The former chief investment officer of Everbright Pramerica fund management company, Xu Chunmao, is being investigated by police over allegations of insider trading.

If convicted, he faces up to 10 years in prison and could become only the second fund manager in China to be jailed for front-running. Just last month, Han Gang, a former fund manager at Shenzhen-based Great Wall FMC, was imprisoned for a year for just such an offence.

The case against Xu was referred for criminal prosecution after an investigation by the China Securities Regulatory Commission (CSRC), which has sought to crack down on insider trading as part of the “three bottom lines” along with breaches of fair trading and prevention of benefits transfer.

China’s stricter Criminal Law Amendment Act (7) came into effect in February 2009 and industry figures have called for more jail terms as the only sufficient deterrent.

It is alleged that Xu, when serving as CIO and fund manager at Everbright Pramerica, profited from trading securities prior to, simultaneously or slightly after the firm’s mutual funds purchased such securities, says a filing on the Shanghai Asset Management Association (Sama) website.

It is claimed that Xu engaged in front-running through related security accounts. The Shanghai Securities Bureau, the regional arm of the CSRC, carried out the investigation.

Xu resigned from Everbright Pramerica in April last year to join Lombarda China FMC as deputy general manager, but left soon afterwards. He was reportedly under investigation in August.

The investigation of Xu meant that the CSRC placed Everbright Pramerica’s new fund application on hold in early January this year. The regulator resumed processing the company’s new fixed-income fund application on March 10, according to local media.

On May 30, Sama also reported that Huang Lin, a former fund manager at Franklin Templeton Sealand FMC, had traded the same eight securities as in the fund’s portfolio through another person’s account prior to or simultaneously as the China Income fund under his management from March 2007 to April 2009.

Huang was fined Rmb300,000 ($46,000) by the CSRC, which also banned him for 10 years from engaging in securities business and taking up positions as director, supervisor or senior manager at publicly listed companies. His securities qualification was revoked as well.

During the first 10 months of last year, the CSRC examined 114 allegations of insider trading and conducted formal investigations on 42 of them. As a result, 16 people and two institutions received administrative punishments and 15 cases were referred to police.