The mystery of the Zhongke case

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Topic:A share trading uniform

Several legal issues regarding the Zhongke Entrepreneurship Case

Wen/Zhu Weiyi

On June 11, 2002, the Zhongke Entrepreneurship (hereinafter referred to as "Zhongke") case The Beijing Second Intermediate Court opened a trial. This case cannot be attacked for a long time, obviously it is difficult. As long as it is a major case, we have always been strict and fast. The Zhongke case can be regarded as a major and important case, but after the trial, it was difficult to move forward. It seems that the judges and prosecutors encountered difficulties. What will be the problem?

Procedural issues

The judges tried very hard to hear the case. In the first trial, he sat on it for more than four hours without squinting his eyes, and looked attentively and attentively. It seems that manipulating the price of securities trading is laborious, and it is more laborious to try the crime of manipulating securities trading prices.

It is said that one of the advantages of our court trial is that the judge can give full play to his subjective initiative, but the judge in the Zhongke case does not seem to be able to effectively control the procedure and rhythm. On the first day of the trial, the defendant Ding Fugen (hereinafter referred to as the "defendant") was tried. The prosecutor kept asking questions for too long, and he asked for more than two hours in one go. The two judges then asked for more than forty minutes. In this way, when the lawyer defends and asks questions, it is very difficult for everyone to think back to the previous question. The prosecutor still asked questions according to the original text, which seemed far-fetched. It can be seen that the public prosecutor is deliberately imitating the US court trial questioning, but it seems to be unsuccessful.

The judge seems to be incapable of controlling the situation, which is excusable. The judge does not often face so many reporters and observers. Where is the prosecutor? The prosecutor can speak more clearly, but lacks strong motivation. Because we do not have a jury, nor do we have amateur judges in Germany (Germans do not have a jury, but they are all collegiate benches for felony trials, and their members include amateur judges composed of ordinary citizens).

The jury has many shortcomings. The biggest problem is that the jury members do not understand the law. They have not received professional legal training, which is a challenge to prosecutors and defense lawyers. Because the members of the jury are not legal professionals, the public prosecutor and the defense lawyer need to clarify the issue more clearly. The public prosecutor especially needs to make it clear, because the burden of proof in criminal proceedings lies with the public prosecutor. This has the advantage of forcing the prosecutor to be clear, clear, and clear again. The prerequisite for clarity is that the prosecutor himself must first investigate the problem clearly. If the prosecutor can do this, the law and the rule of law can be deeply rooted in the hearts of the people, which is more important than punishing the defendant.

The key issue of manipulating the price of securities trading

But not everything is not satisfactory. Judges, prosecutors and defense lawyers have shown high professional standards, and they have also grasped the problem. Key points: 1. Whether the defendant knowingly and intentionally; 2. Whether the defendant received improper benefits.

(1) Subjective and deliberate

The defendant was charged with the crime of manipulating securities trading prices (hereinafter referred to as "manipulation"). Because it is a criminal offence, the public prosecutor has the burden of proof and must prove subjective intention, that is, the defendant has a subjective desire to manipulate securities. The defendant has repeatedly emphasized that many things he did not know at the time, and only learned after the fact. The prosecutor repeatedly emphasized that the defendant had followed Lu Liang very early and it was impossible not to know. The implication is that knowing is subjective intention.

But knowing is not the same as subjective intention. General traders can be informed, but they do not necessarily have subjective intentions. Because here the defendant is regarded as the tool of the principal offender, and the tool does not have its own subjective intention. Scribing is indeed more difficult. Before the Berlin Wall was demolished, a total of 176 people died after crossing the Berlin Wall. Many of them were shot and killed on the spot by the East German border guards. After the reunification of the two Germanys, courts were held to try the perpetrators at the time. The leader of the East German Party, Honecker, ordered the shooting and was naturally tried. But what about the soldier shooting below? Are soldiers also guilty of murder? But the soldier thought he was innocent and just executed the order. At that time, East German law prohibited its citizens from going to West Germany without permission.Allow them to vote with their feet. Therefore, it is difficult to say that the soldier who fired the gun was guilty. What about the Nazi guards who slaughtered Jews in the concentration camps? Are they guilty of murder?

