The Defense Approach to the Inappropriate Evidence Confirmation in Insider Trading and Insider Information Disclosure Crimes
Preface
The evidence determination process for insider trading and insider information leakage cases involves identifying insider information, confirming the identity of the subject, fixing the contact trajectory, verifying abnormal transactions, and excluding defense reasons. Ultimately, a closed-loop determination of the entire case evidence chain is achieved. However, in practice, there are many problems such as "excessive presumption" leading to a lowering of the proof standard, ambiguous criteria for abnormal transactions, and the lack of completeness of the indirect evidence chain. In the criminal defense process, strategies such as "fine-grained defense of insider information", effectively dismantling the presumption rules of "abnormal transactions" and "contact and transaction consistency", and strictly controlling the completeness of the indirect evidence chain should be adopted to effectively address these issues.
Unlike traditional criminal offenses, the behaviors in insider trading and insider information leakage cases often occur in private scenarios of information transmission. The facts of insider information leakage are difficult to fix, and a large number of transaction behaviors are completed online, lacking the common physical traces and direct verbal evidence found in traditional crimes. This makes evidence determination the core difficulty in handling such cases, especially in the handling of "zero confession" cases, which poses a high difficulty in obtaining evidence. In view of this, in recent years, through the handling of a large number of typical cases, judicial practice has gradually formed a set of evidence determination rules system centered on objective evidence and supported by the indirect evidence chain to address the characteristic of such criminal behaviors being difficult to verify. However, this set of evidence rules has also gradually exposed many controversial issues, such as excessive presumption leading to objective conviction, ineffective closure of the evidence chain, and inability to exclude reasonable doubt. Therefore, the existing rules in practical operation are worthy of further reflection and discussion.
01 Review of the Evidence Determination Rules for Insider Trading and Insider Information Leakage Cases
The evidence determination rules system for insider trading and insider information leakage cases has been gradually constructed in the long-term judicial practice. It relies on the general evidence rules of traditional criminal litigation and forms an independent normative logic based on the particularity of securities crimes. It can be divided into three levels: legislative normative level, judicial interpretation level, and practical operation level.
From the legislative normative level, the criminal charge statement directly clarifies the basic direction of evidence collection and determination for such cases, namely the five core elements of "insider information", "subject identity", "information transmission", "transaction connection", and "subjective intent". Combined with multiple judicial interpretations and normative documents on securities and futures crimes that have been issued successively, a specialized evidence rule system for such cases has been gradually established.
First, the "sensitive period rule". That is, by defining the specific time period from the formation to the disclosure of insider information, the time boundary of transaction behavior is clearly limited. All transactions that occur within the sensitive period are generally considered to meet the time conditions for insider trading.
Second, the "abnormal transaction rule". That is, by comparing the historical transaction habits of the perpetrator, large-scale concentrated transactions that significantly deviate from their past operation patterns are taken as the core basis for presuming the existence of a connection between the transaction behavior and insider information.
Third, the "contact and transaction consistency rule". This is the most widely applied evidence rule in current judicial practice. That is, as long as it can be proved that the insider information insider and the perpetrator had contact during the sensitive period and the perpetrator carried out an abnormal transaction that was highly consistent with the insider information within a short period after the contact, and the perpetrator cannot provide a reasonable explanation, the insider trading behavior can be determined to be established.
Fourth, the "zero confession determination rule". That is, in cases where the defendant refuses to confess and there are no direct verbal evidence to prove the process of insider information transmission, through the mutual confirmation of multiple pieces of indirect evidence, a complete evidence loop can be formed, and the criminal facts can be determined to be established. It can be seen that at the practical operation level, a relatively fixed evidence determination process has been formed. It starts from the determination of insider information, gradually proceeds to the confirmation of the subject's identity, the fixation of contact trajectories, the verification of abnormal transactions, and the exclusion of defense reasons, ultimately completing the closed-loop determination of the entire case evidence chain.
In terms of the application of evidence types, such cases highly rely on the probative force of documentary evidence. Objective documentary evidence such as securities trading records, bank fund details, communication call records, company internal meeting minutes, and appointment documents occupy the core position of the entire case evidence system. Verbal evidence mainly plays the role of auxiliary confirmation. This evidence rule system centered on objective documentary evidence has largely reduced the risk of erroneous cases caused by the instability of verbal evidence and solved the conviction problems of a large number of insider trading cases lacking direct evidence.
