JC Master · Listed Company Securities Compliance Column | Can Reverse Trading Preclude the Determination of Insider Trading Abnormality? — An Empirical Analysis Based on the Case of Zhou Moumou’s Insider Trading in Jiangquan Real Estate

　　The high-quality development of the capital market hinges on the compliance foundation of listed companies. As the registration-based system is fully implemented and regulatory frameworks are iteratively refined, securities compliance has become a central pillar for the stable operation of listed offices. Accurately aligning with regulatory guidance and fortifying compliance safeguards are critical enablers for enterprises to navigate market cycles.

　　To this end, we have established this dedicated column, focusing on the core areas of securities compliance for listed companies: summarizing the key points of new regulatory rules, deconstructing the rationale behind typical enforcement actions, dissecting the essence of court rulings, and thoroughly examining the practical challenges of compliance. Adopting a legal‑professional perspective, we employ clear, pragmatic language and scenario‑based analysis to interpret compliance requirements, map out risk pathways, and provide actionable guidance, helping companies strengthen their internal control systems, mitigate compliance risks, and enhance the effectiveness of their compliance management.

　　When compliance thrives, enterprises thrive; when compliance is stable, development is stable. We hope this column will serve as a trusted partner for listed companies—providing insights into regulatory trends, helping to address compliance challenges, mitigating compliance risks, and strengthening the foundations of sustainable growth—so that together we can foster the sound and healthy development of the capital market.

　　I. Introduction to the Issue: Can Reverse Trading Serve as a Justification for Excluding Abnormal Trading Activity in Insider Trading Cases?

　　In the administrative enforcement and judicial practice concerning insider trading, defendants often argue that their trading activities lacked abnormality by pointing to the existence of reverse trades during the sensitive period for inside information, thereby seeking to preclude a finding of insider trading. Whether this defense has legal merit and whether it can effectively rebut the determination of trading abnormality remains a frequent point of contention in both regulatory proceedings and judicial adjudication.

　　Recently, our office’s attorneys represented a case involving loss‑avoidance‑type insider trading, in which the central issue was highly representative: The regulatory authority held that, during the sensitive period for inside information, the respondent engaged in selling shares after contacting and communicating with an insider, thereby constituting loss‑avoidance‑type insider trading. In response, the respondent argued that the trades were consistent with his personal investment habits and that he had adopted a bearish stance based on publicly available information, while also asserting that, following the sales at issue, he subsequently executed offsetting purchases, contending that, taken as a whole, the transactions lacked any abnormality and should not be characterized as insider trading.

　　Drawing on practical agency experience and taking the insider‑trading case of Zhou Moumou involving Jiangquan Industrial as a core case study, this paper empirically examines the limits of the effectiveness of reverse trading in determining the abnormality of insider transactions, clarifying that post‑trade reverse purchases made during the sensitive period do not have the legal effect of precluding the finding of an insider‑trading violation.

　　 II. Case Review: Practical Patterns of the Reverse Trading Defense

　　(1) The Formation and Transmission of Inside Information

　　Shandong Jiangquan Industrial Co., Ltd. (hereinafter referred to as “Jiangquan Industrial”) is a listed company on the Shanghai Stock Exchange and has been planning a backdoor listing since 2010; Weimidu Technology (Beijing) Co., Ltd. (hereinafter referred to as “Weimidu Technology”) planned to pursue a backdoor listing in 2013.

　　1. In January 2014, Liu Mouhui, an executive director of Weimeidu Technology, commissioned shareholders to seek a shell company;

　　2. In March 2014, Mr. Lü, a partner at Chengdu Hanyi Tiancheng Investment Center and a shareholder of Weimidu Technology, commissioned Mr. Ren, a sponsor representative at Chuancai Securities, to identify a shell company. Mr. Ren, in turn, sub‑delegated the task to Mr. Zhang Ye to assist with the screening process.

　　3. On April 10, 2014, at the arrangement of Zhang Mouye, Ye, a sponsor representative of Jiangquan Industrial, traveled to Chengdu to promote shell‑resource opportunities, and Zhang Mouye disclosed basic information about Jiangquan Industrial to those present.