Of course the leader of the concentration camp is guilty, but what about the guards below? The answer depends on many factual questions, such as: the position of the guard, is it to execute the order completely, or to kill indiscriminately? The same is true for the guards on the border of East Germany. If they can avoid bloodshed, but they wantonly shoot people who cross the border, then they are more likely to be convicted. This is similar to the standard for judging bad people in daily life. We look at whether a person is a bad person, not whether he will only do good and not bad things all his life, or even whether he is at the expense of others and himself, but whether he takes pleasure in harming others and detriment to himself. Those who build their happiness on others’ pain and do things that hurt others and themselves are bad guys (don’t worry about the low standards. If you can do nothing that hurts others and yourself, it’s not easy. Up).

Some people will say that this is a matter of fact, not a legal issue. Yes, it is a matter of fact. Legal issues and factual issues are often intertwined, and there is no clear dividing line at the junction of the two. Moreover, it can be said that the legal issues in litigation are all issues of fact after all, at least they are inseparable from issues of fact.

Of course, how much money the defendant took is also very telling. If the defendant doesn't take much money, then there is even more reason to believe that he is forced to make a living, but only a tool, without his own subjective intention. The more money you take, the more it shows that the defendant is not only involved, but may be the main participant and planner (otherwise, how can you get a lot of money). Of course, whether the defendant takes a lot of money is also relatively speaking. Compared with the judge, the defendant has a lot of money. But if compared with Lu Liang, the defendant's income is not too much.

Therefore, in addition to determining whether the defendant is the main planner of Zhongke, it is also necessary to determine whether he is the main commander. The prosecutor seemed to prove this. The defendant raised funds for the stock market. Raising capital is not equal to the subjective intention of manipulation, but the people who can draw huge sums of money are not the idle generation, their status will not be too low, at least they are not ordinary traders. Lu Liang and others set up a number of companies as tools for raising funds and stocks. The defendant is a legal representative in at least one of the companies.

(2) Improper benefits

According to Article 72 of the Securities Law, the purpose of manipulation is to "obtain improper benefits." The defendant and the prosecutor debated this in court. The prosecutor believes that the wages, bonuses and housing allocated from the company by the defendant are all benefits referred to in the "Securities Law." The defendant's lawyer agreed with the prosecutor's point of view in court. Obviously, the term "interests" should be interpreted in a broad sense.

How the judge wrote in the judgment of the above two issues will not have much impact on the outcome of the Zhongke case itself, because there is enough evidence to convict him. But if it is not clearly defined, it may cause unnecessary panic for the trader.

The trouble with this case is that the principal offender has not been brought back to justice, and the extent of the role played by the defendant and others is difficult to determine. The defendant may have gone astray involuntarily. But it may also be because the principal culprit is not there, so the responsibility is passed on to the principal. As long as the principal offender does not return to the case, the prosecutor will be passive and the judge will be passive. The passivity of the prosecutor is the passivity of the judge, because the judge has to write the judgment in the end. This is probably a reason why the Zhongke case cannot be attacked for a long time. But in the final analysis, it is because the crime of manipulation is relatively serious. As long as the people who talk about the rule of law, they are a little bit of a rat and don't dare to be careless. So is there an alternative?

The application of investment contracts and securities laws

Manipulation is a transaction issue. You can also look at whether Zhongke’s fund-raising behavior itself is legal. In this regard, my country’s securities laws are almost blank. Simply call many financing methods "illegal financing". It can also be refined under the US Securities Law.

(1) The application of securities and securities laws

Zhongke’s practice has also been done in the United States. After long-term exploration, the US courts and lawyers Define it as an investment contract, which in turn can be regarded as a security. The U.S. Securities Law has a broad definition of securities. Stocks, bonds, promissory notes, investment contracts, and partnerships can also be regarded as securities. As long as it is a securities, it must follow the issuance procedures of the Securities Law and make a large amount of disclosure. (See the picture on the left and the appendix "What are securities?")

The Securities Law applies to listed companies and companies issuing securities. If the non-listed company has more than 500 shareholders and no less than 1 million assets, the "Securities Law" also applies.

