Concerned party: Zhou Hehua，male, born in July 1966. He served as the Director, Deputy General Manager and Secretary of the Board of Guangdong Keda Mechinery & Electronics Co., Ltd. (hereinafter referred to as Keda) at the time of the violation. Now, he is General Manager of Guangdong Xincheng Financing & Leasing Co., Ltd. (hereinafter referred to as Xincheng Leasing), Director of Foshan Keda Stone-Machine Co., Ltd. （hereinafter referred to as Keda Stone-Machine）, and Executive Director of Keda Mechinery & Electronics (Hong Kong) Co., Ltd.（hereinafter referred to as Keda Hong Kong）. His address is No. 2, 8th Street, Yuanmingju, Shunde Country Garden, Shunde District, Foshan City, Guangdong Province.
According to the relevant provisions in the Securities Law of the People’s Republic of China (hereinafter referred to as the Securities Law)，CSRC placed the case about the stock insider trading of Keda Mechinery & Electronics on file for investigation and prosecution，and legally informed the concerned party of the fact, reasons and basis of deciding on an administrative punishment, and the rights of concerned party under the law. The concerned party made a legal statement and defense，but did not request a hearing. The investigation and hearing upon this case has ended.
The investigation results show that Zhou Hehua conducted the following violations：
1. Formation process of insider information
After the long-term communication with the principals of Foshan Henglitai Machinery Co., Ltd. （hereinafter referred to as Henglitai）, Keda Mechinery & Electronics made the basic framework about the acquisition of Henglitai in February 2010. The acquisition targets were 100% stock equities of Henglitai，including 51% stock equities of Touch Wood held by Henglitai. The acquisition consideration was determined according to the actual profits assessed and predicted, and the P/E ration slightly lower than 12 times. The annual profit of Henglitai was preliminarily estimated to be RMB 70 million to RMB 80 million. On March 23, 2010, the shares of Keda Mechinery & Electronics were temporarily suspended, and the continuous suspension started since March 24. On April 29, 2010, the trading of shares of Keda Mechinery & Electronics was resumed. That very day, the stock rose by 10%, and the Shanghai Composite Index rose by -1.10%.
According to Paragraph 2.1 in Article 75 of Securities Law, the above information belongs to the insider information that involves the company’s operation and finance or has a significant impact on the market price of company securities. The sensitive period of insider information was from February 10, 2010 to April 29, 2010 when the information was disclosed.
2. Related facts about the suspected insider trading through the “Zheng XXX” account
Zheng XXX had a securities account with the capital account number of 1868××××8903. On August 3, 2009, it was opened in the Jihualu Branch of GF Securities in Foshan. It had two shareholder accounts, namely Shanghai account with the number of A224 × × × 437, and Shenzhen account with the number of 0135 × × × 634. Zheng XXX and Zhou Hehua were a married couple. The main capital resource of”Zheng XXX” account was Zhou Hehua. The account transactions were conducted by both of them.
Zhou Hehua serving as Director of Keda Stone-Machine (a holding subsidiary of Keda Mechinery & Electronics) is the statutory insider. From March 15 to March 19, 2010, Zhou Hehua and Zhou XXX in the capacity of Secretary of the Board of Keda Mechinery & Electronics went together to Shanghai to handle the procedures of registering rights exercise for the company's ESOP participants. During that period, they stayed in the same hotel with the insiders, namely Legal Representative Bian XXX and General Manager Zhou XXX of Keda Mechinery & Electronics. There were certain days when they all stayed in the hotel and talked frequently over phone.
On March 17, 2010, Zhou Hehua sold a total of 14,000 shares of Galaxy Power stock through the ”Zheng XXX” account, and obtained the total sum of RMB 290,876.38. But compared to the original purchase amount of RMB 315,714.86, it means a loss of RMB 24,838.48, representing the loss ratio of 7%. The amount available in the”Zheng XXX” account increased from RMB 21,205.29 before the selling to RMB 312,081.67. Subsequently, 16,000 shares of Keda Mechinery & Electronics stock were bought through the ”Zheng XXX” account, with a total turnover of RMB 303,359.40, accounting for 97% of the account balance before buying. The transaction took place in Shanghai.
With regard to the purchase of Keda Mechinery & Electronics stocks through the ”Zheng XXX” account, Zhou Hehua and Zheng XXX deliberately concealed the truth. As for whether they were both in Shanghai when trading the stocks, Zheng XXX and Zhou Hehua had inconsistent answers when being inquired for three times. So, it shows they intentionally concealed the truth.
