprehensive on-site inspections. The investigation revealed that, in promoting its investment advisory services to potential clients, Company J made false claims about the firm’s past performance. Several of the company’s sales personnel repeatedly told investors that the success rate of the individual stocks recommended by the firm was as high as 80%, with expected returns of approximately 20% over a single service period.

However, upon verification and comparison, the company’s historical performance in related investment advisory services does not align with the aforementioned marketing and promotional materials.

The evidence obtained during the on-site inspection also indicates that Company J has deficiencies in business operations, compliance management, and risk control, and has failed to implement effective measures to regulate the professional conduct of its sales personnel. Furthermore, when conducting client follow-up visits, the company did not verify, as required by applicable laws, regulations, and internal policies, whether its sales personnel had engaged in prohibited practices such as making guaranteed returns, thereby allowing such misconduct to become widespread. As a result, sales personnel have commonly promoted products and solicited clients by exaggerating past performance and promising investment returns.

In October 2014, in response to the aforementioned violations, the Guangdong Securities Regulatory Bureau imposed an administrative regulatory measure on Company J requiring it to make corrections and promptly address customer complaints and disputes while actively responding to customers’ legitimate demands. Ultimately, Company J provided compensation totaling more than RMB 100,000 to investors who had suffered losses due to unauthorized promises of returns made by its sales personnel.

 

 

Case 18

Marketing practices should be standardized, and commission rates should be clearly defined.

In July 2014, Mr. Cao filed a complaint through the CSRC’s 12386 hotline, stating that in June 2012 he transferred his account to the K Securities Branch in the Guangdong jurisdiction. At the time, the client manager, Mr. Xu, verbally promised a commission rate of 0.4‰; however, during actual trading, the branch consistently charged 0.8‰ and, on occasion, also imposed a handling fee of RMB 5 per transaction.

The hotline, through the Guangdong Securities and Futures Industry Association, forwarded Mr. Cao’s complaint to Branch K for handling. The Guangdong Securities and Futures Industry Association actively urged the company to properly resolve the complaint and also recommended that the company conduct a comprehensive self-examination of its account-opening commission practices to ensure that fees are charged in a fair and reasonable manner.

The branch office reviewed Mr. Cao’s account-opening documents, follow-up call recordings, and other client files and found no evidence that Mr. Cao had raised any objections to the commission rate or submitted a request for an adjustment. Client manager Mr. Xu also stated that he had never made any commitment to charge Mr. Cao a commission of 0.4‰. With regard to the RMB 5 commission in question, in accordance with the relevant provisions of the “Notice on Adjusting the Standards for Collecting Securities Trading Commissions” issued by the National Development and Reform Commission and other departments, where the commission for each A-share transaction is less than RMB 5, the minimum charge of RMB 5 shall apply; therefore, this fee is compliant and reasonable.

The next day, the branch staff presented Cao’s account-opening documents and audio recordings, along with relevant policy documents, and engaged in a face-to-face discussion with him to explain the situation. Cao stated that he had no objection to the commission fee of RMB 5 per transaction; however, if it had not been for Client Manager Xiao Xu’s promise to charge a commission rate of 0.4‰, he would never have transferred his account.

The branch office stated that Mr. Cao’s claims were unsubstantiated. Unconvinced, Mr. Cao once again called the 12386 hotline to express his dissatisfaction with the branch and to demand a refund of the overcharged commission, along with appropriate compensation.

With both sides on the brink of a full-blown confrontation, the hotline immediately contacted the Guangdong Securities and Futures Industry Association, requesting the appointment of a professional mediator to facilitate settlement.

The mediator first requested the branch to provide Cao’s previous commission charge receipts, then explained the situation to the branch manager, pointing out that although Cao could not furnish relevant evidence, his trading commissions had consistently been 0.8‰ prior to the account transfer, suggesting that the primary reason for the transfer was likely the more favorable commission rate. The mediator urged the branch to reconsider the issue of refunding a portion of the commission. At the same time, the mediator clearly outlined the pros and cons to Cao, advising him to take a step back and accept the mediation proposal given the current lack of sufficient evidence, so as to achieve a win-win outcome for both parties.

With the reasoned and well-founded mediation provided by the hotline and the Guangdong Securities and Futures Industry Association, the branch office refunded a portion of Mr. Cao’s commissions and simultaneously streamlined its account-opening process by adding a step for signing a document confirming the commission rates. The smooth resolution of the issue enabled Mr. Cao to appreciate the hotline’s genuine concern and dedication; he ultimately signed the mediation agreement and continued to conduct trading through Branch K.

