— Illegal securities

I. What is illegal securities activity?

Answer: In securities activities, investors need to be most vigilant against illegal securities activities. Various types of illegal securities activities have caused significant losses for numerous investors.

In the process of investors’ securities investment and trading, the laws and regulations related to investors’ interests serve as a powerful sword for safeguarding their legitimate rights and interests. Violating these laws and regulations—especially engaging in deliberate, deceptive practices aimed at systematically extracting profits from investors—is what we refer to as illegal securities activities.

II. What are the types of illegal securities activities?

Answer: Illegal securities activities take many forms, but their most significant characteristic is deception. Criminals exploit investors’ desire to make big profits quickly—even to get rich overnight—by falsely claiming that they have insider information or can provide high-performing stocks, thereby swindling investors out of hefty fees for information and membership. Even more egregious are cases where criminals set up underground securities markets or launch schemes involving unregistered shares, all aimed at defrauding people of their money. Such actions by criminals generally amount to fraud; in severe cases, they may even violate criminal law and constitute crimes, including fundraising fraud, illegal fundraising, and unauthorized business operations.

Although China’s criminal law and securities regulations impose stringent penalties on securities fraud and even outright scams, due to differences in investors’ levels of knowledge and capabilities, there will always be investors who fall victim to deception. Therefore, investors must strive to enhance their own competence and deepen their understanding of securities-related knowledge. At the same time, they should remain vigilant and watch out for such fraudulent activities to protect themselves!

The main types of illegal securities activities include: illegal consulting and illegal fundraising scams. “Overseas fake fund” scams and the establishment of a black market for securities.

III. What is illegal consulting?

Answer Illegal consulting has long been a persistent problem in our country, but during periods when the stock market performs poorly, such activities simply have no room to survive. However, when the stock market is booming, some unscrupulous individuals take advantage of many investors’ eagerness to find high-performing stocks. They lure unsuspecting investors with promises that they possess inside information and can help them secure lucrative “bull-market” stocks, thereby defrauding them of their hard-earned money. These fraudsters range from individual scammers to investment or consulting firms lacking proper qualifications. Using various deceptive tactics, they swindle investors and reap unjustified profits. Many victims fall prey to these scams, only realizing the deception when it’s already too late.

The hallmark of this type of scam is that the fraudsters typically claim to have inside information and usually operate from out of town, making it impossible for investors to meet them in person. Instead, they ask investors to transfer the fee for the information to their bank accounts located in other cities.

In fact, investors can easily spot the scam with just a little bit of thought. If these scammers really knew about so-called “hot stocks,” wouldn’t they have already made a fortune by trading them themselves? Why would they still bother charging investors consulting fees or information fees?

Another deceptive tactic is to charge investors membership fees. Fraudsters pose as “stock market gurus” and fabricate extraordinary stock-trading performance records to gain investors’ trust. Once investors fall for the scam, the fraudsters urge them to join the “membership” and pay the associated fees.

Investors should be reminded that even legally authorized investment institutions holding securities investment consulting qualifications are not permitted to collect membership fees in locations other than their registered offices.

Characteristics of this type of behavior: Such activities are typically carried out under individual names and mostly leverage the internet. The scope of these scams is broad, potentially spanning across the entire country.

[Case Link] — The Case of the Leading Brother’s Illegal Business Operations

Changchun youth Wang Xiujie, driven by the desire for illegal profits, has... Starting in 2006, Wang began blogging online to guide investors in stock trading. At the time, the stock market was booming, and investor enthusiasm for stock investments reached an unprecedented high. As a result, his blog quickly gained immense popularity, becoming known as “the No. 1 stock market blog,” and Wang himself was dubbed the “leading elder brother” of the stock market. Over the following year, Wang repeatedly posted recruitment notices online, charging fees ranging from 3,000 yuan, 5,000 yuan, 10,000 yuan, 13,000 yuan, 27,000 yuan, to 37,000 yuan per member annually. He provided securities guidance to these paying members and collected membership fees from a total of 16 members, generating illegal business income exceeding 205,000 yuan. Under his guidance, many small and medium-sized investors saw their wealth significantly eroded.

On May 23, 2008, the court publicly delivered its verdict in the case of Wang Xiujie, known as “Leader Brother 777,” who had been widely reported across the country for her illegal business activities. In the first-instance trial, the court sentenced Wang Xiujie to three years’ imprisonment for the crime of illegal business operations, imposed a fine of 600,000 yuan, and ordered the recovery of her illegal gains totaling more than 205,000 yuan.

