Misstatement

1. Overview
2. Development of civil liability regime
3. Key elements of civil liability
4. Procedural issues of civil suits
5. Model case regime

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1. Overview
◼ Misstatement: Securities Law2019
❑ S19: prospectus disclosure
◼ The application documents for securities offering submitted by
an issuer shall fully disclose the information required by
investors for making value judgments and investment
decisions, and the content shall be true, accurate and
complete.
◼ A securities service intermediary and its staff that produce the
relevant documents for securities issuance shall strictly
perform its/his statutory functions and duties, and guarantee
the truthfulness, accuracy and completeness of the
documents as produced thereby

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❑ s 78: continuous disclosure
◼ The issuer and other parties with information disclosure
obligations provided for by laws, administrative regulations
and the provisions issued by the securities regulatory authority
of the State Council shall legally perform the information
disclosure obligation in a timely manner.
◼ The information disclosed by the parties with information
disclosure obligations shall be true, accurate and complete真
实、准确、完整, concise and clear, easy to understand 简明清
晰，通俗易懂, and shall not contain any false records,
misleading statements or material omissions

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The reality…

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Overview (cont)

◼ Legal liability regime in China: Securities Law2019

❑ Criminal liability:
◼ serious misconduct may attract criminal liability
❑ Administrative liability:
◼ CSRC
❑ Civil liability:
◼ Focus of our discussion

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Criminal liability
◼ For fraudulent offering: S160 of Criminal Law
(Amendment 11 or Amendment 2020, promulgated on 26
December 2020, effective from 1 March 2021)
❑ Whoever issues any shares of stock, corporate or enterprise
bonds, depositary receipts, or other securities determined
by the State Council in accordance with the law by
concealing any material fact or falsifying any major content
in the share offering prospectus, share subscription form,
corporate or enterprise bond offering prospectus, or any
other offering document shall, if the amount involved is
huge, the consequences are serious, or there is any other
serious circumstance, be sentenced to imprisonment of not
more than five years or limited incarceration and a fine or
be sentenced to a fine only;
◼ or if the amount involved is especially huge, the consequences are
especially serious, or there is any other especially serious
circumstance, shall be sentenced to imprisonment of not less than
five years and a fine

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❑ The controlling shareholder or actual controller who
organizes or instigates the commission of any conduct
in the preceding paragraph shall be sentenced to
imprisonment of not more than five years or limited
incarceration and a fine of not less than 20% nor more
than one times the illegal offering proceeds or be
sentenced to such a fine only;
◼ or if the amount involved is especially huge, the
consequences are especially serious, or there is any other
especially serious circumstance, shall be sentenced to
imprisonment of not less than five years and a fine of not
less than 20% nor more than one times the illegal offering
proceeds.

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Criminal liability
◼ For continuous disclosure: s161 of Criminal Law
❑ Where a company or an enterprise with information
disclosure obligations in accordance with the law provides
its shareholders and the public with a financial accounting
report which is false or conceals any material fact, or fails to
disclose according to the applicable provisions any other
important information that shall be disclosed in accordance
with the law, causing any seriously damage to the interests
of shareholders or any other person or with any other
serious circumstance, its directly liable executive in charge
and other directly liable persons shall each be sentenced to
imprisonment of not more than five years or limited
incarceration and a fine or be sentenced to a fine only;
◼ or if the circumstances are especially serious, shall each be
sentenced to imprisonment of not less than five years nor more
than ten years and a fine.
❑ …

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Administrative liability
◼ for fraudulent offering: s181 of 2019 Securities Law
❑ An issuer that conceals any important fact or fabricates any
major false content in its announced securities offering
documents shall be fined not less than two million yuan but
not more than 20 million yuan if it has not offered
securities; or if the issuer has offered securities, it shall be
fined not less than 10% but not more than one time the
amount of funds unlawfully raised. The directly responsible
person in charge and other directly liable persons shall be
fined not less than one million yuan but not more than 10
million yuan.
❑ Comment:
◼ Significantly higher than before (s189 of the old law): a fine of
300, 000 yuan up to 600, 000 yuan for issuer, and a fine of
30,000 yuan up to 300, 000 yuan for the responsible persons

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❑ Where the issuer's controlling shareholder or actual
controller organizes or instigates the commission of any
violation of law prescribed in the preceding paragraph, its
illegal income shall be confiscated and it shall be fined not
less than 10% but not more than one time the amount of
illegal income; if it has no illegal income or its illegal income
is less than 20 million yuan, it shall be fined not less than
two million yuan but not more than 20 million yuan. The
directly responsible person in charge and other directly
liable persons shall be fined not less than one million yuan
but not more than 10 million yuan.