 

 

Case 19

Endless service, patience melts the ice.

With the innovative development of the capital market, the complexity of securities-related services has increased, leading to frequent misunderstandings and disputes arising from investors’ lack of familiarity with the relevant business processes. Front-line staff at market participants, through effective communication and attentive service, genuinely assist investors in resolving their issues, thereby systematically addressing and resolving complaints and disputes one by one.

On a trading day in March 2015, the counter of a certain securities branch was surrounded by customers. Suddenly, the crowd erupted in commotion, and one customer, visibly agitated, shouted in a shrill voice: “I want to file a complaint!” To avoid disrupting other clients, the branch staff immediately escorted the customer to the reception room to ascertain the details of the situation.

It turned out that the client needed to apply for the bank’s third-party custody service, which, in accordance with the bank’s regulations, must be confirmed at a bank branch. To facilitate the client, the branch requested the bank to provide a securities–bank POS terminal to assist the client in completing the signing process. Unfortunately, during the transaction, the POS terminal lost communication, preventing the signing from being completed. The handling teller explained the situation to the client and advised the client to visit the bank to complete the remaining procedures.

However, the customer believed that the teller was deliberately delaying the process and demanded immediate handling while obstructing other customers from conducting their routine transactions. Staff members patiently explained the situation to the customer while simultaneously contacting the bank’s equipment maintenance team to determine the cause of the malfunction. Upon learning that the issue could not be resolved in the short term, they coordinated with the relevant bank branch to prioritize processing the customer’s transaction. At the same time, a dedicated vehicle was arranged to transport the customer to the bank, where staff provided continuous accompaniment throughout the entire process, ultimately ensuring the customer left satisfied.

On another trading day in March 2015, Ms. Liu requested a fast redemption of her fund with L Fund Management Company, intending to use the redemption proceeds to subscribe for new shares. However, the redemption was unsuccessful because L Fund Management had exhausted its available advance-funding quota. When Ms. Liu contacted the company’s customer service for clarification, she was informed that, due to the depletion of the advance-funding limit, a fast redemption could not be processed on that day. Ms. Liu stated that, as a result of the failed fast redemption, she missed the opportunity to apply for new shares and demanded compensation of RMB 40,000 for any losses incurred from missing out on the new-share subscription.

To soothe Ms. Liu’s emotions, customer service representatives communicated with her repeatedly over the following three hours, explaining in detail that although the day’s advance funding limit had been exhausted, she could still process a standard redemption; however, Ms. Liu declined this option. After the market closed that day, L Fund Company contacted Ms. Liu again, informing her that the company had increased the advance funding limit and that she could reapply for an expedited redemption if needed. Ms. Liu replied that it was already after 3:00 p.m., rendering the redemption meaningless.

Over the following several business days, L Fund Company engaged in multiple rounds of communication and explanation with Ms. Liu, seeking her understanding. Ultimately, L Fund Company’s patience and meticulous attention won over Ms. Liu, who subsequently withdrew her claims for compensation or any losses, thereby bringing the dispute to a satisfactory resolution.

Subsequently, L Fund Company implemented a series of improvement measures, including determining whether to increase the margin financing limit based on market demand for new share subscriptions, assigning dedicated personnel to monitor the utilization of the margin financing limit in real time, and sending text message alerts to clients on special occasions such as new share subscription days and public holidays to remind them to arrange their funds in advance, thereby providing investors with more attentive service.

 

 

Case 20

Unauthorized Agency Transactions and Loose Internal Controls Lead to Disputes

In January 2013, futures investors Zhang and Chen submitted a written complaint to the Guangdong Securities Regulatory Bureau, stating that both had opened accounts in 2011 at the Q Futures branch within the jurisdiction. They alleged that the branch’s staff managed and traded on their accounts, frequently analyzing price charts and providing trading instructions, claiming that selling at high levels and buying at low levels would invariably yield profits. However, after more than a year of such trading, their accounts ultimately incurred losses.

The Guangdong Bureau conducted an inspection of the Q Futures Branch. By obtaining and reviewing account-opening documents, trade settlement statements, historical transaction details, fund deposit and withdrawal records, and trading-system logs, and by meticulously examining and cross-referencing the branch’s computer IP addresses and MAC addresses, the Bureau found no evidence to support the complainant’s allegation that branch staff had engaged in unauthorized client-directed trading.