Not surprisingly, Liu Yucai and Du Lingqing from Shanghai also engaged in illegal securities activities online, collectively attracting... More than 600 clients invested over 100 million yuan, and the illegal gains amounted to 7.57 million yuan. In 2008, the No. 2 Intermediate People's Court of Shanghai sentenced the defendant Liu Yucai to seven years and six months in prison for the crime of illegal business operations, and imposed a fine of 2 million yuan; the defendant Du Lingqing was sentenced to seven years in prison and fined 1.5 million yuan. The illegally obtained proceeds were confiscated. This case has been dubbed the “leading boss” case of Shanghai.

Analysis:

Whether it’s Wang Xiujie, Liu Yucai, or Du Lingqing, their actions all constitute disruptions to the order of the securities market and have resulted in criminal penalties for violating criminal law.

The verdict in the “Leading Brother Case” carries profound significance. The sentencing in the “Leading Brother Case” will undoubtedly serve as a deterrent, warning more “future participants” against following in their footsteps. At the same time, it also offers an important lesson to investors, reminding them to approach investment with the right mindset and methods; otherwise, not only are they likely to become victims themselves, but they may also inadvertently provide fertile ground for illegal operators.

The verdict in this case represents a significant step forward in the rule of law in the market and will, indirectly, play a role in maintaining normal market order and protecting victims.

IV. What is an illegal fundraising scam?

Answer: This scam typically takes the following form: First, it involves fabricating false information—such as claiming that a company is about to go public domestically or internationally, or that its stock offering has received government approval—to trick the general public into purchasing the so-called “investment products.” “Preliminary shares”; second, illegal intermediary agencies, under the guise of “investment consulting firms,” “property rights brokerage companies,” or “representatives of investment companies in China,” illegally buy, sell, or act as agents for unlisted company stocks without obtaining approval from the legally authorized authorities.

The core reason scammers lure investors into buying and selling stocks is that the stocks are about to go public, thereby weaving a narrative that by investing now, one can profit from the IPO. The dream of getting rich overnight. Many investors have purchased fake, non-existent so-called “initial public offering” shares in this illegal trading market, suffering heavy losses.

[Case Link] — Initial Public Offering Fraud Case

In 2003, Zhu Moumou transformed a shell company—obtained free of charge—into Shanghai Littun Biotechnology Co., Ltd., a high-tech joint-stock company engaged in the research and production of various natural plants and high-efficiency health products, through a series of fraudulent measures including false capital increases, fictitious verification of capital contributions, and other deceptive practices. Subsequently, Zhu and his accomplices promoted Littun Company’s upcoming listing on the NASDAQ in the U.S. by establishing websites and distributing promotional materials. They also enlisted the help of numerous investment consulting firms to facilitate extensive equity transfers. To deceive investors, Littun Company created a website that looked exceptionally sophisticated and professional, available in both Chinese and English versions—almost rivaling the websites of multinational corporations. The website featured numerous photos of the company’s large-scale production and cultivation facilities, even including images of visits by national leaders to the company’s premises. The website also displayed impressive data on the company’s production scale and profitability, presenting an image of “excellent” business performance. Moreover, the website continuously updated information on industry policies and market trends. Meanwhile, positive reviews about Littun Company flooded the internet, and even mainstream financial media carried investigative reports indicating Littun’s preparations for a potential IPO on the NASDAQ in the U.S. For instance, one media outlet reported: “The company’s project technologies are internationally advanced, and all its products are sold overseas”; “The company has established long-term, stable business partnerships with more than 60 foreign enterprises, renowned pharmaceutical manufacturers, and research institutes”; and “The company is now actively preparing for its IPO.” In mid-April 2005, the company issued a public announcement stating that it had entered the guidance period under the sponsorship of a securities firm based in Shenzhen, China, a process scheduled to last one year. Many investors were misled by Littun’s glamorous facade. Over the course of more than two years, over 800 domestic and international investors purchased more than 20 million shares at prices ranging from 1.6 to 6 yuan per share. Zhu Moumou personally pocketed over 30 million yuan from these equity sales.

In early 2007, the fact that Zhu Moumou and Liden Company had engaged in a disguised public offering by “obtaining something for nothing” was exposed. The Liden Company case was ultimately prosecuted as a crime of fundraising fraud. The principal offender, Zhu Moumou, was sentenced to life imprisonment, while another accomplice, Gan Moumou, was also sentenced to 11 years in prison.

Analysis:

The occurrence of this situation is closely linked to investors’ lack of securities knowledge. Compared with the Lanzhou black-market case, the initial-share scam represents a more sophisticated form of deception. While in the Lanzhou black-market case, most victims were deceived precisely because of their lack of even basic securities knowledge, in the initial-share fraud cases, although victims may have some rudimentary understanding of securities, their knowledge is often superficial and incomplete—they do not truly grasp the relevant principles governing the listing and issuance of securities both domestically and internationally, thus enabling the scammers to succeed. For instance, regarding stock issuance, Article 39 of the Securities Law stipulates that: “Stocks, corporate bonds, and other securities publicly issued in accordance with the law shall be listed and traded on stock exchanges established in compliance with the law or transferred on other securities trading venues approved by the State Council.” As for the issue of domestic enterprises listing overseas, Article 238 of China’s Securities Law stipulates: “Any domestic enterprise that directly or indirectly issues securities abroad or lists its securities for trading overseas must obtain approval from the securities regulatory authority under the State Council in accordance with the regulations of the State Council.”

