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Amid vigorous crackdowns on illegal securities and futures activities, the Prior Notice of Administrative Penalty issued by the China Securities Regulatory Commission (CSRC) is often merely the prelude to a crisis. The lurking risk of criminal prosecution is the Sword of Damocles hanging over the responsible persons.

 

01 Case Overview

Recently, a major breakthrough has been achieved in an administrative penalty case involving listed company information disclosure violations represented by our Firm’s Capital Market Team. Leveraging solid interdisciplinary expertise covering law, finance and accounting, the team accurately identified key grounds for appeal and defense. Not only was the benchmark administrative penalty imposed on the client substantially reduced, the annual illegal guarantee amount was cut by RMB 1.2 billion. The proportion of guarantee amount against audited net assets dropped sharply from 71.75% to 35.62%, pulling the client completely below the threshold for criminal filing and prosecution and thoroughly eliminating criminal risks for relevant liable persons. The client spoke highly of the team’s professionalism and case judgment capability, stating specially: “Your law firm’s team has helped us avoid criminal risks, far exceeding our expectations. We offer our sincere gratitude!”

02 Core Challenge: Data Recognized in the Prior Notice of Administrative Penalty Crosses Criminal Filing Threshold, Threatening Corporate Operation and Personal Fortunes

This case arose from an information disclosure violation: a wholly-owned subsidiary of the listed company improperly used time deposit certificates to provide pledge guarantee for loans of its controlling shareholder without timely disclosure. In the Prior Notice of Administrative Penalty, the CSRC preliminarily determined that the cumulative illegal guarantee amount of the company in 2017 stood at RMB 2.2155 billion, accounting for as high as 71.75% of the listed company’s audited net assets for that period. This figure implied severe risks of criminal liability.

In accordance with the Provisions of the Supreme People’s Procuratorate and the Ministry of Public Security on Standards for Filing Criminal Cases under the Jurisdiction of Public Security Organs (II), where the amount involved in illegal guarantees reaches or exceeds 50% of the latest disclosed net assets, the threshold for filing a criminal case for the crime of illegally disclosing or failing to disclose important information is met. Under the initial determination, relevant persons of the company would face criminal filing and criminal liability. Therefore, this defense went far beyond responding to administrative penalties alone; it constituted a crucial battle concerning the normal operation of the enterprise and safeguarding the personal freedom and professional future of relevant personnel.

03 Breakthrough Strategy: Penetrate the Appearance of Transactions and Rectify Evidentiary Findings in Accordance with Law

Based on financial practice and civil and commercial legal rules, our Capital Market Team conducted in-depth investigations beyond the surface of loan contracts and guarantee contracts, submitted defense arguments from two core dimensions, which were ultimately recognized and adopted by the CSRC adjudication department:

(1) Clarify the nature of guarantees and eliminate duplicate statistical amounts

Initially, the CSRC investigation department classified one bank-operated “deposit certificate split and re-pledge” as two independent guarantees, resulting in duplicate calculation of an amount up to RMB 600 million. After careful verification, our team pointed out that both pledges secured the same principal loan of RMB 500 million. They merely constituted succession and replacement of the existing guarantee structure without generating new debts or substantial risk exposure, and should not be double-counted in the cumulative illegal amount.

(2) Clarify the accessory nature of guarantee contracts relative to principal contracts and adjust the statistical year for accounting purposes

Although one pledge contract was signed at the end of 2017, the corresponding principal loan was actually disbursed in early 2018. Pursuant to the accessory principle of guarantee contracts under the Civil Code of the People’s Republic of China, our team argued that the guarantee became effective together with the principal contract starting from 2018 and produced no legal effect in 2017. Accordingly, this RMB 600 million guarantee should be reclassified to the 2018 statistical period, leading to another reasonable deduction of RMB 600 million from the 2017 illegal guarantee base.

04 Case Outcome and Practical Value: From Mitigated Administrative Penalty to Elimination of Criminal Risks

Supported by our team’s professional defense, the CSRC adopted our core arguments in its Decision on Administrative Penalty. The cumulative illegal guarantee amount for 2017 was adjusted downward from RMB 2.2155 billion to RMB 1.015 billion, and the corresponding proportion against net assets was revised from 71.75% to 35.62%. This ratio is well below the 50% threshold for criminal case filing, successfully blocking the risk of criminal prosecution against relevant liable persons.

This major revision of recognized monetary amount and factual findings carries great significance for preventing administrative and criminal liabilities. At the administrative liability level, the finding of serious illegal circumstances was substantially lowered and the administrative penalty amount markedly reduced. At the criminal liability level, the illegal ratio fell below the criminal filing threshold, eliminating criminal legal risks at the source.

05 Compliance Insights: Proactive Risk Control and Professional Defense — Twin Engines for Crisis Resolution

Drawing practical experience from this case, our Firm puts forward the following compliance and risk control suggestions for capital market participants:

(1) Active Response. Faced with regulatory investigations and penalty notices, passive resistance should be avoided. Parties shall actively exercise statutory rights including statement and hearing to strive for rectification of factual findings.

(2) Professional Response. Securities violation cases span multiple disciplines including law, finance and accounting. Engaging interdisciplinary professional lawyers helps deliver effective statements and defense opinions, correct factual misjudgments, strive for mitigated, reduced or exempt penalties, and prevent transfer of cases for criminal investigation.

(3) End-to-End Risk Control. Compliance risk control for capital market participants shall be advanced and implemented throughout the whole process. Early-stage compliance training shall eliminate risks before violations occur. Where potential violations emerge, timely internal rectification and professional response shall be arranged, including cooperating with administrative investigations, submitting defense evidence and statements, conducting cross-examination in penalty hearings, presenting professional defense opinions, and conducting subsequent criminal risk assessment.

Compliance management and dispute resolution in capital markets are highly complex. Our Firm has long focused on capital market compliance, securities administrative proceedings and criminal defense, providing full-spectrum, multi-dimensional compliance legal services for listed companies and capital market entities. By deeply integrating law, finance and accounting, we build systematic compliance risk prevention systems, supporting listed companies and other capital market participants to achieve steady development amid stringent regulation.

http://www.billions-lawyer.com
Shanghai BillionsLawyer LLP

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