The CSRC's fine reveals new regulatory trends: companies "brag" or face heavy fines

Strict supervision has become one of the important directions of the CSRC's work in 2024.

Wu Qing, chairman of the China Securities Regulatory Commission, said in his public "debut" after taking office that he would keep his eyes open, strengthen early correction of problematic institutions and enterprises, deal with all kinds of risks as soon as possible, crack down on all kinds of violations of laws and regulations, and focus on cracking down on major violations of laws and regulations in key areas.

According to the recent fine interview and research of the China Securities Regulatory Commission, the 21st Century Business Herald reporter found that some new characteristics began to appear:

First of all, listed companies are the top priority of strict supervision. Judging from the listed companies that have been fined large sums of money, on the one hand, financial fraud is the hardest hit area, and the fines often amount to millions or even tens of millions; if false data is used to raise funds, it will involve fraudulent issuance, and the amount of fines and confiscations will increase to tens of millions or even hundreds of millions of yuan.

On the other hand, some false behaviors that do not involve financial data and are "harmless" in the eyes of some companies will also be heavily punished. For example, on April 7, Aolian Electronics was fined a total of 7.5 million yuan for "bragging".

Second, market manipulation will be subject to stricter penalties than in the past, both by individuals and businesses. If the investment is lost, the penalty amount may be relatively limited, but if the profit is large, it may be followed by a huge fine, and the China Securities Regulatory Commission recently announced a fine of up to 271 million yuan.

In addition, intermediaries such as securities firms, accounting firms, and law firms that provide services to the capital market have also become the focus of severe punishment; especially when listed companies violate laws and regulations, intermediaries will be subject to extended inspection and punishment. However, due to the lack of a legal basis for the punishment of third parties for cooperating with counterfeiting, there is a lot of room for improvement in such punishments.

Financial fraud has become the hardest hit area for listed companies

Financial fraud has been the focus of the CSRC's severe punishment for a long time. According to the interviewees' analysis, the penalties for this type of fraud are different from those in the past: on the one hand, the supervision is stricter and more detailed, and some fraud that used to be fooled away will now be uncovered, such as using accounting standards to play with book data, and on the other hand, the penalties for problems of the same nature and severity have been increased.

A more typical example in the recent past is Hongxiang shares. On April 3, the China Securities Regulatory Commission issued an administrative penalty and market ban decision on Hongxiang shares, and the company and related parties were fined up to 65.56 million yuan, and two parties were banned from the market at the same time. Among them, the fine of the "first evil", the actual controller of the company, the chairman and general manager amounted to 22.88 million yuan, sending a clear signal of "zero tolerance" to the market.

The reason why Hongxiang shares were fined tens of millions of yuan was because it used false statements to raise funds many times in addition to financial fraud. On the one hand, in 2017, 2018 and 2019, the amount of Hongxiang shares suspected of inflating profits accounted for 38.03%, 47.72% and 48.19% of the company's total disclosed profits in the current period, respectively. On the other hand, there were material false records in the announcement documents of its implementation of private placement of shares in 2019, implementation of convertible bond financing in 2020, and application for issuance of shares and payment of cash to purchase assets and raise matching funds in 2020.

In contrast, in March, Aerospace Power, which was also punished for financial fraud, was fined 11.8 million yuan, which only inflated revenue and profits, and did not use false data to raise funds.

Businesses "brag too much" or collect millions in fines

It is worth noting that in addition to the large fines that may be imposed for financial fraud, some issues that are considered "understandable" by some company members may also incur heavy fines, such as "excessive bragging".

On April 7, Aolian Electronics and related responsible persons were fined a total of 7.5 million yuan, which did not involve inflated profits, etc., and was fined for "exaggeration".

At the end of 2022, Aolian Electronics, which is mainly engaged in automotive electronics, officially announced that it had become the most popular company in the sector, with its share price rising by more than 200% in two months, and its market value soaring from more than 2 billion yuan to about 7 billion yuan.

At that time, Aolian Electronics announced that it planned to establish a perovskite research institute and unite a team of well-known professors and experts leading in the research and development of perovskite technology in China to create a three-in-one platform system of material formulation, process equipment and module production, and formulated a clear plan for capacity construction. Subsequently, Aolian Electronics received a letter of concern from the exchange, and in the reply to the letter of concern, Aolian Electronics exaggerated the past work performance, core competitiveness, and industry influence of the core figure Xu Mingjun in the perovskite industry, for example, Xu Mingjun only made suggestions for a project, and did not play a guiding role in key core technologies or major processes, but described his role as "guidance".