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Admin liability
◼ for continuous disclosure: s197 of 2019 Securities Law
❑ Where the party with information disclosure obligations fails to
submit the relevant report or perform the information disclosure
obligation in accordance with the provisions of this Law, it shall
be ordered to take corrective action and given a warning and
fined not less than 500,000 yuan but not more than five million
yuan; and the directly responsible person in charge and other
directly liable persons shall be given a warning and fined not less
than 200,000 yuan but not more than two million yuan.
❑ If the issuer's controlling shareholder or actual controller
organizes or instigates the commission of the aforesaid violation
of law, or conceals the relevant information, resulting in the
occurrence of any of the aforesaid circumstances, it shall be fined
not less than 500,000 yuan but not more than five million yuan;
and the directly responsible person in charge and other directly
liable persons shall be fined not less than 200,000 yuan but not
more than two million yuan

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❑ Where the report submitted or information disclosed by the party
with information disclosure obligations has any false records,
misleading statements or material omissions, it shall be
ordered to take corrective action and given a warning and fined
not less than one million yuan but not more than ten million yuan;
and the directly responsible person in charge and other directly
liable persons shall be given a warning and fined not less than
500,000 yuan but not more than five million yuan.
❑ If the issuer's controlling shareholder or actual controller
organizes or instigates the commission of the aforesaid violation
of law, or conceals the relevant information, resulting in the
occurrence of any of the aforesaid circumstances, it shall be fined
not less than one million yuan but not more than ten million yuan;
and the directly responsible person in charge and other directly
liable persons shall be fined not less than 500,000 yuan but not
more than five million yuan.

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❑ Comments:
◼ Significantly higher than before (s193 of the old law): a fine of
300, 000 yuan up to 600, 000 yuan for issuer, and a fine of
30,000 yuan up to 300, 000 yuan for the responsible persons
◼ 16/April/2018: Ms Zhao Wei case on information disclosure
❑ 万家文化、龙薇传媒 each fined RMB600,000;

❑ Zhao Wei and her husband etc. each fined RMB300,000 as

well as 5-year barring
❑ a long story…but is it just information disclosure case?

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2. Development of civil liability regime

◼ Importance of civil liability

❑ Role of Civil Liability (private enforcement)
◼ Complement public enforcement
❑ Functions:
◼ Compensatory;
◼ Deterrence

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◼ A historical review
❑ Securities Law of 1999:
◼ Provides in principle for civil remedy, but courts were reluctant
◼ Widespread misstatement incidents in the market: Dot com boom
❑ 2001 SPC Circular:
◼ A temporary ban: legislative and judicial conditions were not ripe
❑ 2002 SPC Circular:
◼ Lifted the temporary ban, but too simple (5 articles only)

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◼ 2003: watershed in the history of China’s securities law
❑ Supreme Court’s Provisions on Misstatement (SCPM)
❑ Full title:
◼ Zuigao Renmin Fayuan Guanyu Shenli Zhengquan Shichang Yin
Xujia Chenshu Yinfa De Minshi Peichang Anjian De Ruogan Guiding
[Provisions of the Supreme People’s Court Concerning the
Acceptance and Trial of Civil Compensation Securities Suits
Involving Misstatement] (effective from February 1, 2003)
❑ An interesting feature of China’s legislative system

◼ S69, s173 of Securities Law of 2005

❑ Partly codify the 2003 SCPM

◼ S85, s163 of Securities Law 2019

❑ Basically the same, except that controlling shareholder and
actually controller are also subject to presumption of fault