02 Reflection and Doubt on Evidence Rules
Although the current insider trading evidence rule system has played a significant role in combating securities criminal activities, with the continuous increase in the number of cases in practice, the inherent logical flaws and operational boundaries of this system have gradually emerged, triggering multiple doubts.
Firstly, "excessive presumption" leads to a lowering of the proof standard. The fact presumption mechanism widely used in the current rules, which aims to solve the practical problem of the secrecy of insider information transmission and the difficulty of obtaining direct evidence, is gradually expanded in application during case handling. One should be cautious to prevent this presumption rule from being overly applied, avoiding the extreme situation of directly equating "time coincidence" with "insider trading". If there is a short call duration and few calls between the two parties during the sensitive period, it is not advisable to directly determine the existence of insider information transmission, but the rationality of the call content should be considered, and other normal business or family relationships between the two parties should be further investigated. Conversely, if the presumption rule is applied, it means disregarding the highest proof standard of "excluding reasonable doubt" and improperly transferring the burden of proof from the prosecution to the defendant. That is, if the defendant cannot provide a "reasonable explanation" for their trading behavior, they will be directly presumed guilty, which fundamentally violates the principle of presumption of innocence.
Secondly, the definition of "abnormal transactions" is ambiguous. In current judicial practice, there is a lack of a unified and clear quantitative standard for the determination of "abnormal transactions". Different judicial authorities have significant differences in their interpretation standards. Even if the actor traded the relevant stocks during the sensitive period, it cannot be directly determined as "abnormal transactions". Instead, it should be comprehensively judged based on various factors such as whether the actor had a long-term tracking history of the stock in the past, the proportion of the transaction amount in the total funds of the account, and many other factors.
If the actor's trading behavior during the sensitive period fully conforms to their long-term trading habits, but just happened to buy the involved stocks, it should not be directly determined as an "abnormal transaction". This ambiguous determination standard directly breaks the boundary between "normal investment behavior" and "insider trading behavior". The independent investment judgment made by the actor based on public market information may be labeled as "abnormal transaction" at any time, expanding the scope of crackdown on insider trading crimes.
Finally, the review standard for defense reasons is overly strict. Under the current evidence rules, the defense reasons proposed by the actor are often difficult to be accepted. Even if the actor had certain market analysis reports, investment plans, etc. before the transaction, they generally do not have objective and visual defense evidence materials. These trading decision bases are often just an idea or a trading thought for ordinary investors. If it is required that the defendant must provide complete, pre-formulated, and clearly marked written investment evidence materials with specific transaction time points and price ranges to negate the determination of insider trading, then it is rather strict for the actor. In the real-world scenario of securities investment, the trading decisions of the vast majority of ordinary investors are based on immediate judgments of publicly available market information, and they do not form such standardized written investment plans. As a result, a large number of reasonable investment defenses are thus directly excluded. Even if the perpetrator submits multiple public brokerage research reports as the basis for their trading decisions, proving that their decision to buy stocks was entirely based on market analysis, they may still have their defense rejected on the grounds that "the research reports did not clearly indicate the specific purchase time of the stock", thereby negating the rationality of their defense. Therefore, if the requirement for the rationality of the defense is too high, it can easily lead to the inability of the perpetrator to effectively defend themselves. In fact, this determination logic completely ignores the basic laws of securities market investment behavior.
Finally, the completeness of the indirect evidence chain is lacking. In "zero confession" insider trading cases, the requirement for the closed loop of the indirect evidence chain should not be too low. One cannot simply determine that the evidence chain is closed based on the existence of contact records and abnormal transaction records, completely ignoring the reasonable contradictions between the evidence and the possible other reasonable doubts. In some cases, the contact between the insider information knower and the perpetrator occurred before the sensitive period, and the time of the perpetrator's stock purchase was far from the contact time, with a large amount of other market information intervening in between. In such cases, it is not appropriate to directly determine that the transaction is strongly related to the insider information, and the establishment of insider trading should be cautiously determined.
