Financial fraud methods and legal analysis during the New Third Board listing process

Recently, a typical case of financial fraud by a company listed on the National Equities Exchange and Quotations (NEEQ), in which a company was punished for violating laws and regulations regarding information disclosure, has caused a stir. Given that there are currently very few cases of illegal information disclosure on the New Third Board that have imposed administrative penalties, this case is one of the few cases, and the investigation of the case highlights the shortcomings of the current New Third Board legal system. Below is the knowledge I bring to you about financial fraud methods and legal analysis during the NEEQ listing process. Welcome to read.

1. Introduction to the case

In 2013, a company inflated profits by 55,382,210 yuan by undercounting costs and 73,729 yuan by showing fair related transactions. , 327 yuan, the total inflated profit in 2013 was 129,111,537 yuan. On December 8, 2014, a company was listed on the "New OTC Market". In the "Public Transfer Statement" disclosed, it disclosed an inflated profit for the above-mentioned 2013, which was a false statement.

A certain company was investigated by the China Securities Regulatory Commission on July 7, 2015. On June 30, 2016, the China Securities Regulatory Commission made an administrative penalty decision on a certain company. According to Article 193 of the Securities Law, a certain company was punished. The company was given a warning and fined 600,000 yuan, and its main responsible person was given a warning and fined 300,000 yuan, 100,000 yuan, and 50,000 yuan respectively.

2. Main modus operandi

In the case of a certain company, financial fraud was mainly carried out by undercounting costs and conducting related transactions that showed fairness. The following mainly analyzes two fraud techniques.

(1) Misappropriating labor costs in production costs to purchase assets and recording them as inventories

To undercount operating costs and inflate profits.

A certain company signed a nurturing agreement in 2013, but the company did not actually perform the transparent nurturing work, but included the transparent nurturing expenses in the asset account. The above-mentioned method mainly manifests itself in fabricating labor contract expenses in production activities, and misappropriating the above expenses to purchase assets, which has achieved its purpose of undercounting operating costs and inflating profits.

(2) Inflating income and operating profit of a company by showing fair related transactions.

According to the financial vouchers and detailed accounts related to the sales business in 2013 provided by a company, the main targets of a company’s sales in 2013 were its affiliated companies.

According to the industrial and commercial registration data, from the establishment of a company to July 1, 2013, a limited company in Beijing was the company’s sole shareholder. During this period, a company and its affiliates were under the same control. related parties.

On December 15, 2012, a company signed a "Purchase and Sales Agreement" with its affiliates. The related transaction price of a company's sales to its affiliates has greatly exceeded the book purchase price of the product purchased from outside at the same time. The unfair portion should not be recognized as revenue.

3. Legal issues exposed in a company’s illegal disclosure case

Since the New Third Board market is an emerging market, the relevant legal system is not perfect, and the regulation of illegal activities is not enough. This article will discuss the relevant legal application issues in this case from the following aspects.

(1) How to characterize the financial fraud of companies listed on the New Third Board during the listing process and how to punish them.

In this case, a company falsely stated in its "Public Transfer Statement" submitted to the National Equities Exchange and Quotations that since the New Third Board market is an emerging market different from the main board, the above-mentioned illegal acts should be classified Is it a fraudulent issuance, should Article 189 of the Securities Law be applied for punishment? Or should it be characterized as an information disclosure violation, and Article 193 of the Securities Law should be punished?

This article believes that NEEQ companies are in the listing process China Finance’s fraudulent behavior can be regarded as fraudulent issuance. However, given that the New Third Board market is currently in its growth stage and the legal and regulatory system for the New Third Board market is not yet complete, the information stipulated in Article 193 of the Securities Law should currently be applied to the above-mentioned violations. Disclose the provisions on liability for violations of laws. Mainly based on the following reasons:

First, according to the "Notice of the General Office of the State Council on Strictly Cracking Down on Issues Related to Illegal Issuance of Stocks and Illegal Operation of Securities Business" (Guobanfa [2006] No. 99, hereafter According to Article 3(2) of Document No. 99, disguised public issuance of stocks is strictly prohibited. If the total number of shareholders after the issuance of stocks to a specific target does not exceed 200, it is a non-public issuance. Non-public issuance of stocks and equity transfers may not be issued to the public through public means such as advertisements, announcements, broadcasts, telephone calls, faxes, letters, promotion meetings, information sessions, the Internet, text messages, public solicitation, or disguised public means. The listing process of NEEQ companies will inevitably involve public issuance, so the financial fraud of NEEQ companies during the listing process can be regarded as fraudulent issuance.

