In January, China’s securities regulator handed down its first punishment for a lawyer who engaged in insider trading. Mi Xingping, a partner at top Beijing law firm Jun He Law Offices, had leaked information about a merger he was working on to a relative who traded on it, the regulator said.
Such an act in the United States would no doubt result in disbarment and possibly jail time. Last November, Matthew Kluger, a former senior associate in the Washington, D.C., office of Wilson Sonsini Goodrich & Rosati, was disbarred and given a 12-year prison sentence for passing on insider information from his work.
So what did Mi get?
The China Securities Regulatory Commission imposed a $5,000 fine, with Mi’s position at his firm and license to practice undisturbed.
Yan Yiming, an independent litigator in Shanghai, says the prospect of such a small fine would not deter anyone who saw a chance to make serious money, and might frankly encourage others to take a chance. “This level of punishment is far from enough to prevent insider trading from happening again,” he says.
But Yan also thinks the paltry penalty simply underscores the prevailing notion among the nation’s professionals that insider trading is not exactly beyond the pale.
“In China, insider trading is not considered a very bad thing,” he says. “People who are able to obtain the information and profit from it are considered capable instead of being guilty of a crime. The society is more tolerant of it.”
Many lawyers say they believe insider trading is common among those working at leading law firms in China.
“It might be something people talk about over dinner with friends, and all they see are short-term financial opportunities,” King & Wood Mallesons Shanghai partner Meg Utterback says. “They think about making a dollar or a kuai before they think about breaking the law.”
Utterback says one issue is that the ethical standards are different for lawyers in China. Though there is a duty of client confidentiality, it doesn’t carry the same weight as the equivalent in the U.S., she says. “U.S. attorneys have the requirements of privilege emphasized again and again through law school and the bar exams.”
Mi, who joined Jun He in 2002 and became a partner in 2010, was hired by Beijing-based, Shenzhen-listed advertising production company BlueFocus Communications Group to conduct due diligence on a proposed acquisition of rival Catch Stone Advertising (Beijing) Co. Ltd. in 2010. According to the CSRC, Mi disclosed BlueFocus’ plans to a cousin, Feng Xili, who subsequently bought $48,300 in BlueFocus stock and then sold it four months later for a $7,700 profit.
The CSRC said Mi’s defense was that he had not benefited from Feng’s trading. Though the regulator said it traced Feng’s initial $48,300 back to Mi, the partner claimed the money belonged to a colleague and that he only acted as an intermediary. But the CSRC found Mi guilty of leaking insider information, whether he made a profit or not. Feng was fined $23,000 for his role in the scheme.
Mi declined to comment on the matter. Jun He managing partner David Liu also did not respond to requests for comment, and other partners at the firm declined to comment as well.
The relatively small amount made by Feng may have been a factor in the light punishments for him and Mi. Chinese law does provide for punishments of between five and ten years in prison for instances of insider trading that are “extremely serious,” with the amount of profit largely seen as the key measure of seriousness. A court in Guangdong province last month upheld a seven-year sentence for a former general manager of a Shenzhen battery maker who netted $3 million trading in his company’s stock ahead of an acquisition.
Some lawyers say such cases have raised consciousness of the risks of insider trading. “People no longer think it’s easy to profit from insider dealings,” says a Shanghai partner with one of the largest Chinese firms. “The risk is too high. I knew people who went to jail for it. Fewer are willing to take the chances.”
A Shenzhen-based lawyer with a Chinese law firm says the CSRC’s scrutiny has probably made it more likely that lawyers engaging in insider trading will be caught. In Mi’s case, records of calls between him and Feng showed that they were in unusually close contact during the time prior to the planned transaction.
Basil Hwang, a partner in Hong Kong with Zhong Lun Law Firm, says that law firms need to do a better job educating lawyers and nonlawyer staff on what is insider information and what is not. “I don’t think the level of awareness is sufficient in any law firm, but western and Hong Kong firms tend to be more sensitive,” he says.
Utterback says Mi’s case does suggest the CSRC is taking a more active role investigating listed companies. “Previously, we really only saw these cases coming from regulators outside of China,” she says. “My prior insider trading work in China all related to Chinese companies listed in the U.S., where a third party had accused someone of insider trading under U.S. law. Obviously, we are going to see the Chinese regulators taking a closer look at these same issues.”
In 2013, among the 84 official administrative penalty notices the CSRC issued, 37 of them involved insider trading. Last August, state-owned brokerage Everbright Securities received a record fine of $85 million for insider trading on its proprietary account, with four people, including former president Xu Haoming, each fined $100,000 and banned for life from the securities and the futures markets.
But many are still skeptical about future enforcement efforts. Yan, who is currently representing multiple investors suing Everbright over losses they claim resulted from market turmoil caused by the brokerage’s insider trading, thinks the government needs to show it will consistently police such activity.
“We did see swift reaction and harsh penalties from the government recently,” he says. “We hope they can keep it up, but it’s hard to expect real changes just because of one or two examples.”