　　4. On April 15, 2014, Lü sent Weimeidu Technology’s financial data to Ren Mosheng and commissioned him to draft a restructuring plan; Ren Mosheng, in turn, prepared the draft based on the “JQSY” (Jiangquan Industrial) information provided by Zhang Mouye.

　　5. On April 29, 2014, Ren MouSheng sent the restructuring plan to Lü Mou, who on the same day forwarded it to Liu MouHui; at that point, the inside information regarding the major asset restructuring of Jiangquan Industrial and Weimeidu Technology was officially established.

　　6. On May 13–14, 2014, the two parties held face-to-face discussions and conducted on-site inspections, reaching a preliminary agreement on the restructuring;

　　7. On June 12, 2014, Jiangquan Industrial issued a “Notice of Suspension of Trading Due to the Planning of a Major Asset Restructuring,” thereby disclosing inside information.

　　(II) Determination of the Subject’s Identity and Its Connection to the Transaction

　　The CSRC has determined that Zhang Mouye, as an intermediary in this restructuring, became aware of the inside information no later than April 29, 2014, and thus qualifies as a person legally required to be deemed an insider.

　　Zhou, a professor at a certain college in Chengdu, served as Zhang Mouye’s undergraduate advisor. The two maintained a close and long-standing relationship and engaged in financial transactions. During the sensitive period for the insider information at issue, Zhou frequently communicated with and directly contacted Zhang Mouye, and obtained from him information regarding expectations of a restructuring of Jiangquan Industrial.

　　(III) Determination of Trading Anomalies and Defense Based on Reverse Trading

　　1. Facts Found by the Regulator

　　Following its investigation, the securities regulatory authority determined that, in the insider‑trading case involving “Jiangquan Industrial,” Zhou Moumou contacted and communicated with an informed party, Zhang Mouye, prior to the disclosure of material nonpublic information, and used three trading accounts to make a sudden influx of funds for concentrated trading in “Jiangquan Industrial.” The timing of these trades closely coincided with both the moments when Zhou Moumou communicated with Zhang Mouye and with the times when Zhang Mouye himself traded “Jiangquan Industrial.” Furthermore, the Commission concluded that, during the sensitive period, Zhou Moumou abruptly transferred funds to execute concentrated trading in “Jiangquan Industrial,” demonstrating a office intent to purchase, and that the timing of these transactions was highly aligned with both the communication events and Zhang Mouye’s own trading activities—circumstances sufficient to establish that Zhou Moumou’s trading in “Jiangquan Industrial” was manifestly abnormal.

　　2. Defenses of the Defendant

　　Zhou Moumou raised several defenses, one of which is that during the period at issue, he both bought and sold shares; in particular, in the two trading days immediately preceding the suspension of trading in the stock, he engaged in a substantial volume of sales of “Jiangquan Industrial” shares. This selling activity demonstrates that his trading was not solely motivated by insider information for profit, and therefore his trading behavior does not exhibit any abnormality.

　　3. Regulatory and Judicial Ruling Conclusions

　　The securities regulatory authority, for its part, holds that Zhou’s sudden and determined buying activity, coupled with a high degree of temporal overlap between the trading moments and the times of contact as well as with Zhang Mouye’s own trading activities, is sufficient to establish that the trading behavior was manifestly abnormal. Moreover, the defendant’s claim that it engaged in only a small number of sales during the sensitive period does not suffice to dispel the overall abnormality of the trading pattern. This view has been upheld by courts at all three levels—including the Supreme People’s Court—in both the first-instance and second-instance proceedings, as well as in the retrial.

　　III. Core Logic: The Legal Basis for Recognizing Abnormality Despite Reverse Transactions

　　(1) The core criterion for assessing trading anomalies: information relevance, rather than the unidirectionality of trading direction.

　　The essence of insider trading is the use of non‑public, material information to obtain profits or avoid losses. At the heart of determining whether a transaction is abnormal is assessing whether there is a strong causal link between the trading activity and the inside information, rather than simply examining whether the trade was a buy or a sell. In the Jiangquan Industrial case, even though Mr. Zhou engaged in some sales, key facts—such as his sudden entry into the market, concentrated buying, and the close temporal alignment between the trading moments and the times of communication—directly demonstrate a direct causal relationship between the trading behavior and the inside information. The fact that the trades were executed in the opposite direction does not alter the fundamental nature of information exploitation.

