In 2004, a great loss in the structured bond products of the United Investment Trust led to a significant decline in the fund's net worth, triggering a bank-run-like situation in which investors redeemed the fund in large amount. At that time, the Financial Supervisory Commission ("FSC") took relevant measures to ease the redemption and set up the "Bond Fund Liquidity Improvement Task Force" to regularly review and track changes in the liquidity of bond funds, as well as their subscription and redemption status. In February 2005, in order to avoid the crisis of massive redemption by investors, which would once again lead to systemic risk in the financial market, the FSC requested each securities investment trust company to liquidate all structured bonds by the end of December 2005. The FSC requested that the structured bonds be liquidated in accordance with the following principles: (1) in compliance with existing laws and regulations; (2) no loss to the fund beneficiaries; and (3) any loss should be absorbed by the shareholders of the securities investment trust companies ("Three Principles").

At that time, all the securities investment trust companies holding structured bonds, while fulfilling FSC's requests, had tried to minimize their losses in various ways. Company A, the securities investment trust company who was unable to bear the loss incurred from the liquidation of structured bonds, had sold its structured bonds to five investment companies owned by the family of Company A's chairman. These five investment companies then used the structured bonds to raise funds from Company B, a company founded by Company A's chairman, through the Reverse Repurchase Agreement ("RS").

In 2009, the prosecutor believed that the chairman of Company A had sold the structured bonds of Company A and bought them back with the chairman's affiliates, which was suspected of obtaining excessive loans from Company B and transferring the damages that should have been absorbed by the shareholders of Company A to Company B. The prosecutor charged the chairman of Company A and his wife for the crime of special breach of trust under the Securities and Exchange Act.

The courts of the first and second instance both convicted the defendants of the crime of special breach of trust under the Securities and Exchange Act, holding that regardless of whether the FSC's Three Principles are administrative guidance or administrative decision, the FSC had the authority to make the rules. As a business that needs special license from the government, the securities investment trust company should follow the Three Principles. Since the defendants had violated the Three Principles when liquidating the structured bonds and caused damages to Company B, they had committed the crime of special breach of trust under the Securities and Exchange Act.

However, after the case was remanded by the Supreme Court, the courts of the first and second new trial held that the promulgation of the Three Principles by FSC had violated the organic laws. The principles of "no loss to the fund beneficiaries" and "any loss should be absorbed by the shareholders of the securities investment trust companies" under the Three Principle not only were obviously contrary to market and international practice, but also had violated the provision in the Company Act stating shareholders should only bear limited liability. The Three Principles were administrative guidance with no binding effects. Furthermore, after investigating how the FSC had handled the United Investment Trust incident in 2005, the Control Yuan considered that FSC had failures in promulgating the Three Principles and therefore proposed corrective measures against FSC. Besides, what the defendants have done were based on reasonable business judgments. The defendants were acquitted in both the first and second new trial.

Since the securities investment trust companies are business that needs special license from the government, those companies are usually unable to refuse instructions or requests from the competent authority, regardless of the form, in order not to affect the approvals for issuing new funds or to changing the size of the existing funds in the future. However, if the competent authority's request goes against the market practice with no precedent, the enterprise can only manage to fulfill such request in other ways (e.g., in this case, the special trading model was designed to avoid the collapse of Company A, which was unable to bear the loss of liquidating the structured bonds at once). In determining whether the crime of breach of trust has been committed, several courts have adopted the "business judgment rule." Under such circumstance, if it can be proved that the defendant's actions are to meet the competent authority's requests, such actions are in compliance with the business judgment rule, and the defendant has no criminal or unlawful intent, there is still a chance for the defendant to be acquitted.

(The article is originally in Chinese which can be found here.)