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◼ 2022 SPC Circular
❑ Zuigao Renmin Fayuan Guanyu Shenli Zhengquan
Shichang Xujia Chenshu Qinquan Minshi Peichang
Anjian De Ruogan Guiding 最高人民法院关于审理证券
市场虚假陈述侵权民事赔偿案件的若干规定 [Provisions
of the Supreme People’s Court Concerning the Trial of
Civil Compensation Cases Involving Securities Market
Misstatements] (issued 21/01/2022; effective
22/01/2022)
❑ 35 provisions, divided into 8 parts

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3. Key elements of Civil liability
◼ What is misstatement? s4 and s5 (2022 Circular,
unless specified otherwise)
❑ 1. False or misleading statement
❑ 2. Material omission
◼ The standard of materiality: TSC Industries Inc v Northway Inc
(1976)
❑ 3. Inappropriate disclosure
◼ Not timely;
◼ Not in a proper way:
❑ A statement which is literally true may nevertheless be misleading
❑ Example: National Exchange Pty Ltd v ASIC [2004]
▪ Price v payment methods

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Forward-looking info (FLI)

◼ S6: when the plaintiff claims that the issuer commits

misstatements because the forward-looking
information disclosed, such as earnings forecasts
and development plans, is significantly different from
the actual situation, the court shall not support such
claim, unless:
1. The disclosure document does not adequately provide
risk warnings of the major factors affecting the realization
of the FLI;
2. The basic assumption and accounting policies used as
the basis for the FLI are obviously unreasonable;
3. There are significant changes to the premise of the FLI,
but the FLI is not updated timely

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Materiality
◼ S10: misstatements are material in any of the following
circumstances:
1. The content of the misstatement is major event as defined
under s80(2) and s81(2) of 2019 Securities Law
2. The content of the misstatement is major event as stipulated by
the regulator
3. The making, exposure or correction of the misstatement causes
the trading price or trading volume of relevant securities to
change significantly
For 1 and 2, if the defendant proves that misstatement did not cause
significant changes to the trading price or trading volume, then
it is not material
◼ Note:
❑ How to judge “trading price or trading volume”?: judicial
discretion
❑ CSRC administrative penalty is no longer determinative: see
later slides

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◼ Who can sue?: s1 of 2022 Circular
❑ Anyone suffers loss due to misstatements in the
offering and trading of securities in securities trading
places
◼ S34: including stock exchanges (Beijing; Shanghai; Shenzhen)
and other national securities trading places as approved by
the State Council
◼ Cover both primary market and secondary market
❑ Regional equity market
◼ can be referred to (参照适用)

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Key elements

◼ Who are defendants?

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Defendants
◼ s85 & s163: 2019 Securities Law
❑ 1. Controlling SH and actual controllers
❑ 2. Issuers or listed companies
❑ 3. Senior management members
◼ directors, supervisors; managers and other senior officers
◼ persons who are directly responsible
❑ 4. Underwriters
❑ 5. Listing sponsors
❑ 6. Securities service institutions (Professional intermediaries)
◼ Accounting firms; law firms; etc
◼ Proportionate liability
❑ 7. Other entities or individuals who commit misstatements
◼ 2022 Circular: M&A counterparts; suppliers, clients etc

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◼ S85 of 2019 Securities Law:
❑ Where the party with information disclosure obligations fails
to disclose information according to relevant provisions, or
there are any false records, misleading statements or
material omissions in the announced securities offering
documents, periodical reports, interim reports and other
information disclosure materials, which causes any loss to
investors in securities trading, the party with information
disclosure obligations shall assume compensatory liability.
❑ The issuer's controlling shareholder, actual controller,
directors, supervisors and senior executives and other
directly liable personnel and the sponsor, the underwriting
securities company and their directly liable personnel shall
assume compensatory liability jointly and severally with
the issuer, unless they can prove that they have no
fault.

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◼ S163 of 2019 Securities Law:
❑ A securities service institution that prepares and issues
such documents as audit reports and other authentication
reports, asset appraisal reports, financial advisory reports,
credit rating reports and legal opinions for securities
offering, listing, trading and other securities business
activities shall act with due diligence and inspect and verify
the veracity, accuracy and integrity of the content of the
documents and materials serving the basis.
❑ If the documents prepared and produced by it have any
false records, misleading statements, or material
omissions, causing any loss to any other person, it shall
assume compensatory liability jointly and severally with the
client, unless it can prove that it has no fault.