The lack of completeness of the indirect evidence chain essentially replaces rigorous logical argumentation with the simple addition of indirect evidence, presenting a significant risk of evidence chain rupture. Ignoring the requirement for the completeness of the indirect evidence chain means relaxing the proof standard, theoretically speaking, it does not exclude the reasonable doubt that the perpetrator may have made trading decisions based on other public information or other legitimate reasons after the subsequent acquisition of insider information.
03 Responses of Defense Lawyers
In the face of many controversial issues in the current evidence rule system for insider trading, defense lawyers should, within the framework of the current law, rely on securities expertise and criminal evidence rules, to construct a systematic defense strategy, while safeguarding the legitimate rights and interests of the parties involved, and promoting the standardized operation of the insider trading evidence rules.
First, "insider information" should be defended in a refined manner. Starting from the core attributes of insider information, conduct substantive review of the evidence related to the insider information submitted by the prosecution, focusing on verifying whether the formation time of the involved information is accurate, whether it had been partially known to the market before the perpetrator's trading, and whether it falls within the legal category of "having a significant impact on the stock price". Through submitting industry public analysis reports, market fluctuations data after the disclosure of similar companies' information, etc., evidence can be provided to prove that the involved information does not have the "significance" feature, or that the core content of the information can be derived from publicly available market information, thereby denying the legal nature of insider information and cutting off the basis for the establishment of the insider trading behavior.
Second, the "abnormal trading" should be substantially deconstructed. If the case file contains complete trading history data, quantitative comparison can be used to prove that the alleged "abnormal" trading behavior is completely consistent with the trading pattern formed by the perpetrator over a long period. Data analysis can be conducted from multiple dimensions such as the turnover rate, holding concentration, trading frequency, and capital mobilization habits of historical transactions, to prove that the trading behavior of the perpetrator during the sensitive period does not have a substantive difference from their past operations, and does not fall within the "obviously abnormal" trading circumstances as stipulated in the judicial interpretation.
If the involved trading behavior is indeed different from their previous trading habits, then, in combination with the perpetrator's trading records of the involved stocks over a long period, the evidence of analysis and judgment, or other trading decision bases, it can be proved that their trading decisions were based on normal investment choices after long-term attention, rather than a sudden operation after obtaining insider information. Thirdly, effectively disassemble the presumption rule of "contact and transaction consistency". During the criminal defense process, one should not merely passively deny the contact evidence provided by the prosecution. Instead, one can deeply explore the rationality of the defendant's defense and, when necessary, actively collect relevant evidence to prove that the actual content of the contact has nothing to do with the insider information. This can be demonstrated by presenting the details of the communication records, travel trajectories, and witness testimonies of the parties involved, proving that the purpose of the contact was completely unrelated to the insider information. The legitimacy of the contact can be established.
At the same time, focus on verifying the length of the time interval between the contact and the transaction, and investigate all the relevant public information released in the market during that period. This will prove that the defendant had sufficient time to make an independent trading decision based on the subsequent public market information, fundamentally cutting off the causal relationship between the contact behavior and the transaction behavior, and breaking the causal relationship presumption logic of the prosecution.
Fourth, promote the substantive review of the defense of legitimate transactions. During the criminal defense process, one should change the traditional "simple oral defense" defense model and actively collect and organize a complete chain of evidence that can prove the independence of the transaction decision. This includes materials such as the defendant's historical browsing records of the involved stocks, previous communication records with securities analysts, download timestamps of relevant public research reports, and normal communication records with other investment partners. This will fully restore the entire process of the defendant's investment decision-making, clearly presenting to the court that the transaction decision was completely based on public market information and not completed using insider information. At the same time, in combination with the general investment rules of the securities market, explain to the court that the trading decisions of ordinary investors do not need to form strict written investment plans, and promote the court to conduct a substantive review of the defense of legitimate transactions.
Fifth, strictly control the standard of the completeness of the evidence chain. During the criminal defense process, all indirect evidence submitted by the prosecution should be cross-examined one by one. Focus on checking for unavoidable reasonable contradictions among the evidence, such as no communication between the parties during the sensitive period of insider information, insufficient evidence of leaking insider information, the source of funds being completely unrelated to the insider information, and the defendant not trading immediately after obtaining the so-called "insider information" but instead having a long delay. This will point out that the prosecution's evidence system has not reached the criminal proof standard of "exclusion of reasonable doubt", cannot form a complete evidence loop, and urges the court to make a determination of insufficient evidence.