　　(II) Reverse transactions must be assessed substantively from both quantitative and qualitative perspectives.

　　In judicial and regulatory practice, reverse transactions are not uniformly accepted; instead, they are subject to a dual review assessing both their quantitative proportion and the nature of the conduct:

　　First, at the quantitative level, the scale of reverse‑trade transactions is typically far smaller than that of like‑direction trades, serving only as a localized, ancillary activity and failing to alter the core characteristic of the overall trading pattern—namely, its reliance on insider information. In the Jiangquan Industrial case, Zhou Moumou, using his own account and those of two others, collectively purchased 3,436,489 shares, 281,200 shares, and 218,500 shares in large quantities, while the corresponding sales volumes were extremely low, thus not affecting the determination of overall abnormality.

　　Second, at the qualitative level, reverse trading may constitute risk‑management activity based on inside information, rather than an independent and legitimate market decision. Indeed, some actors use reverse trading to conceal their intent to engage in insider trading; in essence, such conduct still amounts to leveraging inside information to flexibly adjust trading strategies.

　　(3) The dynamic nature of inside information means that trading behavior may be subject to strategic adjustments.

　　Inside information exhibits dynamic changes throughout the planning and implementation phases. When a person adjusts their trading strategy in response to developments in the information or anticipated risks, this does not, in itself, indicate normal trading activity; rather, it may reflect a sophisticated exploitation of inside information. For example, in the Shiji Dingli insider‑trading case, the defendant, Shen, argued that he had sold shares after making purchases during the sensitive period. However, the regulatory authorities meticulously traced the formation and evolution of the inside information, examined the correspondence between his trading patterns and the information’s fluctuations, and found that the timing of his reverse trades coincided precisely with moments when the inside information experienced volatility or underwent a turning point. On this basis, they concluded that the reverse trading itself constituted clear evidence of abnormal trading behavior. Such “reverse trading” is, in fact, indicative of a deep exploitation of inside information, rather than grounds for dismissing its abnormality.

　　 IV. Practical Guidance: The Determination of Abnormality in Insider Trading Should Adhere to a Comprehensive Assessment Approach

　　Simply asserting that “reverse trading exists during a sensitive period” to claim that the transaction is not abnormal cannot, by itself, serve as a valid defense against liability. Both regulatory authorities and judicial bodies have explicitly rejected the “single‑feature negation theory,” which holds that a single characteristic—such as the direction of a trade—cannot be used to dismiss the overall abnormality of the conduct. Based on past precedents, both regulators and courts have consistently opposed this approach: the mere absence of irregularities in one aspect (e.g., the presence of reverse trading) does not suffice to negate the abnormality of the entire trading pattern. Instead, a comprehensive, multi‑factorial assessment must be conducted, focusing on the nexus between the trading activity and inside information. Key considerations include: 1) whether the funds involved exhibit unusual patterns, such as sudden inflows, rapid fundraising, or concentrated use; 2) whether the transaction size and position changes deviate markedly from historical trading habits; 3) whether the timing, proportion, and rationale of the reverse trades align with normal trading logic; 4) whether the trading behavior closely corresponds to the formation, evolution, and public disclosure of the inside information; and 5) whether the actor maintained any communication or contact with individuals privy to the inside information.

　　Of course, if the actor can indeed demonstrate that the reverse transaction was based on factors independent of inside information—such as publicly available information, a long-term investment strategy, or the need for risk diversification—and that both the reverse and the corresponding forward transactions are reasonable in scale and logically consistent, it may be possible to challenge the finding of abnormality. However, such cases are exceedingly rare in practice.

　　V. Conclusion

　　Reverse trading does not automatically constitute a valid defense against the finding of insider‑trading abnormality. In cases such as Jiangquan Industrial and Shiji Dingli, the courts have clearly established a consistent line of reasoning: the key criterion for determining the abnormality of insider trading lies in the high degree of correlation between the trading activity and the inside information, rather than in the unidirectional nature of the trade. A party’s mere assertion of “reverse trading” as a defensive argument cannot alter the fact that they have exploited inside information, nor can it rebut the overall abnormality of the trading conduct. This adjudicatory principle both upholds the core principle of “informational fairness” in the securities market and provides clear guidance for the regulation and judicial determination of insider trading.