The Guangdong Securities Regulatory Bureau intensified its investigation and found that the futures trading accounts of Zhang and Chen were both managed by their mutual relative, Tian. Tian was responsible for all fund deposits and withdrawals as well as trading activities, and also handled follow-up calls from the branch regarding margin calls. Furthermore, all callback calls from the Q Futures branch—whether related to account inquiries or margin supplementation—were answered by Tian. Despite knowing full well that Tian was not the account holder, the Q Futures branch nevertheless tacitly allowed Tian to execute futures trades on behalf of the two clients’ accounts in the branch’s on-site trading area.

According to the then-effective Measures for the Administration of Futures Companies and the Regulations on Client Account Opening in the Futures Market, any authorization for another person to trade on behalf of a client must be expressly provided for in the futures brokerage contract; however, none of the aforementioned clients designated Mr. Tian as their agent in the signed futures brokerage contracts.

Following the occurrence of trading losses, both Zhang and Chen asserted that they had not personally placed the trades in question, alleging that the branch office’s internal management was inadequate and that it had allowed employees or third parties to operate their accounts at will, and they accordingly demanded compensation for their financial losses. Recognizing shortcomings in its internal and contractual management, the branch office proactively offered a certain degree of compensation to the clients.

In view of the fact that, despite being aware of the client’s account being traded on a proxy basis, the branch office failed to disclose the associated risks to the client or to require the client to complete the necessary authorization and proxy procedures, nor did it implement other preventive measures to safeguard the client’s trading activities and assets, the Guangdong Bureau has imposed regulatory corrective action on the branch, ordering it to rectify the situation within a specified time frame and holding the relevant persons accountable.

The branch thoroughly reviewed customer account-opening documentation in light of identified issues, refined its account-opening management procedures, and replaced the branch manager.

 

 

Case 21

No security issue in the system is trivial; emergency response must be handled appropriately.

In October 2013, the R Futures Company within the jurisdiction experienced a failure in its centralized trading system during the continuous trading session, resulting in an outage of the primary trading system and affecting nearly 800 client trades.

Following the incident, R Futures Company activated its emergency response plan: first, it immediately contacted the system vendor to investigate and rectify the malfunction, thereby restoring client trading; second, it implemented a manual emergency order-entry procedure and provided emergency order submission services to multiple clients via an emergency hotline; third, it promptly notified clients of the system outage and the emergency order-entry process through its SMS platform, corporate website, and market data system; fourth, it conducted thorough customer reassurance and explanation efforts, issuing an apology letter to investors via the company’s website and official Weibo account while simultaneously monitoring public sentiment to assess the extent of the incident’s impact; and fifth, it reported the details of the incident and its impact to the relevant securities regulatory authorities.

Upon receiving the report, the Guangdong Bureau immediately organized R Futures Company to launch emergency response measures for this information security incident and dispatched a special investigation team to conduct an on-site inspection to determine the root cause. The investigation revealed that the outage was caused by human error on the part of R Futures’ system operations and maintenance personnel; furthermore, after detecting anomalies in data archiving, the company failed to follow established operating procedures for anomaly troubleshooting, resulting in the inability of the centralized trading system to start up normally.

Based on the findings of the investigation, the Guangdong Bureau has imposed a regulatory measure requiring R Futures Company to make corrections. The Bureau has directed R Futures Company to conduct a comprehensive review and identification of issues in its centralized trading system, to refine its technical management policies and emergency response mechanisms, and to effectively mitigate risks. At the same time, the Bureau has mandated that the company activate its internal accountability mechanism.

R Futures Company conducted a thorough review and identification of internal management issues, revised and refined its system operations and maintenance management procedures, organized targeted emergency response drills and training, and provided compensation to affected clients. In addition, the company initiated an internal accountability process and imposed disciplinary measures—including demotion and forfeiture of bonuses—on multiple senior executives and other individuals held accountable.

 

 

Case 22

Impartial Mediation Wins Hearts; Persuasion and Reason Bring About a Win-Win Outcome

In July 2014, the Guangdong Securities and Futures Association received a complaint from Mr. Chen, who stated that he was a client of a futures branch within the association’s jurisdiction. On March 10, 2014, the coking coal contract held by Mr. Chen reached the risk threshold set for that futures contract, whereupon the branch notified him by telephone at 9:30 a.m. on the same day to deposit additional margin. As Mr. Chen failed to promptly meet the margin call or close out his position on his own, the branch sent him another forced liquidation notice via text message at 10:10 a.m. and proceeded with the forced liquidation of his coking coal contract around 10:42 a.m.; however, the trade did not execute because the price had hit the daily limit down. At approximately 9:15 a.m. on March 11, the branch again initiated forced liquidation of Mr. Chen’s contract, which was subsequently executed.

