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On April 19, the website of the China Securities Regulatory Commission published an administrative penalty. Zhang, who was the chairman of the listed company Shuzhi Technology at the time, attracted the transferee to take over the shares through block trading during the sensitive period of inside information in 2020 to facilitate the transaction.
In the case, the CSRC stated that block trading is one of the ways of stock trading, and it is illegal to use insider information to engage in insider trading in block trading. Zhang also argued that it was substantially different from typical insider trading and should not be recognized as insider trading.
The peculiarity of this case is not only the way in which the transaction was conducted, but also the penalty result. In general, insider trading is not fined three, but in this case, there is no penalty of six. Zhang was confiscated of about 5 million yuan of illegal gains and fined about 30 million yuan.
Huge goodwill impairment was announced
Mr. Zhang was the chairman and legal representative of Shuzhi Technology at that time, and the actual controller of Shanghai Nuomu.
In 2016, Shuzhi Technology announced its intention to acquire Blackbird Hypersonic Investments Ltd. (hereinafter referred to as BBHI), the relevant acquisition was completed in 2017, and the goodwill amount of 5.628 billion yuan was formed due to the acquisition of BBHI.
Since the first quarter of 2020, affected by the decline in BBHI's performance, the operating situation of Shuzhi Technology has begun to deteriorate. After July 2020, as the situation changed, Shuzhi Technology began to consider whether to carry out goodwill impairment on four wholly-owned subsidiaries including BBHI at the end of the year. After discussion, Zhang and others believe that if the business situation improves in the third and fourth quarters, the amount of goodwill impairment may be relatively small, and if there is no improvement, the amount of goodwill impairment may be billions of yuan.
On October 29, 2020, Shuzhi Technology released its third quarterly report, with a net profit decrease of 96.66% over the same period last year. Zhang began to consider implementing goodwill impairment.
On or about December 20, 2020, Zhang and others went to the Shenzhen Stock Exchange to report the results of the goodwill impairment test, and the Shenzhen Stock Exchange required Shuzhi Technology to announce the goodwill impairment in accordance with laws and regulations.
On December 23, 2020, Shuzhi Technology issued the "Reminder Announcement on the Decline in the Operating Performance of Subsidiaries and the Risk of Goodwill Impairment", announcing that the operating conditions of the four wholly-owned subsidiaries continued to deteriorate in 2020, and it is expected that goodwill impairment will be provided for by about 5.6 billion yuan to 6.1 billion yuan in 2020.
The China Securities Regulatory Commission (CSRC) believes that the huge loss of the company caused by the huge provision of goodwill impairment of Shuzhi Technology is a major event of "the company has incurred a major loss or a major loss" as stipulated in Item 5, Paragraph 2 of Article 80 of the Securities Law, and is insider information as stipulated in Paragraph 2 of Article 52 of the Securities Law before it is made public. The inside information was formed on October 29, 2020 and was made public on December 23, 2020. Zhang is the chairman of the board of directors of the company and is an insider of inside information.
Bulk deals are discounted and shipped
Zhang, as the chairman and legal representative of Shuzhi Technology, is the legal insider of the inside information in this case, and he actively organized and promoted the implementation of matters related to goodwill impairment and knew the inside information.
During the sensitive period of inside information, Zhang sold 19.7 million shares of "Shuzhi Technology" through a block transaction of 124 million yuan and illegal gains of 5.027 million yuan through stock price discounts.
The CSRC believes that Zhang's above-mentioned behavior violated the provisions of Article 50 and Article 53, Paragraph 1 of the Securities Law, and constituted insider trading under Article 191, Paragraph 1 of the Securities Law.
In the course of the hearing, Zhang mainly put forward the following defense opinions: first, his share reduction was passively carried out under the pressure of the securities company's pledge to repay the loan and return the funds of the listed company, and the funds obtained from the share reduction were indeed used for the above-mentioned repayment, which had legitimate reasons and could constitute a cause for illegal obstruction of insider trading.
Secondly, the share reduction does not conform to the typical characteristics of insider trading and is not abnormal.
Thirdly, the transaction method in this case was a block transaction, not a secondary market auction transaction, which is substantially different from a typical insider transaction, and should not be deemed to be insider trading.
Finally, the punishment is obviously unusually heavy, which does not conform to the principle of proportionality of excessive punishment and the purpose of administrative punishment. In summary, Zhang requested to be exempted from punishment.
It is illegal to engage in insider trading through block trading
After review, the CSRC rejected the parties' above-mentioned defense opinions for the following reasons.
First of all, Zhang's defense did not constitute a cause for illegal obstruction. Zhang's assertion that "the shareholding reduction was carried out passively under the pressure of the brokerage broker's pledge to repay the loan and return the listed company's appropriation, and the funds obtained from the shareholding reduction were indeed used for the above-mentioned repayment" is his defense of the motive of insider trading, and is not a "legitimate reason". Zhang, as the chairman of the board of directors of a listed company, should comply with the provisions that the stocks involved in the case must not be bought or sold before the information is made public. Even if the reduction is for the purpose of repayment, it should be reduced after the listed company announces the relevant matters. Zhang sold the stock before the inside information was made public, and used the inside information to obtain additional income, which infringed on the interests of other investors, and the relevant acts constituted insider trading.
Second, Zhang was an insider engaged in insider trading, and his trading behavior involved in the case was also obviously abnormal. Zhang's subjective intention to use inside information to make a profit was obvious. The behavior of selling "Shuzhi Technology" by the accounts of "Zhang" and "Shanghai Nuomu" controlled by Zhang is highly consistent with the formation process of inside information. Zhang used a "discount" method to attract the transferee to undertake the shares in order to facilitate the transaction, and the urgency of his shareholding reduction was high, and the relevant trading behavior was obviously abnormal.
Thirdly, block trading is one of the ways of stock trading, and it is illegal to use insider information to engage in insider trading in block trading.
Finally, the punishment in this case was appropriate. As the chairman of the board of directors of a listed company, Zhang engaged in insider trading, with a transaction amount of up to 124 million yuan, and the circumstances were vile.
Based on the facts, nature, circumstances and degree of social harm of the parties' illegal acts, and in accordance with the provisions of Article 191, Paragraph 1 of the Securities Law, the CSRC decided to confiscate 5.027 million yuan of illegal gains and impose a fine of 30.1618 million yuan on Zhang.
Source: Brokerage China
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