Therefore, investors must step up their learning efforts and continuously enhance their investment knowledge. Some investors might say, “But the threshold for investing is just too high—after all, I’m not a professional. How could I possibly understand all those complex concepts?” If that’s your view, I’d still like to strongly encourage you: actually, learning about investment is inherently crucial to sound investment behavior. Moreover, there are numerous ways and channels available for acquiring knowledge, and today’s information resources are incredibly advanced. With just a bit of effort and attention, you can still grasp many fundamental concepts. If, despite your best efforts, you still can’t make sense of something, let me offer you this piece of advice: when it comes to topics you simply don’t understand, it’s better to pass them by than to get them wrong. At least until you’ve fully grasped them, it’s best to stay away from them altogether.

V. What is... The “fake overseas fund” scam?

Answer: In recent years, with the rapid development of the fund industry, the number of fund investors has expanded significantly, and fraudulent funds have begun to emerge. Some overseas funds appear online as foreign mutual funds or private equity funds, luring investors with promises of exceptionally high returns. In 2007, the “Swiss Mutual Fund Case” was cracked, and the “offshore investment fund” scam was also exposed to the public. The so-called Swiss mutual funds took advantage of the public’s lack of clarity about how foreign mutual funds operate, as well as their eagerness to obtain high dividends, thereby tricking investors into falling for the scam.

[Case Link] — Case of Illegally Absorbing Public Deposits in the Name of a Fund

In July 2008, Sun and Li, the Shanxi market representatives of the “American Bear Stearns Fund,” claimed to investors that their fund offered three tiers of returns—100%, 150%, and 200%. Members who joined the fund were also encouraged to recruit additional members and earn bonuses. Later, after investigation by public security authorities, it was revealed that this was a complete scam. Sun and Li are suspected of the crime of illegally absorbing public deposits and have been arrested.

In this case, the victims purchased online through an introduction by someone else. “The U.S. Bear Stearns Fund”—most payments were made in cash, and all transactions lacked any official receipt or proof of payment. Participants relied solely on their own records to track amounts, and the distribution of profits and bonuses followed the same pattern. In addition to purchasing the fund himself, the victim, Che, also introduced and recruited more than twenty relatives and friends to buy into the fund, totaling approximately 1.3 million yuan, resulting in a loss of over 730,000 yuan. More than ten other individuals, including Lei, also purchased over one million yuan worth of the fund through Li Xiaohong—but none of them received any refunds.

Analysis:

Securities investment is a high-risk industry, so the notion of a fixed return is simply impossible. Legally compliant fund companies—whether domestic or foreign—cannot and will never offer investors fixed returns, let alone... From 100% to 200%, it’s all a matter of degree. So, greed is the greatest enemy—when your desire for more becomes too strong, you’ll end up getting hit by a pie falling from the sky.

Six, what is the establishment of a securities black market?

Answer: Criminals take advantage of investors’ lack of securities knowledge by setting up illegal securities trading venues and engaging in unlawful operations. They either carry out the buying and selling activities required by their clients using accounts they’ve opened at legitimate institutions. or engaging in so-called trading activities through illegal means such as wagering and hedging outside of regulated trading venues, thereby deceiving investors. The main forms of deception include:

( 1) Using fictitious purchases and fake sales to deceive investors.

Some illegal entities don't even transmit clients' order instructions to legitimate trading venues for trade matching. Instead, they directly hedge or gamble with clients’ orders. To further conceal their activities, these illegal entities even masquerade as legitimate institutions, claiming that they merely act as intermediaries between clients and the legitimate institution—when in reality, the legitimate institution would never actually “partner” with them. Once these illegal entities have succeeded in their scheme, they promptly abscond with the funds. Therefore, investors must carefully check the legal procedures and credentials of any investment firm before making an investment.

( 2) Engaging in fraud by manipulating trading times and trading prices.

The customer cannot immediately check the transaction status. Market data transmission is also untimely, inaccurate, and incomplete. Some institutions even artificially control and manipulate market data by altering transaction records, creating virtual market trends on trading terminals based on aggregated buy-and-sell information, and providing transaction prices that simply do not exist in the legitimate market. Once investors enter such a trap, it will be extremely difficult to avoid losses.

( 3) Provide financing (overdraft) to investors.