(2) Investment contract

The investment contract has three elements: 1. Invest in cash; 2. Have a common business; 3. In addition, investors rely on the efforts of others to make profits . Whether the investment contract is a security,It also depends on other factors, including:

1. Whether investors actively participate in management

Some issuers try to make some adjustments in management, but the judges are very strict. , Do not want to be easily recognized. The judge depends on whether the investor has time to participate in management and whether he has the ability to participate in management. If it is not, the investment contract may be considered a security. For example, some issuers have suggested that investors watering trees every year are also participating in management. The judge did not support this statement.

US judges emphasize substance rather than formality. Even if investors participate in management on the surface, such as in the form of partnership, if investors still have to rely on other people for profit, the judge will consider it as an investment contract .

2. Ways to sell investment contracts

US judges need to see whether investment contracts are sold to the public in large quantities. A bulk sale is different from a one-on-one two-party transaction and is usually considered an issue. If it is a one-to-one transaction between two parties, the investment contract is not considered a security. The purpose of the securities law is to protect the majority of investors. One-to-one sales are not public offerings, so the securities law does not apply.

3. Whether there is a market in the investment contract

It depends on the market, whether it is an over-the-counter transaction or an on-exchange transaction, and whether there is a market maker. The market maker is an important symbol of the American exchange. Merrill Lynch’s sale of certificates of deposit was once deemed to be securities. Certificates of deposit are generally not considered securities. But Merrill Lynch not only acted as a broker for the certificate of deposit, but also made the market for it.

4. Are there other laws applicable?

When a US judge decides whether an investment contract is a security, the factors to be considered include whether, in addition to the securities law, there are other laws restricting the Vouchers to avoid legal blind spots.

Zhongke’s fundraising exactly meets the three criteria of the US investment contract. What Zhongke raises is cash (cash investment), which is mainly used to buy and sell Zhongke stocks (joint undertakings), and profits depend on the efforts of others (stock speculation by Lu Liang and others). China Science and Technology can have many agreements for financing, including securities investment agreements, government bond management entrusted agreements, entrusted wealth management and loan agreements, but many of these agreements have the characteristics of investment contracts. There are also a large number of investors. They have signed cooperation agreements and entrusted financial management agreements with more than 100 investment units or individuals, raising a total of approximately US$5.4 billion. Zhongke also uses 1,500 personal accounts, which may also be regarded as securities issuance (see the appendix "What are securities?")

(3) It may also be a fund

In the United States, if the borrower is a company and uses more than 40% of its assets for securities investment, the borrower may be regarded as an investment company-our securities investment fund. If it is an investment company, it is subject to the "Investment Company Law" (equivalent to the "Securities Investment Fund Law" draft that we are still discussing). Zhongke is very similar to such a company, because most of its funds are used for stock trading, that is, securities investment.

Securities and Illegal Financing

According to my country's "Securities Law", whether financial products are securities is determined by the State Council. When encountering problems similar to those in the United States, most of us are accused of "illegal financing" or "illegal fund-raising", which are resolved by government agencies other than the securities regulatory authority.

There are several problems with this. First, "illegal financing" is often a criminal offence. But financiers usually just want to profit by evading regulation, without much malice. If the scale of financing is limited, it will not cause excessive harm to the stock market. The crime of illegal financing seems too great.

Second, the definition of illegal financing is more vague than the definition of securities, although the definition of securities is already very vague. As a result, many financing practices are neither illegal financing nor securities. On the contrary, there is no applicable law and they evade supervision. At present, China has more illegal financing, which harms the interests of investors and also the interests of securities companies. Brokers are afraid of insider trading, but welcome the crackdown on illegal financing. The US approach is also objectively beneficial to brokerage firms. Because brokers usually do not bypass the securities law to engage in issuance. Coupon merchants have a big business and will not take risks easily. Furthermore, the brokers are good at raising funds for the company, relying on it to raise funds for the company.

Third, the so-called illegal financing often has the characteristics of securities, and in fact it is also a flexible product launched by issuers to circumvent securities supervision. Compared with other government departments, securities regulatory agencies have more experience, skills, and powers in this regard.

