September 14, 2008
Wacky insider trading case
Here's a report of what purports to be China's first civil suit for damages on account of insider trading. The defendant, Chen Jianliang (陈建良), is the former vice president of Xinjiang Tianshan Cement Co., a listed company, and is currently the CEO of its wholly owned subsidiary, Jiangsu Tianshan Cement Group Co., headquartered in Nanjing. In 2004, when Chen was at Xinjiang Tianshan, he used his knowledge of an impending corporate restructuring to engage in insider trading, buying and selling stock between June 21 and June 29, when the restructuring was publicly announced and caused the stock price to go up. In 2007, the China Securities Regulatory Commission found that he had violated relevant sections of the Securities Law on insider trading and fined him 200,000 yuan. (Punishment decision here.) (Since his insider trading involved the ultimate sale of almost 200,000 shares, this fine would be less than his gain unless he made less than 1 yuan per share; I haven't looked up the stock price at that time, but such a small gain seems unlikely.)
The plaintiff is a Guangdong man (I think; I'm making a likely but not foolproof inference from the name), Chen Ningfeng (陈宁丰), who lost money trading Xinjiang Tianshan stock around the June 21-29 period in which the defendant was engaging in insider trading. He brought suit against Chen in the Nanjing Intermediate-Level People's Court.
The news report says (at first; but see below) that neither the plaintiff, the defendant, nor the defendant's lawyer showed up, so the plaintiff's lawyer, the redoubtable securities lawyers Song Yixin (宋一欣) had the floor to himself. The CSRC decision left no room for doubt about the underlying culpability of the defendant; the issue the court was concerned with was that of measurement of damages. This, of course, has been a big problem in civil suits in the US as well; given that the plaintiff would have traded in the impersonal market even if the defendant had not engaged in the insider trading, a direct link between the plaintiff's losses and the defendant's wrongful trading is not plausible. (In the US, Congress eventually solved the problem by statute: the plaintiff gets standing by having engaged in transactions "contemporaneously" - undefined in the statute, but probably meaning within a window of few days - with those of the defendant, and need not prove anything further by way of specific loss causation. Damages are limited by the defendant's gains less what he has already paid out via disgorgement under Section 21(d) of the Securities Exchange Act.)
Attorney Song sought to make an end run around this problem by asserting, according to the news report, that in the US and Europe, the burden of proof was reversed in insider trading cases, and it was up to the defendant (who hadn't shown up) to prove that the plaintiff's losses - calculated at 9383.68 yuan - were not caused by his insider trading. (As we can see above, this is not entirely accurate or entirely inaccurate. US law hasn't really figured out what the damage theory should be, and so has a rule about recovery. That this is a theory of recovery instead of damages is shown by the fact that contemporaneous traders even in O'Hagan-type cases, where under misappropriation theory the wrong is perpetrated not on other traders but on the owner of the inside information, are allowed to sue and recover. I think it makes more sense to see plaintiffs as being given standing in order to motivate them to act as private attorneys-general, not in order to allow them to recover damages they actually suffered.)
At this point, a true Perry Mason moment occurred in the proceedings. The defense attorney (who had apparently by this time shown up in court) whipped a piece of paper out of his pocket: a signed request from the plaintiff requesting that the suit be withdrawn. Apparently legal ethics rules in China do not forbid one party's lawyer from talking directly to the other party.
Needless to say, this was a bit startling to Song Yixin, who asked the court to reject the request. (I'm not sure whether or how far he challenged its authenticity.) Not only should the plaintiff act through him, the designated representative, he pointed out, but he also had a contingency fee arrangement with the plaintiff whereby he had fronted the legal costs, and so he also had an economic stake in the case. The plaintiff could not unilaterally withdraw the suit. (I think it's fair to say that in the US - not of course necessarily a model of the right way of doing things - this conflict of interest between lawyer and client in contingency-fee cases would be treated as an embarrassing necessity better left unmentioned, not trumpeted loudly in public.) Song remarked to reporters that the plaintiff must have "gotten to" the defendant.
The reporter telephoned the plaintiff, who denied that he had "sold out" to the plaintiff.
As of the date of the report, the court (at least for the time being) has not accepted the plaintiff's request, and proceedings continue. As if fearing that the case was not already bizarre enough, the defendant's lawyer has stated that because the plaintiff has withdrawn the suit, it does not exist any more and there is no issue of "non-appearance". Furthermore, he has stated, if the court treats its proceedings as a trial, he will sue the court itself. (In China, as in most other legal systems, if you are unhappy with a court's decision the normal recourse is appeal to a higher court.)
For his part, Song says that his goal is to see if investor losses caused by insider trading can be recouped through a civil suit. If the court agrees to the plaintiff's request to withdraw the suit, he will sue the plaintiff for breach of contract and seek other investors to sue Chen Jianliang.
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