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June 13, 2012

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Verdict still to come in insider trading case

CHINA'S largest insider trading case drew to a close yesterday with the Shanghai No.1 Intermediate People's Court due to give its verdict at a later date.

Li Xuli, 39, former investment director of Shanghai-based Bank of Communications Schroders Fund Management Co, was detained last August on suspicion of exploiting private information in two stocks in the fund that he managed to trade in shares and make over 10 million yuan (US$1.6 million) profit.

He is alleged to have placed orders for his personal accounts when trading the two stocks between February 28 and May 5 in 2009, according to an investigation by the China Securities Regulatory Commission.

The case highlighted the regulatory body's increasing efforts to crack down on illegal stock trading, but at the same time pointed out some shortcomings in the current system, experts said.

Li is said to have ordered an agent to buy shares on his behalf while advising the fund to buy the same stocks in large quantities in early April 2009, the prosecutor said.

The transaction, involving more than 50 million yuan in shares of the Industrial and Commercial Bank of China and the China Construction Bank, was said to have earned Li more than 10 million yuan when he sold them in June 2009.

"Li was taking advantage of the fund's money to increase his own wealth," the prosecutor said. "Such behavior has greatly hurt the benefits of the fund and stock investors in general."

Independent judgment

Li, who should not trade shares as a fund industry insider, had access to two accounts opened under the names of a relative and an acquaintance of his wife, the prosecutor said.

Defense lawyers argued that Li's shares were bought days after the fund made its purchase, and were sold months after the fund did, indicating that his behavior was based on independent judgment.

"Everyone hates insider trading but one man is only guilty if there is evidence," said Zhu Youbin, one of Li's lawyers.

Li told the court that he had allowed the agent to buy "two or three million shares" instead of 10 million, through a phone call, and he "actually despised decisions made by the fund managers."

"I am not completely innocent but I did not intend to use the inside information," Li said in court. "I have a lot of chances to make money on my own."

Lawsuits against insider trading are considered difficult due to the secrecy of the operation, and the case was the latest and highest-profile crackdown on insider trading after a law was passed in 2009 that stepped up the punishment for such behavior.

Yang Tao, a professional investor, said on his microblog that there was no clear definition to determine whether such behavior was illegal, and it would be unfair if court pronounced a defendant guilty without sufficient evidence.

Zheng Mingwei, a lawyer, said there are loopholes in current rules about determining the amount of illegal profits, which could affect the sentence.

He said any regulation to prevent insider trading could not eliminate them, but the case would set alarm bells ringing across the fund management industry.


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