In addition, illegal financing and illegal fund-raising also need to be distinguished. The two are often used as synonyms for each other, but they are not the same. Legal analysis is a bit like the split of Shanghai Xiaokai in the past. It is not only combed shiny and shiny, but also needs to be sorted out. Both are illegal money traps. If you look into it carefully, there is usually an enterprise or company for illegal financing, which is a kind of scammer with a family business. People like Deng Bin also collect money, but they can’t be counted.It was financing, because they had nothing, it was a complete fraud. Most of the illegal fund-raising started in the first place. Illegal fund-raising people are fierce as desperadoes. The securities regulatory authority is too weak to subdue this stubborn evil. The combination of the military, police, constitution, and special forces is more promising. Some illegal fundraisers may still come from Hong Kong and Macao compatriots or Taiwan, disguised as patriotic compatriots, which will alarm the Hong Kong and Macao Affairs Office and the Taiwan Affairs Office. If the illegal fundraiser is an international student, the Board of Education may have to come forward.


There are two practical meanings to clarify the definition of securities: 1. Expand the scope of securities supervision; 2. The legal basis for flexible securities supervision. Clarifying the definition of securities and expanding the scope of application of the securities law will increase the responsibilities of the securities regulatory authority and involve the division of powers between it and the central bank. Fortunately, the definition of securities is a case-by-case, which can be flexibly controlled. In addition, a clear definition of securities can increase the legal basis for penalties and, if necessary, help avoid penalties for criminal liability.


What are securities?

The definition of "securities" in the U.S. Securities Law is very broad, including stocks, notes, bonds, and investment contracts. Section 2(1) of the Securities Act of 1933 in the United States stipulates:

Unless the context requires otherwise, any bills, stocks, financial instruments, securities, corporate bonds, debt certificates, benefits in profit sharing agreements Or participate in any interest or evidence normally regarded as securities are securities referred to in this law.

There are similar provisions in Article 2 of my country’s Securities Law:

This law is applicable to the issuance and trading of stocks, corporate bonds and other securities recognized by the State Council in accordance with the law in China.

The definition of securities is a matter of threshold. Whether investment certificates are classified as securities is related to the applicability of the securities law. In order to circumvent regulation, the company does everything possible to bypass securities. Among all types of securities, investment contracts have the most changes, and bull insemination and pyramid schemes have also been used to bypass securities. Therefore, lawsuits concerning whether financial products are securities have occurred in the United States from time to time, and sometimes alarmed the Supreme Court of the United States to hear cases, define the definition, affirm the definition, or amend the definition.

1. Stocks

Stocks are the most common securities, including common stocks, preferred stocks and convertible bonds. Convertible bonds are securities that are also bonds and stocks, but are usually regarded as stocks.

2. Bonds

Corporate bonds are securities and are subject to the restrictions of securities regulatory authorities. However, in China, for a long period of time, the issuance of bonds by enterprises has not been supervised by the securities regulatory authorities, which is a big gap in the regulatory system.

According to the securities laws of the United States, bonds issued by governments, commercial banks, or non-profit charitable organizations are also securities, but they can enjoy exemptions. China’s "Securities Law" also has similar provisions, that is, "The issuance and trading of government bonds shall be separately regulated by laws and administrative regulations."

3. Bills

US "1933 Securities The definition of securities under the Law is very broad, and there are inevitably many exceptions in practice. Section 3(a)(10) of the Securities Exchange Act of 1934 provides for an exception, that is, "any note whose debt repayment period does not exceed 9 months at the time of issuance" is not a security. But there are exceptions in the exceptions. The US courts have made many more rules based on specific circumstances. Although it is not a case for one proposal, the boundary is already like a flowing sand line, and it is difficult for experienced lawyers to grasp it.

IV. Options

Put options, call options and general options are all securities and are subject to securities laws.

5. Futures contracts

According to the US "Commodity Futures Trading Commission Act", the definition of commodities includes securities. Securities futures contracts and stock exchange indexes are supervised by the Futures Trading Commission.

VI. Investment contract

(1) Definition of investment contract

An investment contract is when investors invest money in a common business, and Relying solely on the efforts of others to make profits. Money (money) is money in a broad sense. Savings paid by employees to participate in retirement funds are also considered money. Common enterprise refers to the pooling of investors’ money in one place for common purposes. Expected profits is a narrow interpretation. Pensions paid by employees are not counted as profits, because most of the funds for pensions are provided by the employer, not profits from the funds paid by employees. Relying solely on the efforts of others (solely from efforts of the promoter or a third party) means that the investor’s profit does not depend on the investor’s own efforts, but on the efforts of others.

