People’s Procuratorate of Jing’an District of Shanghai Municipality v. Zhao Zhe
(Case of the Manipulation of Securities Trading Prices)

Public Prosecution Organ: People’s Procuratorate of Jing’an District of Shanghai Municipality.

Defendant: Zhao Zhe, male, 29 years old, resident of Shanghai Municipality, college graduate, former trading liquidator in the Computer Department of Shanghai Linglinglu Securities Trading Office of Shijiazhuang Trust and Investment Co., Ltd., and arrested on July 1, 1999.

The People’s Procuratorate of Jing’an District of Shanghai Municipality (hereinafter referred to as the Jing’an People’s Procuratorate) filed a public prosecution to the People’s Court of Jing’an District of Shanghai Municipality (hereinafter referred to as the Jing’an People’s Court) against Zhao Zhe (hereinafter referred to as Zhao) for the crime of manipulating securities trading prices.

The bill of prosecution alleged that:
Zhao intruded into the computer information system of Shanghai Xinzhalu Security Trading Office of Sanya Zhongya Trust and Investment Corporation (hereinafter referred to as Sanya Trading Office) and altered the authorization data to be sent out, so as to raise stock prices and then to realize profits when he and his friends dumped stocks. As a result of his actions, the prices of two stocks, “Xingye Real Estate” and “Lotus Gourmet Powder”, were intentionally raised. Zhao and his friends gained illegal profits of tens of thousand yuan by selling the two stocks they held. While Sanya Trading Office suffered an economic loss of more than 2,950,000 yuan. Zhao’s actions constituted the crime of manipulating securities trading prices. Therefore, he should be punished in accordance with Article 182 of the Criminal Law of the People’s Republic of China (hereinafter referred to as the Criminal Law), and should also be ordered to compensate the economic losses to Sanya Trading Office.

Zhao defended that: he did not clearly tell Gao Chunxiu (hereinafter referred to as Gao) that the price of “Lotus Gourmet Powder” would rise to its “stop-line” in the afternoon of April 16, 1999 (“stop-line” is a measure adopted by the stock exchange for controlling the rise of stock prices when it rises to a certain percentage of the closing price of the stock”). Therefore, Zhao Zhe claimed that he had nothing to do with the selling of “Lotus Gourmet Powder” by Gao.

Zhao’s defender also argued that Zhao was only guilty of altering the data in the computer system of Sanya Trading Office. This act should be punishable under Paragraph 2 of Article 286 of the Criminal Law. Moreover, Gao’s selling the stocks of “Lotus Gourmet Powder” was not a necessary consequence of Zhao’s act, and this was his first offence, and he was very sincere in confessing what he had done and had promised to exert his best efforts to make up the losses. Therefore, he should be given a mitigated punishment, and be put on probation. Finally, the economic losses of Sanya Trading Office had been caused not only by Zhao’s act, but also by the compulsory sell-out of Sanya Trading Office. Therefore, Zhao should not be liable for all the losses.

Upon trial, the Jing’an People’s Court found that:
Zhao had received higher education in electronic science and technology, and had several years of work experience in securities trading. Thus he was skilled at computer processing and programming for securities trading.

In the afternoon of March 31, 1999, Zhao went to one of the business offices of Sanya Trading Office and illegally intruded into its computer information system through a computer terminal used for the clients to consult information. He found that no password was needed to access the database for commissioned offers. He subsequently started to think about altering the information in the said database and artificially raising stock prices so as to gain profits from selling the stocks held by himself. On April 15, he intruded again into the computer information system of Sanya Trading Office, made a copy of the said database, and made a successful simulated alteration of the said database. After the alteration succeeded, he then decided to execute his plan on the next day. To show his “ability” to manipulate the stock market, he instructed Gao to buy “Lotus Gourmet Powder” and sell it when its price rose.

When the stock trading rested at noon of April 16, Zhao came to Sanya Trading Office again and altered, through the computer terminal, the data on commissioned offers to be sent out by Sanya Trading Office to the stock exchange. He altered five clients’ authorizations to buy other securities into their purchase of 1,989,500 shares of “Xingye Real Estate” and 2,989,800 shares of “Lotus Gourmet Powder” at their stop-line prices of that day. After the stock trading resumed that afternoon, when Sanya Trading Office sent out the altered authorizations to the stock exchange, the prices of the said two stocks immediately rose sharply. Zhao took the opportunity to sell the 7,800 shares of “Xingye Real Estate” which he had bought from the Shanghai Stock Trading Office of Tianjin International Investment Corporation, and made a profit of 7,277.01 yuan. Gao and Wang Qihua, his broker, also sold 89,000 shares of “Lotus Gourmet Powder,” which they had bought under the instructions of Zhao, and gained a profit of 84,000 yuan. Other holders of the said two stocks also took the opportunity to sell them, so Sanya Trading Office that had sent out the information had to spend more than 60 million yuan to buy the two stocks at the stop-line price or the price close to stop-line price. Because it did not have sufficient cash at hand, Sanya Trading Office had no choice but to sell out the stocks, and as a result, it suffered an economic loss of 2,950,000 yuan. After the criminal act of Zhao was found out, the public security organ recovered about 400,000 yuan of economic losses.