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◼ Any defences?

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Daqing Lianyi case（大庆联谊）2004

◼ The first major case on misstatement

❑ 大庆联谊石化总厂 (Daqing Lianyi Petro-chemical
General Plant) established Daqing Lianyi Ltd（大
庆联谊） and got it listed in Shanghai
❑ Shenyin wanguo （申银万国）was the
underwriter
◼ misstatements:
❑ 1997: prospectus; listing notice
❑ 1998: annual report

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◼ Disputes:
❑ Daqin Lianyi:
◼ misstatement was made by its controller, not the company
itself
❑ Shenyin Wanguo:
◼ misstatement was made by the company, not the underwriter;
◼ further, underwriter has no duty and ability to detect/stop
misstatement
❑ What do you think?

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Defenses:

◼ Strict liability
❑ Issuer; Listed company
◼ Fault-based liability for other people, but rebuttable
presumption: the defendant has the onus of proof

◼ S13: the “fault” can be divided into two types:

❑ Intentional;
❑ The defendant seriously violates the duty of care, and thus
has negligence in relation to the misstatement

❑ NOTE: it should be gross negligence…

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Directors, supervisors, management
◼ S14: directors, supervisors, senior managers and other
directly responsible persons claim no fault for
misstatements, the court shall consider the following
factors:
❑ The person’s post and responsibility;
❑ The role the person plays in the formation and dissemination of
disclosure documents;
❑ The way the person obtains and understands relevant
information;
❑ The measures the person takes to verify relevant information
If the above persons cannot provide evidence on care and diligence,
and claim no fault merely on the grounds that they do not engage in
daily operation of the company, do not have professional
backgrounds and specialist knowledge, believe the materials
provided by the issuer or its management, or believe the
professional opinions provided by securities service institutions, the
court will not support

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◼ S15: The issuer’s directors, supervisors and senior
management, according to s82 of Securities Law, express
opinions with specific reasons attached in written form,
which are disclosed, the court may hold that they have no
fault, unless they cast an affirmative vote in discussing and
verifying disclosure documents.
◼ S82 of 2019 Securities Law
❑ An issuer's directors and senior executives shall sign written
confirmation opinions on securities offering documents and
periodical reports.
❑ The issuer's board of supervisors shall examine the securities
offering documents and periodical reports prepared by the board
of directors and offer written examination opinions. Supervisors
shall sign written confirmation opinions.
❑ The issuer's directors, supervisors and senior executives shall
ensure that the issuer discloses information in a timely and fair
manner, and the information disclosed is true, accurate and
complete.
❑ …

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Independent directors (ID)
◼ S16: If ID can prove any of the following
circumstances, the court shall hold him to have
no fault
◼ Before signing relevant disclosure documents, he was
not able to find problems even using the assistance of
professionals such as accountants and lawyers in
relation to relevant specific issues that do not belong
to their areas of expertise;
◼ What is meant by “using the assistance”? Need to use it with
care and diligence?
◼ Does it mean that non-accounting/legal IDs will have an easier
job? Can accounting/legal IDs use others’ assistance too?
◼ …

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ID (cont.)

❑ If ID produces evidence that he has performed

duties in accordance with the law, regulation and
company constitution, or after the misstatement is
exposed, timely urged the issuer to rectify the
situation and the result is good, the court can take
it into account in determining his extent of fault.

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Underwriter/Sponsor
◼ S17: sponsors, underwriters and their directly responsible
persons need to submit due diligence (DD) working paper,
DD report and internal assessment opinions, and if they
can prove the following circumstances, the court shall hold
them to have no fault:
❑ They already did DD on the relevant content of disclosure
documents in accordance with law, regulation and industry
standards;
❑ In relation to the content that is not supported by professional
opinions of securities service institutions, they have reasonable
grounds to believe that the content is true, after DD and
independent judgment;
❑ In relation to the content that is supported by professional
opinions of securities service institutions, they have reasonable
grounds to rule out professional skepticism and form reasonable
reliance, after careful verification and necessary investigation
◼ Comment:
❑ “professional skepticism”, “reasonable reliance”: judicial
discretion