Whether the investment contract is a security or not involves other factors, including:

1. Whether investors actively participate in management

Some issuers do something in management As a workaround, if some issuers propose, investors also participate in the management of watering the trees every year. But the judge depends on whether the investors have time to participate in management and whether they have the ability to participate in management.

American judges emphasize substance rather than formality. Even if it appears that investors participate in the management, if it appears in the form of a partnership, if in fact investors still have to rely on promoters or other people for management, the judge will consider it as an investment contract.

2. Ways to sell investment contracts

Mass sale to the public is different from a one-to-one two-party transaction, which is usually regarded as an issue.

3. Whether there is a market for the investment contract

It depends on whether it is an over-the-counter transaction or an intra-exchange transaction. It also depends on whether there is a market maker. The market maker is an important symbol of the American exchange. Merrill Lynch’s sale of certificates of deposit was once deemed to be securities. Certificates of deposit are usually not considered securities. But Merrill Lynch not only acted as a broker for the certificate of deposit, but also made the market for it.

4. Are there other laws applicable?

American judges must also consider whether there are other laws that restrict the voucher in addition to the securities law to avoid legal blind spots.

(2) Whether various forms of investment are securities

The limited partnership depends on whether investors actively participate in management. If not, it is assumed that the ownership of the limited partners is securities, but this assumption can be refuted.

If an unlimited partner is in charge of an unlimited partner (general partnership), and the other unlimited partners just passively obey, the judge may treat it as securities.

Loan participation voucher (loan participation) was launched by the U.S. Commercial Bank in the late 1960s. At that time, inflation and market interest remained high. U.S. commercial banks launch such certificates in due course. The bank issues loans and depositors have certain property rights in the loans. This approach aims to circumvent the supervision of high interest rates by the regulatory authorities. Loan participation certificates are generally not considered securities.

Real estate may also be regarded as a tool for issuing investment. The factors involved are: whether the real estate business is fully entrusted to others; whether the rental house can only be handled by a third party; whether the business returns are emphasized. If the answer is all yes, the property rights may be regarded as "securities issued."

Pension plans or employee benefit plans allow employees to own stocks or options . Such stocks or options are usually not securities in the legal sense, unless the employee’s resignation, resignation or retirement may involve stocks or options. For example, some employment contracts stipulate that if employees leave, resign or retire, they must sell stocks.

Discretionary account (discretionary account) is authorized by the client to buy and sell securities or commodities by the broker. The broker can choose the type, time and price of securities. Such accounts are usually not considered securities unless many accounts are pooled together at the same time.

Whether marketing franchise (franchise) is a security depends on whether there is risk capital. Risk capital is the cash or assets invested by investors in a company in exchange for equity or common stock in the company, and this type of investment is not a loan. According to the concept of venture capital, as long as the marketing franchise assignee’s investment is part of the initial capital, and the marketing franchise assignee cannot control the marketing franchise enterprise, the marketing franchise is a security⑦. The judge held that if the marketing franchise cannot control the enterprise, the amount of return on its investment is actually controlled by the marketing franchise. This idea is actually a continuation of the concept of "relying on the efforts of others to profit only".

The typical form of membership is a club membership card. But as long as the membership status cannot be changed hands, it cannot be regarded as securities.

Whether business cooperatives are considered securities depends on the potential return on investment and the transferability of equity.

If animal breeding programs depend on professional knowledge, such contracts may be regarded as securities.

MLM (pyramid sale scheme) can also be considered as securities issuance. MLM is an investor who obtains a promise after purchasing a product, and the investor can get a commission every time he sells another product in the future. MLM can also be regarded as investment contract securities. Investors also make efforts in MLM, but the judge believes that the efforts of investors are secondary. The management of MLM is still in the hands of others, and the success of MLM depends on the efforts of others.

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Label group:[stock] [investment] [stock issuance] [legal] [securities] [securities law] [market manipulation] [contract management] [illegal fundraising] [judge] [Illegal financing

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