Although China’s Securities Law has laid the legal groundwork for the implementation of margin trading and short selling, to date, no approval has been granted to launch this business. Consequently, securities firms are still prohibited from providing financing and investment services to others. Most illegal securities operators typically offer clients high leverage ratios—providing overdraft facilities—in exchange for promises of substantial returns. They deceive investors by claiming that after profits are made, the two parties will split the earnings, thereby luring investors. This is a serious violation of the law; once detected, all illegally obtained income will be confiscated, and additional penalties will be imposed.

Since the securities markets in China’s more economically developed regions are relatively well-developed and investors there are of higher quality, such criminal activities tend to occur primarily in areas that are relatively less developed, as well as in small- and medium-sized cities or remote regions.

Since the securities market is the most direct venue for the concentration of wealth, it naturally provides a strong incentive for fraudulent activities to emerge. Many fraudsters are willing to take extreme risks in pursuit of exorbitant profits. As a result, illegal securities activities will persist for quite some time to come, and various types of illicit securities products will continue to proliferate. Therefore, we would like to strongly advise investors: be sure to step up your learning, enhance your knowledge and skills, keep your eyes wide open, and remain highly vigilant!

7. Which securities transactions are not protected by law?

Answer: ( 1) Trading stocks in illegally established venues.

Investors may only buy and sell stocks at securities trading venues established in accordance with the law; they are not permitted to engage in stock trading at illegally established venues or institutions.

( 2) Trading in securities that are illegal.

Investors may only buy and sell securities issued in accordance with the law; securities not issued in compliance with the law may not be traded. Currently, securities trading in China can only be conducted on a spot basis and does not allow for the trading of securities futures. 

( 3) Entrust the securities company with full authority to buy and sell stocks.

China’s securities laws and regulations prohibit securities companies from acting as full proxies for investors in stock trading. Therefore, even if an investor signs a power-of-attorney agreement with a securities company, such agreement is invalid and not protected by law. 

( 4) Overdraft transactions.

Currently, China has not yet liberalized margin trading and short selling. Therefore, the practice of securities firms providing investors with overdraft funds is not illegal. Similarly, the “Funds Overdraft Agreement” signed between investors and securities firms is also invalid and does not enjoy legal protection. 

( 5) Other transaction methods that are not protected.

8. What exactly qualifies as...? “A legal securities trading venue”?

Answer: To establish a securities company, one must obtain approval and review from the securities regulatory authority under the State Council. Without such approval from the State Council’s securities regulatory authority, no entity may engage in securities business.

Some criminals illegally establish securities trading institutions and deceive investors. Common methods include:

( 1) Entice investors into trading by offering high leverage through margin financing and securities lending, along with risk commitments;

( 2) Violating the state’s regulations concerning securities trading venues, membership qualifications, and trading seats, and using accounts opened at legitimate institutions to act as an agent for clients’ securities transactions—some even directly offsetting and hedging client orders against their own company’s accounts, engaging in fictitious buying and selling.

( 3) Setting up fictitious trading times and trading prices to prevent investors from immediately checking transaction details, and modifying computer data to create virtual market trends.

( 4) Recruiting customers under the guise of legally registered intermediary companies, constantly changing business locations, company names, and scope of operations; operating in concealed locations with tight control over personnel.

9. What is illegal futures trading?

Answer: With the imminent launch of stock index futures, illegal securities activities disguised as futures have also begun to emerge. Illegal entities are engaging in and acting as agents for overseas futures and options trading. deceiving domestic investors. For example, gold futures were launched at the end of 2007; however, just before the official launch of gold futures, illegal gold futures contracts had already emerged in some areas of Shanghai.

So far The state has not approved any domestic or overseas institution to engage in or act as an agent for overseas futures and options trading. The market quotes provided by illegal entities are incomplete, covering only partial contracts—and in some cases, even overnight quotes. Generally, these entities lack fixed order-placing channels and independently establish their own interpretations of contract terms and trading rules.

10. What should you do if you realize you’ve been scammed?

Answer: If investors discover that they’ve been defrauded, don’t panic or get flustered. Instead, carefully preserve all relevant evidence and report the incident to the local securities regulatory authority or file a police report with the local public security organ. This will help the regulatory authorities or public security organs investigate and bring the fraudsters to justice. If the perpetrators have indeed committed fraud, the regulatory authorities and public security organs will ultimately hold them accountable under the law. After criminal proceedings have begun, you can also file a related civil lawsuit to seek compensation for your losses.

Before taking the above-mentioned actions, if investors feel their capabilities are limited, they can contact and consult with a lawyer to obtain sufficient evidence through professional legal means, thereby proving that their rights have indeed been violated.

If you’ve accidentally fallen into a scam deliberately set up by fraudsters, it’s generally very difficult to fully recover your losses. Therefore, investors should continue to learn more about securities investment to avoid being deceived.