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Case of Xingtai Dinaqi (欣泰电气）
◼ Dongyi Law Firm (东易律师事务所) sanctioned by the
CSRC in 2017
❑ misstatements in its legal opinion for the IPO, stating that
“according to audit report…there is no false records in the
company’s accounting book in the past three years”
◼ Based on the auditing report issued by Beijing Xinghua
Accounting Firm (北京兴华会计师事务所)
❑ Xinghua was sanctioned by the CSRC in 2016 for misstatements
◼ CSRC：
❑ Dongyi Law Firm failed to perform due diligence, as it did not
properly check relevant documents, and simply rely on the
reports of others; working papers were not complete
❑ Affirmed at admin litigation before Beijing 1st Intermediate Court
and then the High court of Beijing

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◼ Comment:
❑ Due diligence?:
◼ need to go through certain procedures even if it may not
be able to detect fraud
❑ Reliance defence?:
◼ Reasonable and not blind/full reliance
❑ Overlap of legal and non-legal work
◼ Accounting issues: accuracy of financial statement
◼ Legal issues: accuracy of debt relationship
❑ Legal fee
◼ Only 900k in the case
◼ Chicken-egg situation

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◼

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Securities service institutions (SSI)
◼ S18:
❑ If there are misstatements in the documents produced by
SSIs, such as accounting firms, law firms, credit rating
agencies, asset valuation agencies, financial advisors, the
court shall decide whether they have fault, on the basis of
law, regulation, rules, industry standards, as well as the
evidence such as working paper on their verification work.
◼ Expert liability
❑ The liability of SSIs shall be limited to their scope of work
and professional areas. If an SSI relies on the ground work
or professional opinions of the sponsor or other SSIs,
causing its professional opinion to contain misstatements,
and it can prove that it rules out professional skepticism
and forms reasonable reliance after conducting careful
verification and necessary investigation in relation to the
ground work or professional opinions it relies on, the court
shall hold that it has no fault.
◼ Proportionate liability

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Accounting firms
◼ S19: if accounting firms can prove any of the following
circumstances, the court shall decide it has no fault:
❑ Did not find errors in the audited materials, after conducting
scrutiny and maintaining necessary professional diligence, in
accordance with practice codes and rules
◼ due diligence defense
❑ relevant entities that auditing business must rely on, such as the
financial institutions, suppliers and clients, provided untrue
documents, and accounting firms did not find out even though
they maintained necessary professional diligence
◼ In practice
❑ made warnings about the fraud of the issuer, and expressed
cautious auditing opinions in the auditing report
❑ Other circumstances which can prove no fault

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Special provisions on defendants
◼ S20: controlling shareholder (CS)/actual controller
(AC)
❑ If the CS/AC of the issuer organizes and orders the issuer
to commit misstatements, causing the plaintiff to suffer
loss, and the plaintiff asks them to be directly held liable for
compensation, the court shall support.
❑ If CS/AC organizes and orders the issuer to commit
misstatements, and after having taken responsibility to
compensate investors, the issuer asks the CS/AC to
compensate it for the money it pays to investors,
reasonable lawyer fee and litigation fee, the court shall
support.

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❑ Note: Punish the mastermind（追首恶）
◼ CS/AC are often the key problem: Chinese characteristics

❑ BUT
◼ Really necessary to stipulate “directly”?:
❑ s85 already provides for joint and several liability for CS/AC
◼ Who has the burden to prove “organizes and orders”?
❑ The plaintiff?
❑ Can the reverse of burden rule under s85 apply?
◼ Actually reduce rather than tighten liability for CS/AC?:
❑ “organizes and orders” implies intention, but s85 is not limited to
intention and may cover negligence

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◼ S21: M&A counterparty
❑ If the information provided by the counterparty to
a major M&A deal falls short of the standard of
being true, accurate and complete, causing the
information disclosure of the listed company to
contain misstatements, and the plaintiff asks the
counterparty and the company to jointly
compensate for losses, the court shall support.
❑ Note:
◼ In practice, use dubious M&A deal （忽悠式并购重组）
to influence share price
◼ 赵薇 case

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◼ S22:
❑ If there is evidence that the issuer’s suppliers, clients,
and financial institutions that provide services to the
issuer, knowing that the issuer commits
misstatements, still collaborate with the issuer by
providing relevant contract, invoice and deposit proof,
or intentionally concealing important facts, thus
causing the issuer’s disclosure documents to have
misstatements, and if the plaintiff asks them and the
issuer to jointly compensate for losses, the court shall
support.
❑ Note: Punish accomplice (打帮凶）
◼ Punishable only when it is intentional
◼ Q: can the plaintiff separately sue the accomplice for
compensation first, as is the case with sponsor?