On December 22, 2022, on the first trading day after Aolian's disclosure of the exaggerated "Cooperation Agreement and Announcement on the Establishment of a Company", Aolian's share price rose 20.01%, while the GEM index fell 0.79% in the same period, with a deviation of 20.80 percentage points. On February 21 and February 22, 2023, on the day and the next trading day when Huaneng Qingneng Institute issued the "Clarification Statement", the share price of Aolian Electronics fell by 29.92%, and the GEM index fell by 1.16% during the same period, with a deviation of 28.76 percentage points.

Due to the "bragging" style of publicizing its own achievements, Aolian Electronics was fined 3 million yuan, and the relevant responsible persons were fined a total of 4.5 million yuan.

"In the past, there was a lot of confusion in companies recognizing revenue that should have been included in subsequent years as current year's revenue, but it was difficult to detect such problems if there were no problems in the company's operation and the supervision was not meticulous enough. In recent years, with the strengthening of supervision, more and more listed companies have been fined for 'eating food', and the number of listed companies that dare to continue to commit fraud has decreased significantly.

However, 'bragging' and exaggeration are still not uncommon, and some even regard them as 'necessary embellishments'. Nowadays, Aolian Electronics has been heavily fined for 'bragging', which is a wake-up call for enterprises with exaggerated psychology and helps to reduce the chaos of 'bragging' in the industry. The interviewee said.

Manipulating the stock market or being fined for "bankruptcy" Intermediaries have also become the focus of strict investigation

Strict supervision is not limited to listed companies, and individuals who have serious violations of laws and regulations such as stock manipulation will also be severely fined.

A few days ago, a certain Niu San was fined as much as 271 million yuan for controlling the use of 87 securities accounts to trade "Dianguang Technology" stocks from December 15, 2020 to November 17, 2021. Another retail investor who lost 14 million yuan due to manipulating the stock of "Dianguang Technology" also received a fine of 1 million yuan.

On February 21, the official website of the China Securities Regulatory Commission disclosed six decisions on penalties related to stock manipulation at one time, including those who created the illusion of active trading through manipulation to mislead and deceive investors, and were fined more than 8,300 yuan; the actual controller of a listed company was fined 8 million yuan for manipulating the company's shares with others; and those who carried out insider trading after obtaining insider information through different relationship chains such as relatives, classmates, and friends, and were fined and confiscated 27 million yuan.

In practice, the phenomenon of market makers and even listed companies manipulating the stock market has been repeatedly prohibited. Today, regulators are using more technical means to increase penalties for such chaos and impose large fines on stock market manipulators. "The regulator will fine the loser hundreds of thousands or even millions, and the profit will be punished according to the amount of profit, after the profit amount reaches a certain amount, the more you earn, the more you will be fined, and no penalty may become the norm. A person familiar with the matter told reporters, "For those who want to manipulate stocks to make a lot of money, what awaits them next may be to be fined and bankrupt." ”

At the same time, the reporter learned from the supervision department that the punishment for securities brokers, accounting firms, law firms and other capital market intermediaries will also be stricter, so as to force them to return to their responsibilities.

First of all, in the IPO stage, once the company is selected for on-site inspection, the intermediary will be extended to inspect, and if there are doubts in the exchange's inquiry response, the sponsor may be supervised on the spot.

Secondly, after the listing of the enterprise, whether it is bond issuance, private placement, etc., or the continuous supervision period of various businesses, if the listed company is suspected of violating laws and regulations, the intermediaries serving it will be paid attention to synchronously, and if they fail to perform their duties, they will be punished.

However, there is currently a lack of necessary legal regulations for third parties who cooperate with listed companies (issuers) in financial fraud. Luo Wei, a member of the National Committee of the Chinese People's Political Consultative Conference (CPPCC) and a first-level inspector of the Office of the Punishment Committee of the China Securities Regulatory Commission, put forward targeted suggestions in the proposal of the two sessions this year, proposing to separately formulate legal liability provisions for third parties that cooperate with the financial fraud of listed companies (issuers). It is recommended to learn from the practice of criminalizing some aiders and accomplices separately in the criminal field (such as the crime of aiding information network criminal activities), and stipulate that the act of a third party cooperating with a listed company (issuer) to commit financial fraud is an independent illegal act.

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