Mr. Chen contends that the futures brokerage firm failed to choose an appropriate time to initiate forced liquidation, resulting in losses, and therefore demands compensation.

With the consent of both parties, this case shall be mediated by a mediator appointed by the Association. During the first mediation session, Mr. Chen expressed strong dissatisfaction with the futures company’s forced liquidation and demanded compensation for losses in the amount of RMB 120,000. The futures branch, on the other hand, stated that although its handling of the incident was somewhat improper, it was nonetheless in compliance with the Futures Brokerage Agreement signed by both parties, and therefore the branch is unable to provide any compensation.

The mediator conveyed the following preliminary views to Mr. Chen: First, pursuant to Article 40 of the Futures Brokerage Agreement, Mr. Chen was obligated, throughout the period he held his positions, to continuously monitor changes in his positions, margin requirements, and account equity, and to manage his trading positions appropriately; however, he failed to fulfill the duties expected of an investor. Second, in accordance with Articles 28 and 32 of the Futures Brokerage Agreement, the futures brokerage branch had, through the China Futures Margin Monitoring Center’s inquiry system, the futures company’s trading system, and the futures market quotation system, proactively notified Mr. Chen of the need to deposit additional margin, and further followed up with telephone calls and text messages to remind him to do so. Third, under Article 42 of the Futures Brokerage Agreement, the futures company is entitled to, at its discretion, select the timing, contract variety, price, and quantity for forcibly liquidating all or part of Mr. Chen’s open contracts.

The mediator further pointed out that, while from a service perspective it was indeed improper for the branch to issue margin-call notices solely via text message and to execute forced liquidation only after the coking coal contract hit its daily limit down on March 10, it would nonetheless be unreasonable to demand RMB 120,000 in compensation solely on the basis of these service shortcomings. The mediation session lasted nearly two hours, and before concluding the discussion, the mediator advised Mr. Chen to reconsider his compensation claim.

Over the following two weeks, through repeated rounds of communication and coordination by the mediator, Mr. Chen reduced his claim to RMB 30,000; however, the futures brokerage branch continued to refuse to pay. Mr. Chen stated that he would pursue legal action to resolve the dispute. Upon hearing Mr. Chen’s decision, the mediator said to him: “We respect your choice and sincerely hope you will prevail in this lawsuit. However, litigation hinges on evidence. At present, both the contract terms and the recorded notification are in favor of the futures brokerage branch; your reasoning alone is insufficient to rebut their evidence. Therefore, we urge you to give this matter careful consideration.” Subsequently, the mediator conveyed Mr. Chen’s position to the brokerage branch and prepared to terminate the mediation process.

To the mediator’s surprise, the following evening, Mr. Chen called and requested a reasonable compensation proposal so that mediation could continue.

Upon receiving Mr. Chen’s request, the mediator carefully reviewed the underlying facts of this dispute. The mediator concluded that, although the branch’s forced liquidation was in accordance with the provisions of the Futures Brokerage Agreement and, under the relevant provisions of the Supreme People’s Court’s “Minutes of the Symposium on the Adjudication of Futures Dispute Cases” and the “Provisions on Several Issues in the Adjudication of Futures Dispute Cases,” the branch would only be liable for damages if it had failed to fulfill its obligation to provide prior notice before carrying out the forced liquidation, the branch nevertheless exhibited shortcomings in this incident, namely inefficiency in handling the matter and a poor service attitude.

Subsequently, the mediator reviewed a large number of settlement solutions for similar disputes and ultimately proposed the following resolution: the branch would refund Mr. Chen the handling fees that had been retained since the opening of his account as compensation, while also appropriately reducing his future transaction fees. This proposal was accepted by both parties; after discussing the relevant details, the two sides finally signed a mediation agreement on August 18, 2014, thereby bringing a protracted and contentious dispute to a satisfactory conclusion.

 

 

Case 23

Invest in Private Equity Funds with Caution—Beware of Illegal Fundraising Schemes

On September 25, 2014, the public security authorities received a report from members of the public alleging that Company S, located in a building in Guangzhou’s Zhujiang New Town, was suspected of illegally raising funds for investment. Subsequently, the Guangzhou Public Security Bureau launched an investigation and issued a “Letter of Assistance for Investigation” to the Guangdong Provincial Bureau, requesting assistance in verifying Company S’s qualifications for conducting securities-related business.

