On December 26, the Supreme People's Court and the Supreme People's Procuratorate (hereinafter referred to as the "Supreme People's Court and the Supreme People's Procuratorate") jointly released typical cases of cracking down on private equity fund crimes in accordance with the law. The case responds to the controversial issue of the application of law in judicial practice, further clarifies judicial standards, and strengthens guidance on case handling.
The "two supremes" said that the next step will continue to increase the punishment of private fund crimes, make full use of existing laws and judicial interpretations, and deal with private fund crimes in accordance with the law. Strengthen coordination and cooperation with administrative supervision departments, public security organs and other departments, further enhance the joint force in combating private fund crimes, and prudently prevent and resolve industry risks. Pay more attention to the active judiciary, strengthen investigation and research on new situations and new problems in the governance of the private equity industry discovered in the course of handling cases, and put forward judicial suggestions for strengthening and improving the construction of industry compliance, so as to boost industry governance and better serve the overall situation of economic development and maintain financial security.
Private equity fund practitioners should raise funds legally, invest in compliance with regulations, and operate in good faith
There are a total of 5 typical cases in this batch, including the case of Su Mouming and others illegally absorbing deposits from the public, the case of fund-raising fraud by Zhongji Group, Meng and Cen, the case of misappropriation of funds by Guo, the embezzlement case of Guo and Wang, and the bribery case of Hu and others who are not state functionaries.
The five typical cases cover common and frequent crimes in the field of private funds, such as illegal fundraising, misappropriation, embezzlement, and commercial bribery by private fund managers that infringe on the interests of investors.
Taking the "case of Su Mouming et al. illegally absorbing public deposits" as an example, from July 2016 to July 2018, Su Mouming used Hong Moumou Wealth Company and Hong Fund Company as private equity fund managers, and successively established Shenzhen Hong Tiancheng Tiancheng Tianfu Investment Enterprise. Shenzhen Hong Huifu No. 2 Investment Enterprise and other limited partnerships, with a number of real estate development projects as investment targets, concealed the fact that the investment projects were all developed by a company actually controlled by Su Mouming or developed in cooperation with others, and issued 5 private equity fund products (4 of which were filed with the Asset Management Association).
Su Mouming instructed Gao and He to organize the sales team to hold a product promotion meeting by word of mouth, and publicize private equity fund products to the public through other financial institutions, private equity companies, and practitioners in the same industry to help promote them, allowing unqualified investors to break through the restrictions on the number and amount of private equity fund investors through "spelling" and "holding on behalf of others", and the affiliated company actually controlled by Su Mouming signed a repurchase agreement with the investor, and Su Mouming personally provided unlimited joint and several liability guarantee, with an agreed annual interest rate of 10% to a return of 14.5%, a disguised commitment to guarantee the payment of principal and interest.
Su Mouming, Gao, He and others illegally raised a total of RMB 599.9 million through the above methods.
After the above-mentioned funds entered the partnership fundraising account, they were transferred to several accounts controlled by Su Mouming, and the funds of each private equity fund product were mixed and used by Su Mouming in a unified manner. Among them, more than 150 million yuan of principal and interest were paid in the form of raising new and repaying the old, more than 130 million yuan were used for investment projects agreed by private equity funds, more than 120 million yuan were used for other real estate projects developed by Su Mouming, more than 101 million yuan were used to purchase building materials, and more than 90 million yuan were used to pay employee salary commissions, the company's operating costs and repay the company's debts.
Due to the rupture of the capital chain, Su Mouming was unable to pay the principal and interest on time. As of the time of the case, the investor's principal had lost more than 441 million yuan.
On May 20 and September 1, 2021, the Shenzhen Futian District People's Court respectively made first-instance judgments, finding that Su Mouming, Gao and He were guilty of illegally absorbing public deposits, and sentenced Su Mouming to five years in prison and a fine of RMB 300,000, and Gao and He were sentenced to three years in prison and fined RMB 100,000 respectively, and continued to recover illegal gains. None of the three defendants appealed, and the judgment has taken legal effect. The public security organs and judicial organs froze a total of more than 6.87 million yuan in bank accounts involved in the case, and recovered the 16 million yuan of defendant Su Mouming's creditor's rights against others and the interest, dividends, commissions, and rebate fees of 35 investors in accordance with the law, and returned them to the investors after the judgment took effect.
Another example is the fund-raising fraud case of Zhongji Group, Meng and Cen. The defendant is Zhongji Supply Chain Group Co., Ltd. (hereinafter referred to as "Zhongji Group"), the defendant Meng is the legal representative and chairman of the board of directors of Zhongji Group, the defendant Cen is the general manager of Zhongji Group, and the defendant Zhuang is the deputy general manager of Zhongji Group (deceased).