The following evidences were presented by the prosecutor to prove its allegation:

1. CV of Zhao and the written certification of his former employer affirmed that: Zhao was a graduate from the Department of Applied Electronic Technology of Shanghai Second University of Technology, he had consecutively worked in two stock brokerages, and he was good at computer programming and processing. Zhao himself also acknowledged this in his confession.

2. Materials for reporting the case by Sanya Trading Office on April 16, 1999 and the Analysis Report of April 19 affirmed that: when Sanya Trading Office checked its computer system, it found that the database for commissioned offers had been intruded by a hacker on March 31, April 15 and 16, and the Analysis Report also reflected that the hacker made copies of the database and altered or deleted them for several times on April 15. Zhao’s confession accorded with these reports.

The account ledgers of the Shanghai Stock Trading Office of Tianjin International Investment Corporation affirmed that Zhao held 7,800 shares of “Xingye Real Estate” in his account. This was consistent with Zhao’s confession that he intended to sell “Xingye Real Estate” stocks that he held at a minimum loss.

The analysis issued by the Computer Technology Department of Shanghai Stock Exchange after its check of the computer system of Sanya Trading Office, and the testimony of Zhou Bin, a computer operator at Sanya Trading Office, confirmed that: the database for commissioned offers in the computer system of Sanya Trading Office was accessible without any password, and, therefore, anyone who only grasped general computer knowledge and who knew about the securities trading computer system would be able to intrude into the system and alter the data. This also accorded with the Zhao’s confession.

In addition, the record of the Jing’an District Office of Shanghai Police Station, and the identification report of the No. 3 Research Institute under the Ministry of Public Security on the Conclusion about the Feasibility of the Intrusion into the Database for Commissioned Offers of the Computer System of Sanya Trading Office as well as the Data Alteration were also in conformity with the Analysis Report of Sanya Trading Office and the confession of Zhao.

3. The computer system inspection result of Sanya Trading Office, the live videotape of April 16, and the identifications of Wang Yang and Liu Jingya, colleagues of Zhao, on the figure in the videotape also affirmed that: at noon of April 16, Zhao went to Sanya Trading Office and intruded into the computer information system by processing the computer, and altered the data on the commissioned offers of five clients, Zhou X, Li X, Zhou XX, Yan XX and Tu XX, for buying or selling other stocks.

The comparison of the inquiries of original authorization data of the five clients with the data altered by Zhao proved that: Zhou X and Li X’s original authorizations were to buy stocks of “Shenneng Shares” and “Fenghua Ball Pens” on April 16, but Zhao pursuaded them into the purchase of “999,000 and 990,500 shares of “Xingye Real Estate” at its stop-line price of that day, namely 10.93 yuan. The original authorization of Zhou XX, Yan XX and Tu XX were to buy the stocks of “Jinjian Rice”, “Suibao Thermoelectric” and “Fujian Cement”, but Zhao pursuaded them all into the purchase of 999,900, 990,300 and 999,600 shares of “Lotus Gourmet Powder” at its stop-line price of that day, namely, 12.98 yuan. Which was in conformity with the Zhao’s confession.

4. Gao testified that Zhao told him on April 14 that he could buy some shares of “Lotus Gourmet Powder” as it would reach its stop-line price in the afternoon of April 16. Therefore, Gao asked Wang Qihua, his broker, to purchase 79,000 shares of “Lotus Gourmet Powder.” Wang himself also purchased 10,000 shares of the same stock. Gao’s testimony was confirmed by that of Wang. Gao and Wang also testified that, before the sock market resumed operation from break in the afternoon of April 16, they authorized the sale of the “Lotus Gourmet Powder” they bought on April 15 at its stop-line price. Zhao confessed that he had told Gao to buy some “Lotus Gourmet Powder”.

5. The case report of Sanya Trading Office, the delivery sheets of the five clients, the statements on the economic losses of Sanya Trading Office as made by Sun Chunjiao from the Finance Department of Sanya Trading Office, the delivery sheet of Zhao for the sale of “Xingye Real Estate”, and the testimony of Gao and Wang affirmed that: after illegally altering the data, Zhao immediately authorized, by telephone, Shanghai Stock Trading Office of Tianjin International Investment Corporation to sell his 7,800 shares of “Xingye Real Estate”. When the altered authorizations were executed at the stock exchange after the stock market resumed trading in that afternoon, the prices of the two stocks jumped to their stop-line prices within a short while, the trading volume of the two stocks also increased sharply, and the market fluctuated violently. Sanya Trading Office had to buy in 5,000,000 shares of the two stocks, which accounted for more than 60,000,000 yuan. In the end, it was forced to sell out all the stocks. Sanya Trading Office thus suffered an economic loss of more than 2,950,000 yuan, of which, only a small part of which was recovered by the public security organ and the other 2,400,000 yuan could not be recovered. The abovementioned evidences clearly proved the fact that Zhao and Gao made illegal profits from selling the stock they held.

