A recent final judgment from the Shanghai Financial Court has ordered a leading securities firm and a private equity firm to pay joint compensation of approximately 10.04 million yuan to an individual investor. The case involved the firms creating an improper trading channel to sell high-risk "snowball" derivative products to the investor, who is an executive of a listed company.
This landmark case fully exposes a grey industry practice where securities firms and private funds collude to bypass regulations on over-the-counter (OTC) derivatives. The court's "look-through" adjudication approach serves as a stark warning for compliance across the entire financial sector.
Persistent Solicitation and a Tailored, Improper Channel
The dispute originated from a six-month-long solicitation campaign by an employee of Huatai Securities Co., Ltd. (601688). Court documents reveal dramatic details.
In September 2022, a Huatai employee contacted a major shareholder of a listed company, referred to as Mr. Fei, via WeChat to promote snowball products, touting better pricing than competitors and exaggerating potential returns. Mr. Fei initially refused, stating the employee was unfamiliar with the business.
Undeterred, the employee persisted, pleading for another chance and offering conditions like connecting with top Shanghai investment managers and arranging for a team to fly to Zhengzhou for a meeting. These efforts gradually alleviated Mr. Fei's concerns, leading to an in-person meeting in March 2023, which initiated the setup of the improper trading channel.
Regulations explicitly state that counterparties for OTC equity options must be professional institutional investors, completely excluding natural persons. Snowball products, being complex structured derivatives with knock-in/knock-out features, are high-risk and off-limits to individuals.
To circumvent these rules, the Huatai employee designed a full scheme using a "private fund channel." This involved assisting Mr. Fei with bridge financing and guiding him to complete online contracts through a private fund managed by Beijing Fun Investment, effectively disguising his individual identity as an institutional investor to meet formal regulatory requirements.
The improprieties extended beyond identity masking. The Huatai employee directly executed trades based on Mr. Fei's instructions and even provided him with correct answers for compliance review tests. Beijing Fun Investment, acting as the channel, completely abdicated its independent risk management and investment decision-making duties, following Mr. Fei's commands and becoming a mere "shell" to evade supervision.
From April 2023 to August 2024, Mr. Fei used this channel to purchase 23 snowball products, transferring approximately 66.85 million yuan in margin. As the underlying stock prices fell, triggering multiple margin calls, the products were eventually liquidated. Mr. Fei recovered only about 52.5 million yuan, incurring a net loss exceeding 14.34 million yuan.
Market observers speculate, based on shareholding and surname, that the investor is likely Fei Zhanbo, former chairman and largest shareholder of Xintian Technology. However, no party involved has officially confirmed this.
Look-Through Adjudication: Channel Disregarded, Firms Held Jointly Liable
Following the substantial losses, Mr. Fei filed a complaint with the Jiangsu Securities Regulatory Bureau. In November 2024, the bureau issued a warning letter to Huatai Securities, confirming two core violations: conducting OTC options transactions with non-professional institutional investors and failing to adequately monitor product holdings; and having deficient branch compliance management, including employees providing test answers, handling trades for clients, and assisting non-professional investors in OTC options.
Armed with this regulatory finding, Mr. Fei sued both Huatai Securities and Beijing Fun Investment for infringement. The first-instance court in Shanghai's Minhang District clearly apportioned liability: Huatai Securities bore primary responsibility (70%) for improper solicitation, assisting in establishing the违规 channel, and failing in suitability obligations; Beijing Fun Investment, as the channel provider, was jointly liable for配合违规操作; Mr. Fei, knowing his own disqualification yet主导 all investment decisions, bore 30% responsibility.
Both defendants appealed. Huatai argued the contracting party was the private fund product, not the individual. Beijing Fun Investment claimed losses were due to market volatility and client decisions, and its channel role was neutral. The Shanghai Financial Court dismissed all appeals, upholding the original judgment.
The court's core logic was clear: look through form to substance. It ruled that both firms, as professional financial institutions, knowingly circumvented mandatory regulations by setting up a fund channel for an ineligible individual. This破坏 financial market order and directly caused the investor to commit large funds without fully understanding extreme risks. The违规行为 directly caused the losses, constituting joint infringement and连带赔偿责任.
Legal experts view this judgment's significance as extending far beyond the individual case. It dismantles the grey practice of using private funds or asset management products as "white gloves" to grant individuals access to high-risk derivatives, effectively nullifying investor suitability rules. This look-through adjudication establishes a precedent: no matter how well disguised, if the underlying beneficiary is a natural person, the包装 is无效.
Systemic Compliance Failures and Industry-Wide Implications
The fact that a top-tier firm like Huatai Securities engaged in such systematic违规操作 exposes deep-seated compliance management flaws.
From frontline employees designing schemes to evade rules, to coaching clients on falsifying suitability tests, to branches failing to detect and stop违规业务, it indicates a performance-driven culture that prioritizes scale over compliance, with superficial employee conduct controls and suitability management.
This ruling establishes three clear judicial benchmarks for the securities and private fund industry.
First, there is no longer grey area for "channel-based" regulatory circumvention in OTC derivatives. Courts will look through to the actual investor identity. If the underlying party is an ineligible investor, institutions involved in creating the channel will be held liable.
Second, investor suitability obligations must be substantive, not procedural. Providing test answers, operating accounts for clients, or concealing extreme risks—common "business tactics"—will be judicially deemed违规 and form the basis for liability.
Third,协同违规 has no "免责方." When a securities firm and a private fund分工配合 to complete an违规交易, they bear joint and several liability, with no distinction between primary and secondary responsibility. The investor can claim full compensation from either party. This forces cross-compliance checks between securities firms and their partner funds, preventing mutual blame-shifting.
From the low-pressure sales pitch of "pleading for a chance" to the final multi-million yuan compensation order, this case serves as a lesson for all financial institutions: seeking业绩 by钻监管空子 will ultimately incur a higher cost. Against the backdrop of tightening financial regulation and穿透式 judicial review, adhering to合规底线 is the true foundation for long-term institutional survival.
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