Second, the listing of a company on the New OTC Market not only involves signing a listing transfer agreement with the stock exchange company, but also requires approval by the China Securities Regulatory Commission if the number of shareholders exceeds 200. If the number of shareholders does not exceed 200, the China Securities Regulatory Commission is exempted from approval. Exemption from approval does not mean disapproval, but the China Securities Regulatory Commission retains this power, and the approval behavior of the China Securities Regulatory Commission should be a public law act. Therefore, during the listing process of the New OTC Market company, Financial fraud should not be regarded as general information disclosure violations.

Third, the NEEQ market is different from the main board market in that it has the characteristics of limited scale of listed companies and low liquidity. Moreover, the NEEQ market is currently in its initial development stage. There are currently relatively few cases of violations of laws and regulations by NEEQ companies. Few, and the legal liabilities stipulated in Articles 189 and 193 of the Securities Law are quite different. If the financial fraud of a New OTC company during the listing process is regarded as a fraudulent issuance, Article 189 of the Securities Law will apply and be punished. , under the current situation that the legal and regulatory system of the New Third Board market is not yet complete, there may be certain legal risks. Therefore, before the relevant NEEQ laws and regulations are promulgated, it is safer to apply Article 193 of the Securities Law to punish NEEQ companies for financial fraud during the listing process. In addition, for general information disclosure violations by companies listed on the New OTC Market, in accordance with the provisions of the State Council’s Decision on Issues Concerning the National Equities Exchange and Quotations (Guofa [2013] No. 49, hereinafter referred to as Document No. 49), the Securities Law of the People’s Republic of China shall apply. Article 193 of the Law stipulates that it is appropriate to impose penalties for illegal information disclosure.

(2) How to deal with the illegal information disclosure of companies listed on the New OTC Market and the failure of relevant intermediaries to perform their duties

In this case, the sponsoring securities firm that provides recommendation business to a company provides audits Both the accounting firm that provided services and the law firm that provided legal services failed to perform their duties diligently. How should the relevant intermediaries be dealt with if they fail to perform their duties diligently? Should it be linked to their administrative licensing and other related businesses?

This article believes that Article 192 of the Securities Law on the sponsor’s liability should be applied to the sponsoring securities firms that fail to perform their duties diligently. Provide for penalties. This is mainly because: first, the recommended listing business and the sponsoring business have certain similarities in terms of responsibilities, work content, and nature of work. Second, the listing recommendation business and the sponsorship and underwriting business both belong to investment banking business. According to Article 5.1 of the National Small and Medium-sized Enterprises Share Transfer System Business Rules, which stipulates that listing recommendation business is prerequisite for obtaining sponsorship business qualifications, the nature of the listing recommendation business should be consistent with The sponsorship business is similar.

Third, securities service institutions are listed in Chapter 8 of the Securities Law, in parallel with the provisions on securities companies in Chapter 6, indicating that securities service institutions should not include securities companies.

Accounting firms and law firms that fail to perform their duties diligently shall be punished by applying the provisions of Article 223 of the Securities Law on the liability of intermediaries. According to Article 59 of the Measures for the Supervision and Administration of Unlisted Public Companies, accounting firms and law firms that fail to perform their duties diligently shall be punished in accordance with Article 223 of the Securities Law.

(3) Whether criminal cases involving companies listed on the New OTC Market should be transferred to the public security organs

According to the provisions of the Supreme People's Procuratorate and the Ministry of Public Security on the standards for filing and prosecution of criminal cases under the jurisdiction of the public security organs (II) )" (hereinafter referred to as the Prosecution Standard 2), the case has reached the standard for criminal prosecution. However, given that a company is a company listed on the New Third Board and there are currently no criminal cases involving New Third Board companies, should the Shenxianyuan case be transferred to criminal prosecution? Penalty should be one of the controversial points in this case.

This article believes that the provisions of "Prosecution Standard II" are set for companies listed on the main board. Due to their own limitations, NEEQ companies have inherent defects such as imperfect corporate governance. If NEEQ companies are compared with NEEQ companies, Treating companies listed on the main board as equals is likely to result in a large number of criminal cases against NEEQ companies, which is not conducive to the development of the NEEQ market and will also create unprecedented pressure on law enforcement. Therefore, criminal prosecution standards can be specified specifically for the NEEQ market. Or add provisions for NEEQ companies in the "Pursuit Standard 2".