All the said evidences were examined and cross-examined at the court session, so they could serve as the basis for the findings of facts of this case.

The Jing’an People’s Court held that:
With the development of economy, science and technology in China, computers had come into use in all fields of the society. At the same time, crimes related to computer technology had been on the rise, which thus posed a serious threat to social stability. Therefore, the punishment against the crimes committed by using computers had become an important task of the Criminal Law.

Zhao, as an employee of a securities brokerage company, was obliged to abide by securities administrative provisions and to preserve the order of securities trading. However, in order to sell his own and his friends’ stocks at inflated prices for making illegal profits, he intruded into the computer information system and altered the authorization information therein. In so doing, he manipulated stock prices, seriously disrupted the trading order and brought huge economic loss to Sanya Trading Office. His acts had violated Item (4) of Paragraph 1 of Article 182 of the Criminal Law and constituted the crime of manipulating securities trading prices, and should be subject to criminal liabilities under the Criminal Law. According to Article 64 of the Criminal Law, his illegal profits of 7,277.01 yuan should be recovered, and according to Paragraph 1 of Article 36 of the Criminal Law, he should also compensate the economic losses to Sanya Trading Office.

Paragraph 2 of Article 286 of the Criminal Law prescribes that: “any act that violates the provisions of the State and has caused serious consequences by deleting, altering or adding to the data or application programs that have been stored, processed or transmitted in the computer information system” shall be the crime of disrupting the computer information system. The object of this crime should be the State security protection regime for computer information systems. While Article 182 of the Criminal Law prescribes that: “any of the following circumstances that has caused serious consequence by manipulating security trading prices for the purpose of gaining unjustifiable profits or transferring risks” constitutes the crime of manipulating security trading prices, of which, Item (4) prescribes “the use of any other method to manipulate security trading prices” is one circumstance of this crime. The object of this crime is the State administration regime for security trading and the lawful rights of investors. Zhao’s actions appeared to be an illegal intrusion into the computer information system of another party and an alteration of the data thereof, and damaged part of the data stored therein. It appears to be similar with the crime as defined in Paragraph 2 of Article 286 of the Criminal Law. However, the purpose of Zhao’s act was not to disrupt the State security protection regime for computer information systems, but rather to make illegal profits by selling stocks at unreasonably high prices. His act resulted in abnormal fluctuation of stock prices and the economic loss of 2,950,000 yuan suffered by Sanya Trading Office, and he and his fiends did gain profits from his acts. Although he employed the means stipulated in Paragraph 2 of Article 186 of the Criminal Law, the objection of his crime was the State administrative regime for security trading and the lawful rights of the investors. Therefore, he committed the crime of manipulating security trading prices, rather than the crime of disrupting computer information systems. The crime as indicted by the public prosecution organ should be established.

Gao bought tens of thousands of shares of “Lotus Gourmet Powder” on April 15 and sold them at the stop-line price just before the stock market trading resumed on the afternoon of April 16. The price in his authorization was the same as that of stop-line of that day. Therefore, his testimony that Zhao told him to buy the stock should be acceptable. The defense given by Zhao and his defender that Gao’s purchase of “Lotus Gourmet Powder” had nothing to do with Zhao should not be adopted.

Due to the alterations made by Zhao, Sanya Trading Office executed false buy-in orders, and thus suffered huge economic losses. Sanya Trading Office’s loss was ostensibly a direct result of its compulsory sell-out because of its inability to make payments, but the fundamental cause was the disruptive acts of Zhao, who should, therefore, be responsible for all the losses of Sanya Trading Office. The defense given by his defender that the losses were also caused by the compulsory sell-out and that Zhao should not be responsible for all the losses should not be accepted.

Even though it was the first time for Zhao to commit an offence, his offence was committed with bad means and had resulted in serious social consequences. In addition, most of the economic losses of Sanya Trading Office could not be recovered up to the present. Therefore, the defense given by his defender that he should be eligible for probation could not be adopted. However, since his confession was sincere, he deserved a mitigated punishment.

In sum, in order to protect the normal management order of the securities market, and to punish the crime of manipulating securities trading prices, the Jing’an People’s Court rendered the following judgment on November 11, 1999:

1. Zhao Zhe committed the crime of manipulating securities trading prices, and is hereby sentenced to the fixed-term imprisonment of three years and a fine of 10,000 yuan.

2. Zhao Zhe should compensate the 2,497,604.62 yuan of economic losses to Sanya Trading Office.

3. The 7,277.01 yuan of illegal profits obtained by Zhao Zhe should be recovered.

After the judgment of the first instance was announced, neither Zhao Zhe nor the prosecutor appealed, so the judgment of the first instance entered into force.