The behavior of buying the stocks of Keda Mechinery & Electronics in the sensitive period of the insider information is insider trading. The illegal income obtained by Zhou Hehua through the ”Zheng XXX” account was RMB 73,991.92. On December 27, 2010, Zhou Hehua sold 16,000 shares of Keda Mechinery & Electronics stocks that were bought on March 17, 2010. On December 28, he turned over RMB 73,991.92 to Keda Mechinery & Electronics.
The above illegal facts can be fully confirmed by the evidences including the inquiry records of relevant personnel, related account transaction records and statistical data.
Zhou Hehua’s behavior of trading the Keda Mechinery & Electronics stocks by taking advantage of the insider information violates Article 73 of Securities Law that provides ”prohibiting the insider of securities transaction insider information and the person who has illegally obtained the insider information from engaging in the securities trading activities by taking advantage of insider information”, and Article 76 that stipulates ”the insider of securities transaction insider information and the person who has illegally obtained the insider information can not trade the securities of the company before the disclosure of insider information”. In addition, it constitutes the behavior as described in Article 202 of Securities Law, namely ”the behavior of trading the securities by the insider of securities transaction insider information or the person who has illegally obtained the insider information，before the disclosure of information involving the securities issuance and transaction or having significant impact on the prices of securities”.
Zhou Hehua explained in his statements and defense materials：Prior to January 2010, he had quitted the positions such as Director and Deputy General Manager of Keda Mechinery & Electronics， Director of Keda Stone-Machine, and Executive Director of Keda Hong Kong, etc. Therefore, he thought he was not the statutory insider of insider information. Entrusted by General Manager Bian XXX, he stayed in Shanghai from March 15 to March 19, 2010 to assist Zhou XXX in handling the issue of registering rights exercise. No related matter about the acquisition of Henglitai was mentioned. From January 7 to March 17, 2010, besides the Keda Mechinery & Electronics stock, a lot of other stocks such as Ping An Insurance stock and TBEA stock were purchased through the ”Zheng XXX” account. He earnestly requested to be exempt from the administrative punishment.
But according to the 2009 Annual Report released by Keda Mechinery & Electronics on February 20, 2010, Zhou Hehua served as General Manager of Xincheng Leasing, Director of Keda Stone-Machine, and Executive Director of Keda Hong Kong. According to Paragraph 1.4 of Article 12 in the Equity and Option Incentive Plan of Keda Mechinery & Electronics, if an option holder resigns, all his or her unexercised stock options will be canceled since the date of leaving office. According to the Announcement on the Third Exercise Results and Equity Change Concerning the Stock Option Incentive Plan which was released on March 20, 2010, Zhou Hehua as the company's core technology (business) person was still an option holder.
From March 15-19, 2010, Zhou Hehua stayed in the same hotel as Bian XXX and Zhou XXX in Shanghai. During that period, they contacted each other frequently, making many calls and eating together.
From January 7 to March 4, 2010, the”Zheng XXX” account traded other stocks. No trading was carried out from March 4 to March 16. On March 17, Galaxy Power stocks were sold through this account to buy the Keda Machinery & Electronics stocks, despite of the loss. On that very day（March 17），Zhou Hehua, Bian XXX and Zhou XXX dined together and stayed in the same hotel, having the telephone contact. The time when Zhou Hehua bought the Keda Machinery & Electronics stocks was highly consistent with the time of contacting the insider，which obviously reflects the characteristics of insider trading.
In summary, the insider trading fact of Zhou Hehua is clear and evidence-verified. His defense facts and reasons are insufficient to make him exempt from the suspicion of engaging in the insider trading, so CSRC shall not accept his suggestion.
According to the fact, nature, case and social harm degree of concerned party’s unlawful act, and in accordance with Article 202 of Securities Law， CSRC decided to：Confiscate Zhou Hehua’s illegal income of RMB 73,991.92, and impose a fine of RMB 147,983.84.
Within 15 days after the punishment decision, the concerned party should submit the fine to China Securities Regulatory Commission.（Bank of deposit：Head Office of China Citic Bank; account No.:7111010189800000162. China Citic Bank will directly turn over the fine to the State Treasury.） Copies of payment voucher marked with the name of concerned party shall be sent to the Enforcement Bureau of China Securities Regulatory Commission for filing. In case of refusing to accept the punishment decision, the concerned party，may submit the application for administrative review to China Securities Regulatory Commission within 60 days after receiving the punishment decision, or institute an administrative litigation to the people’s court with the jurisdiction within three months after receiving the punishment decision. During the period of review and litigation, enforcement of the above decision shall not suspend.
China Securities Regulatory Commission
February 3, 2012