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Joint and Several Liability

◼ Case of Xingtai Dinaqi (欣泰电气）

❑ Xingye Securities（兴业证券), the sponsor for the
IPO, paid the full amount and then sought recourse
against other responsible parties
◼ Jointly and severally liability
❑ Can the plaintiff sue anyone for the whole
compensation?
◼ In practice, who may be targeted most often?
❑ How to seek recourse against others?

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◼ S23: joint and several liability
❑ The distribution and recourse of liability amongst the
parities who are held jointly and severally liable shall
be handled according to Article178 of Civil Code,
except for the circumstances stipulated under s20(2)
of this Circular
◼ Article 178 of Civil Code: if two and more people are held
jointly and severally liable, the rights holder can ask some of
them or all of them to take responsibility.
◼ The portion of liability for each of the jointly responsible people
shall be decided according to their responsibility, and if it is
hard to decide, they shall be liable equally. If some of them
actually take more liability than their fair share of liability, they
can have recourse to other jointly responsible parties.
❑ If sponsors and underwriters asks the issuer or its
controlling shareholders/actual controller to
compensate for its misstatement liability according to
their agreement, the court shall not support.
◼ Avoid the issue of moral hazard

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❑ Comments:
◼ Still NO clear guidance on the recourse and proportion
of liability
◼ In practice, rule of thumb: 5%, 10%...

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International comparison
◼ US prospectus liability regime: s 11 of 1933
Securities Act
❑ An issuer’s liability is absolute with but one exception:
◼ Unless it is proved that the plaintiff knew of the untruth or
omission at the time of transaction: s11(a)
❑ Other defendants: fault-based
◼ resignation and notification to SEC: s 11(b)(1)
❑ Before the effective date of the statement… ‘had resigned
from…or ceased or refused to act in, every office, capacity, or
relationship… and he had advised the Commission and the
issuer in writing that he had taken such action and that that he
would not be responsible… ’
◼ Withdrawal consent: s11(b)(2)
❑ if statement becomes effective without the person’s
knowledge…notified SEC and gave reasonable public
notice…

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❑ due diligence defence: s 11(b)(3)(A)-(B)
◼ ‘had, after reasonable investigation, reasonable ground to
believe and did believe…that the statements were true…’
❑ Reliance defence: s 11(b)(3)(C)
◼ ‘had no reasonable ground to believe and did not
believe…that the statements were untrue…’
❑ reliance may not be blind: a “red flag” may affect the ability of
a non-expert (underwriter) to rely on expert statement (auditor)
❑ The standard of reasonableness: s11(c)
◼ shall be that required of a prudent man in the management of
his own property
❑ Jointly and severally liable: s11(f)
◼ The person who is sued and makes the payment may recover
contribution from others who, if sued separately, would have
been liable to make the same payment

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US (cont.)

❑ Other provisions of 1933 Securities Act:

◼ S12: civil liability arising in connection with prospectus
and communication
◼ S15: liability of control persons
❑ Frequently used as a supplement
❑ Similarly require proof of a mental state and apply
proportionality liability rule
◼ S17(a): SEC power to regulate

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International comparison
◼ Cf. Australia: s731-33 Corporations Act 2001
❑ Defences prospectuses: fault-based liability regime for
all
◼ Due diligence defence for prospectuses
❑ The person made all inquiries (if any) that were reasonable in the
circumstances; and
❑ after doing so, believed on reasonable grounds that the statement
was not misleading or deceptive or that there was no omission
from the prospectus
◼ Lack of knowledge defence for offer information statements and
profile statements
❑ General defences for all disclosure documents
◼ Reliance defence
◼ Withdrawal of consent
◼ Lack of knowledge of new matter

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Key elements (cont)

◼ Should the plaintiff prove reliance &

causation?