Upon investigation, it was found that in 2011, a former bank employee named Hu registered and established Company S in Shenzhen, and in 2013 he subsequently registered a branch office of Company S in Tianhe District, Guangzhou. In early 2013, Hu entered into an agreement with Wang, the head of Company T, whereby Company S would lend a specified amount of funds to Company T on each occasion at an annualized yield of 24%. On the day following each loan disbursement, Company T would pay one-quarter of the agreed yield; thereafter, interest would be settled quarterly until both principal and interest were fully repaid.

Faced with the lure of enormous profits, Hu’s greed rapidly escalated. In September 2013, he colluded with others to register and establish Shenzhen S Jinqu No. 9 Investment Enterprise (Limited Partnership) in the name of Company S (hereinafter referred to as the “Jinqu No. 9 Private Equity Fund”), publicly advertising that it would raise capital through partnership investments and channel the funds in tranches into T Company’s “airline ticket settlement payment” project.

Hu and others marketed the project to an unspecified segment of the public, raising more than RMB 700 million in total. In September 2014, the investment project’s funding chain collapsed, and the Jinqiu No. 9 private equity fund reached maturity; however, the failure to repay principal and interest triggered the case. Most of the victims were bank customers who purchased the product based on recommendations and introductions from bank employees, with some even signing the agreements within the bank’s office premises.

In response to a request for cooperation from the public security authorities, the Guangdong Bureau, after reviewing the relevant business qualifications, issued the following determination: The China Securities Regulatory Commission has not approved Company S as a fund manager for publicly offered funds, nor has it registered Company S as a sales institution for publicly offered funds. Furthermore, neither Company S nor the “Jin Qu Nine Private Equity Fund” has carried out the required registration and filing with the Asset Management Association of China in accordance with the Interim Measures for the Supervision and Administration of Private Investment Funds. With respect to such private equity funds that have failed to fulfill their statutory registration and filing obligations, are of substantial scale, and have attracted numerous complaints, the primary responsibility of the securities regulatory authorities is to cooperate with local governments in lawfully cracking down on their illegal and criminal activities. As of January 2015, the Guangzhou Public Security Authorities had solved the case involving Company S’s alleged illegal fundraising and, in accordance with the law, arrested 13 suspects.

 

 

Case 24

Boasting as a “Stock God” Leads to Illegal Investment Advice and Criminal Conviction

In late October 2011, the Guangdong Securities Regulatory Bureau received a complaint from an investor alleging that Fang had been soliciting members and collecting fees by posting stock-picking recommendations through QQ groups, blogs, and other channels, thereby engaging in unauthorized securities investment consulting activities.

Upon receiving the report, the Guangdong Bureau immediately dispatched staff to conduct a thorough investigation. The investigation revealed that Fang and others initially established Zhaoqing某Technology Information Co., Ltd. to sell computer accessories. Starting in 2010, Fang set up blogs on websites such as Sina.com and Eastmoney.com, using the online handle “Xiaoyao Zhangmenren” to publish extensive content, including commentary on overall market trends and stock recommendations, thereby enticing clients to purchase his “Stock God Analyst” software at a price of RMB 3,800 per copy.

In fact, this software package was purchased in its entirety by Mr. Fang at a discounted price from a Shanghai-based company, yet the software itself has no actual utility for stock trading. Once investors buy the software, they are granted access to the “Xiaoyao Zhangmenren QQ Group” and the “Heima Niugu Live Trading Group,” where they are exposed to what Mr. Fang claims are “exclusive information and original stock analyses.” Every day, Mr. Fang recommends stocks to group members and provides commentary on overall market trends and individual stock performance; moreover, investors who join these QQ groups are required to pay an annual software maintenance fee of RMB 360.

On May 29, 2012, the Public Security Department of Guangdong Province established a special task force and organized the arrest of Fang and members of his criminal gang. Following interrogation, it was determined that since 2010, Fang had recruited more than 800 clients, collected approximately RMB 4 million in software purchase and maintenance fees, and illegally profited over RMB 3.6 million.

Ironically, Mr. Fang, who claims to be “skilled at identifying sector hotspots and leading stocks,” never trades stocks himself; the stock recommendations he disseminates are merely compiled daily from online sources, rather than the result of any original research conducted by Mr. Fang or his associates. Investors can readily obtain such information from publicly available market analyses and research articles published in the media.

In November 2012, the People’s Court of Duanzhou District, Zhaoqing City, rendered a judgment in accordance with the law, finding Mr. Fang guilty of the crime of illegal business operations and sentencing him to ten months’ imprisonment with a one-year suspended sentence, together with a fine of RMB 55,000 and confiscation of the related illegal gains.