——Preface——

To further promote a culture of rational investing and effectively safeguard the legitimate rights and interests of investors, the China Securities Regulatory Commission has designated May 15 as “National Investor Protection Public Awareness Day.” On this day, nationwide efforts will mobilize all stakeholders to coordinate across levels and actively carry out diverse investor protection activities, ensuring that the principles of investor protection take root in the public consciousness and become a matter of conscious practice for everyone.

  2023 As the “May 15 National Investor Protection Public Awareness Day” approaches, this installment of our investor education series focuses on “off-exchange margin financing,” under the theme “Caring for Investors, Acting Together.”

——What You Need to Know About “Off-Balance-Sheet Margin Financing”——

(1) What is off-exchange margin financing?

“Off-exchange margin financing” refers to activities in which institutions or individuals without securities financing qualifications, other than securities companies, lend funds to investors, arrange for investors to use the borrowed funds and their own margin in designated securities accounts to trade stocks, and charge interest, fees, or a share of the profits.

(II) Typical Cases of Off-Market Margin Financing

Case 1: Wu’s illegal business operation case (off-exchange margin financing through account lending)

【Basic Facts of the Case】

  2019 Starting in October of that year, Wu operated Guangdong Yisheng Information Technology Consulting Co., Ltd. (hereinafter referred to as Yisheng Company), developing the Yisheng Network platform and using securities firm client accounts to provide leveraged trading services to stock‑trading clients. Stock‑trading clients would log into Yisheng Network to register as members and transfer “margin” funds into bank accounts designated by Yisheng Company. In return, Yisheng Company provided these clients with leveraged funds ranging from 1 to 10 times the amount of their “margin,” while charging interest on the leveraged funds and transaction fees according to three pricing schemes—daily, interest‑free, or monthly—thereby profiting from the arrangement. From November 2019 to March 2020, Yisheng Company collected approximately RMB 38,114,831 in funds contributed by stock‑trading clients under the guise of “margin.”

【Judgment Result】

The court held that the defendant, Wu, violated state regulations by engaging in securities business without approval from the relevant state authorities, thereby disrupting market order. The circumstances were particularly serious, and his conduct constituted the crime of illegal business operations. Accordingly, the defendant, Wu, was convicted of illegal business operations and sentenced to three years and six months’ imprisonment, together with a fine of RMB 300,000.

First-instance case number: (2020) Yue 0605 Xingchu No. 3368

Case 2: The illegal business operation case involving Lin, Jiang, Lai, and Du (off-exchange financing through a systematic sub-account model)

【Basic Facts of the Case】

  2018 Starting in October of that year, the defendant Lin, as the de facto controller of Fujian Qianwan Hengye Investment Co., Ltd. (hereinafter referred to as Qianwan Hengye), together with defendants Jiang, Lai, and Du, who served as directors of various business departments, used the “Zhanggubao APP” to provide clients with stock trading accounts (which are sub-accounts). Clients executed stock trades through their sub-accounts on the “Zhanggubao APP,” while Qianwan Hengye’s master account opened with a securities firm simultaneously matched these trades on the stock exchange in real time. At the same time, Qianwan Hengye provided clients with leveraged financing at 3 to 8 times the principal amount and charged interest based on the financed sum. The company generated profits by earning the spread between interest income and transaction commissions.

【Judgment Result】

The court held that the defendants Lin, Lai, Jiang, and Du engaged in unauthorized securities business without approval from the relevant state authorities, thereby disrupting market order in a particularly serious manner, and thus each committed the crime of illegal business operations. Defendant Lin played a principal role in the joint offense and is therefore a principal offender; defendants Lai, Du, and Jiang played secondary and auxiliary roles and are accessories, and may accordingly receive lighter or reduced punishment in accordance with the law. Accordingly, defendant Lin was convicted of illegal business operations and sentenced to six years’ imprisonment and a fine of RMB 1.38 million; defendant Lai was convicted of illegal business operations and sentenced to one year and nine months’ imprisonment and a fine of RMB 160,000; defendant Du was convicted of illegal business operations and sentenced to one year and nine months’ imprisonment and a fine of RMB 140,000; and defendant Jiang was convicted of illegal business operations and sentenced to one year and nine months’ imprisonment and a fine of RMB 90,000.

First-instance case number: (2021) Min 0103 Xingchu No. 164

Case Three: The Fraud Case Involving Wang (Off-exchange Margin Financing in the Virtual Disk Fraud Scheme)

【Basic Facts of the Case】

  2020 In April of that year, the defendant, Wang, purchased and established the fraudulent stock‑financing platform “Jiji Strategy” via the internet and founded Shanghai Hongze Investment Management Co., Ltd. Luring victims with promises of high returns from leveraged stock trading, Wang induced them to deposit funds into his company’s account for stock investments; however, the funds never reached a legitimate securities exchange, and Wang used this scheme to defraud the victims of their investment money. From June to August 2020, the victims deposited a total of RMB 1,345,021 into “Jiji Strategy,” withdrew RMB 328,646, and incurred losses amounting to RMB 1,016,375.

【Judgment Result】

The court held that the defendant, Wang, with the intent of illegal appropriation, used deception—fabricating facts and concealing the truth—to defraud the victim of property in an especially large amount. His conduct constitutes the crime of fraud and warrants punishment. Accordingly, Wang was convicted of fraud and sentenced to ten years’ imprisonment, together with a fine of RMB 100,000. Following the first-instance judgment, Wang filed an appeal, but the appellate court upheld the original verdict.

First-instance case number: (2020) Shanghai 0113 Criminal Initial Case No. 2120

Case number for the second instance: (2021) Shanghai No. 02 Criminal Final Judgment No. 385

(3) How can off-exchange margin financing be prevented?

All off-exchange margin financing institutions lack the qualifications to conduct securities and futures business; investors seeking margin trading and short-selling services must do so through licensed securities firms.

Some off-exchange margin financing operations even employ methods such as “virtual trading platforms” and promise high yields and returns, actions that may constitute fraud and other illegal or criminal activities.

If your assets have been unlawfully infringed upon and you have been defrauded by participating in “off-exchange margin financing,” please promptly report the incident to your local securities regulatory authority or public security organ.

——Conclusion——

Off-exchange margin financing operates outside regulatory oversight; its high-leverage nature amplifies market volatility, disrupts the normal order of capital markets, and constitutes illegal activity. Participating in such schemes could result in total loss of investment. Investors should heighten their vigilance, engage in stock and futures trading through legitimate channels, steer clear of off-exchange margin financing, and safeguard their assets.

Reference source:

CSRC: Typical Cases of Over-the-Counter Margin Financing

http://www.csrc.gov.cn/csrc/c106299/c3452535/content.shtml