In May 2015, Meng registered and established a Zhongji Group. From November 2015 to June 2020, Zhongji Group and its directly responsible supervisors Meng, Cen and Zhuang were under the actual control of Shanghai Tan Asset Management Co., Ltd. (hereinafter referred to as "Tan Company"), Shanghai Zhou Asset Management Co., Ltd. (hereinafter referred to as "Zhou Company"), Shenzhen Hui Industrial Service Group Co., Ltd. (hereinafter referred to as "Hui Group") and its partner Beijing Yun Investment Co., Ltd. (hereinafter referred to as "Yun Company") More than 10 companies have adopted a business model of self-financing and self-use, and are engaged in the design, issuance, sales, investment and financing activities of private equity fund products around a Zhongji Group.
Meng, Cen, and Zhuang instructed the staff of Tan and Zhou to use Zhuang's forged financial data and trade contracts to design private equity fund products with false content in the name of investing in the equity of a number of shell companies actually controlled by a Zhongji Group, and split a single financing project into several fund products, and successively issued 39 private equity fund products with Tan, Zhou, and Yun as private equity fund managers. The above three companies are registered as private equity and venture capital fund managers with the Asset Management Association, and 39 products are registered with the Asset Management Association. The relevant fund products are sold by three "Hui Group" companies that do not have the qualifications for private equity fund sales. Meng and Cen instructed the staff of the "Hui Department" company to publicly publicize private equity fund products to the public by holding publicity meetings, holding financial forums and summit receptions, making random phone calls, and placing promotional materials in the public areas of the hotel, falsely claiming that a letter of guarantee was issued by a Zhongji Holding Group Co., Ltd. with a state-owned background, pledged with fictitious accounts receivable, and promised to guarantee principal and interest in disguise, exceeding the amount and time of filing, rolling sales of private equity fund products, and illegally raising more than RMB 7.881 billion in total.
After the raised funds were transferred to the shell target project company, they were illegally pooled from the custody account to the account of Zhongji Group to form a capital pool, which was arbitrarily used by Meng and Cen. Among the above-mentioned fund-raising funds, more than 4.25 billion yuan of principal and interest were paid to investors, more than 1.71 billion yuan of sales commissions, employee salaries and deposits were paid, and more than 390 million yuan were transferred to personal accounts controlled by Meng and Cen and more than 390 million yuan were squandered by individuals, and more than 1.75 billion yuan were invested abroad. The projects invested by a Zhongji Group are in a state of long-term loss, mainly relying on raising new funds to repay old ones to maintain operation. As of the time of the case, the investor's principal had lost more than 3.822 billion yuan.
On November 30, 2022, the Shanghai No. 1 Intermediate People's Court made a first-instance judgment, sentencing Zhongji Group to a fine of RMB 100 million for fund-raising fraud, sentencing Meng and Cen to life imprisonment, deprivation of political rights for life, and confiscation of all personal property. Defendant Zhuang X died of illness during the course of the court trial, and the trial of him was terminated in accordance with law. Meng and Cen appealed. On March 13, 2023, the Shanghai Higher People's Court issued a final ruling, rejecting the appeal and upholding the original judgment. The public security organs and judicial organs froze more than 65 million yuan in bank accounts involved in the case, and sealed and seized dozens of real estate, land use rights, and company equity. After the judgment took effect, the Shanghai No. 1 Intermediate People's Court organized an auction of the sealed and seized assets in accordance with the law, and returned them to the investors together with the bank deposits.
The Supreme People's Court and the Supreme People's Court pointed out that the above-mentioned cases not only have guiding significance for judicial case handling in terms of fact determination and application of law, but also draw a "red line" and "bottom line" for private equity fund practitioners, and educate and warn practitioners to raise funds legally, invest in compliance with regulations, and operate in good faith. In addition, some of the five typical cases prosecuted the suspects of fund-raising fraud in accordance with the law through case filing and supervision, some of them effectively proved the crimes of misappropriation and embezzlement in the complex operation of private equity funds through the comprehensive use of circumstantial evidence, and some actively recovered the stolen goods and recovered losses, preventing the criminals from obtaining any economic benefits. In each case, based on the facts and circumstances of the crime, a punishment commensurate with the crime was imposed in accordance with the law, demonstrating the judicial attitude of severely punishing private fund crimes in accordance with the law, and effectively protecting the legitimate rights and interests of investors.
Take multiple measures to punish private equity fund crimes
The person in charge of the Fourth Procuratorate of the Supreme People's Procuratorate said that the procuratorial organs have always placed the punishment of private equity fund crimes in accordance with the law, the protection of the legitimate rights and interests of investors, and the protection of the standardized and healthy development of the industry in an important position in the performance of their duties.
So far in 2021, procuratorates across the country have prosecuted a total of 2,085 people for private equity crimes. In 2022 and 2023, the Supreme People's Procuratorate will supervise and handle two batches of 16 major private equity fund crime cases, of which 13 have been prosecuted in accordance with the law and 5 have been decided. The embezzlement case of Guo and Wang released this time is the first batch of supervised cases.
"At present, the Supreme People's Procuratorate is studying and drafting normative documents for handling private equity fund crime cases, further clarifying the application of law and the standards for evidence review. The person in charge of the Fourth Procuratorate of the Supreme People's Procuratorate said that in April 2022, the Supreme People's Procuratorate and the Ministry of Public Security jointly issued the revised standards for filing and prosecuting economic crimes, revising the standards for filing and prosecuting crimes such as illegal absorption of public deposits, fund-raising fraud, misappropriation of funds, and embezzlement in the field of private equity funds. The procuratorial organs carry out the entire process of recovering stolen goods and recovering losses, adhere to the principle of "pursuing everything that should be pursued", and do their best to help investors recover economic losses through various means such as "double investigation in one case" and clues on money laundering crimes and commercial bribery crimes.
The Supreme People's Court is also cracking down on private equity fund crimes through the effective exercise of its adjudication functions. The person in charge of the Third Criminal Trial Division of the Supreme People's Court pointed out that the crimes of private funds mainly include two aspects: first, the fund-raising side, which is mainly illegal fund-raising crimes, and some fraud crimes; and second, the use of funds, which involves crimes such as misappropriation of funds, embezzlement of duties, and manipulation of the securities market.
From 2021 to October 31, 2023, courts across the country convicted a total of 1,888 people for private equity crimes. The person in charge of the Third Criminal Trial Division of the Supreme People's Court said that the Supreme People's Court has always adhered to the principle of severely punishing private equity fund crimes, and resolutely sentenced those who should be sentenced in accordance with the law, giving full play to the deterrent effect of the criminal law. At the same time, adhere to the criminal policy of blending leniency and severity, focusing on cracking down on the organizers, plotters, commanders, and the main recipients of illegal benefits, and give lenient punishments to first-time offenders and occasional offenders who are instructed to participate, and to give lenient punishments in accordance with law to those who actively return stolen goods and make restitution, or resolve risks on their own and achieve good results, to ensure the organic unity of political, legal, and social effects.
At the same time, in 2022, the Supreme People's Court issued the revised Interpretation on Several Issues Concerning the Specific Application of Law in the Trial of Criminal Cases of Illegal Fundraising, which further clarified the conviction and sentencing standards for the crime of illegal fundraising and the application of relevant laws, providing a legal and policy basis for combating the crime of illegal fundraising by private equity funds. In addition, the Supreme People's Court, the Supreme People's Procuratorate, the Ministry of Public Security, and the China Securities Regulatory Commission have continued to strengthen communication, coordination, and cooperation in recent years, conducting in-depth research and demonstration on issues related to illegal fundraising, misappropriation of funds, and embezzlement of duties involved in private equity funds, jointly studying and resolving problems encountered in practice, improving and improving relevant working mechanisms, and forming a strong joint work force to ensure that the crackdown is effective and the punishment is effective. Pay attention to the overall planning of efforts such as case trial, recovery of stolen goods and losses, disposal of assets, and maintenance of stability, properly handle major cases of private equity fund crimes involving the public, and always carry out the recovery of stolen goods and losses throughout the entire process of trial and disposal of cases, minimize investment losses, effectively prevent and resolve major financial risks, firmly guard the bottom line of no systemic financial risks, and effectively maintain the country's financial security and stability.
The recovery of stolen goods and losses runs through the entire process of handling cases
The "two supremes" said that the next step will continue to focus on intensifying the crackdown on private equity crimes.
First, we will continue to increase the intensity of punishment for private equity crimes. Correctly distinguish the structure and nature of various types of private placement products, accurately identify the criminal means and legal relationships for those who embezzle or misappropriate the assets and funds of private equity funds by covert means, and pursue criminal responsibility in accordance with the law, so that the vast number of victimized investors cannot be "helpless for help" because of the complex financial structure. Integrate the recovery of stolen goods and losses throughout the entire process of case handling, emphasizing guiding the public security organs to promptly investigate assets involved in the case, lawfully applying the plea leniency system, and doing a good job of efforts for criminal suspects to admit guilt and repentance, return stolen goods and make restitution, and recover economic losses for investors to the greatest extent.
The second is to strengthen coordination and cooperation with securities regulators, public security organs and other departments. The people's courts and procuratorial organs at all levels have strengthened mutual discussion and cooperation with the public security organs in guiding investigations, clarifying the ideas for proving accusations, and unifying the application of law, so as to further enhance the joint efforts to combat private equity fund crimes and prudently prevent and resolve industry risks.
The third is to boost industry governance. The people's procuratorates and people's courts are to put forward opinions and suggestions on strengthening and improving the establishment of industry compliance through methods such as formulating and issuing procuratorial recommendations, judicial recommendations, and promptly releasing typical cases, punishing crimes, curing diseases, preventing crimes, and promoting industry governance, so as to better serve and safeguard the overall situation of economic development and maintain financial security.
Editor-in-charge: Zhu Yumeng
Proofreading: Peng Qihua
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