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◼ s11: the causation between misstatement and investment
decision can be established if the plaintiff can prove the
following:
1. The defendant committed misstatement;
2. The plaintiff traded securities related directly to the
misstatement;
3. the plaintiff traded after the ‘misstatement day’（虚假陈述
日） and before the ‘exposure day’（揭露日） or
‘correction day’（更正日）

◼ NOTE: “fraud on the market” theory

❑ A rebuttable presumption

◼ s12: the causation does not hold in the following

circumstances:
❑ (2) the plaintiff knew and should have known the misstatement at
the time of trading
❑ …

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◼ Misstatement day: s7
❑ For misstatements that are made in disclosure documents, the
date of publication of the documents on the website of stock
exchange and other media as stipulated by the regulator
❑ For misstatements that are made in press conference and media
interview, the date of dissemination on national media
❑ If the documents or media coverage containing misstatements
are published after the trading hours of the market, the next
trading date
◼ Correction day: s9
❑ The person committing misstatement takes the initiative to
announce and correct misstatement in relevant media specified
by the CSRC or the website of the relevant stock exchange

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◼ Exposure day: s8
❑ The date when the misstatement is, for the first time, publicly
exposed in national media, websites of regulators and stock
exchanges, main web portals, famous we-media（自媒体）, and
becomes publicly known in the market
❑ In determining whether the exposure is publicly known, the court
should look at the reaction of the market to the exposure
◼ How big does the reaction need to be?
❑ Unless there is contrary evidence, the following dates should be
exposure day:
◼ The date when the information about the investigation conducted by
the regulator is announced
◼ The date when the information about self-regulatory bodies such as
stock exchanges taking disciplinary measures is announced

54
Datang Dianxun case（大唐电讯）
◼ Facts:
❑ DD was set up in 1998 in Beijing and listed in Shanghai
❑ 6 April 2005: DD issued 2004 annual report
❑ 8 November 2005: DD announced in China Securities News that
it was investigated by CSRC for alleged misstatement
❑ 20 August 2007: the CSRC issued to DD a preliminary notice
about administrative penalty decision, and DD announced it the
following day
❑ 26 May 2008: the CSRC issued to DD the formal administrative
penalty notice
❑ From 27 February 2007: Mr Chen, the plaintiff, started buying DD
shares
◼ Issues:
❑ Misstatement day?
❑ Exposure day?

55
Dongfang Dianzi case (东方电子）
◼ Facts:
❑ 14 July 1997: DD issued its half-yearly
report
❑ 12 October 2001: CCTV program
questioned DD’s accounting problems
❑ November 2002: Yantai City Intermediate
Court commenced a criminal procedure
against DD for alleged misstatement,
which was nationally reported
❑ 17 January 2003: Yantai City Intermediate
Court found that senior management of
DD committed accounting crimes
❑ 8 February 2003: civil suits were filed
◼ Issues:
❑ Exposure date?

56
Kelong Case（科龙电器案）

◼ Facts:
❑ From 2000-2004: Kelong committed
misstatement
❑ 10 August 2004: Professor Larry Lang
（郎咸平）publicly questioned
Konglong’s accounting problems, and
that speech was reported in national
media
❑ 10 May 2005: Kelong publicly
announced that it was investigated by
CSRC for accounting problems
❑ 4 July 2006, CSRC found Kelong guilty,
consistent with what Larry said in 2004
❑ Then, civil suits were filed
◼ Issues:
❑ Exposure date?

57
ChuangXing Resources（创兴资源）

◼ Facts
❑ 12 May 2012: ChuangXing made a disclosure
statement on a M&A deal
❑ 27 March 2014: ChuangXing announced that it was
investigated by CSRC on alleged violations of
securities law, but no further details
❑ 18 June 2015: ChuangXing announced that it received
preliminary penalty decision from CSRC for its
misstatement in the 2012 disclosure
◼ Q:
❑ Exposure date?

58
◼ 大连大福控股股份有限公司、王保杰证券虚假陈
述责任纠纷案（2019）最高法民申5524号
❑ （Dalian Dafu Holding Company & Wang Baojie
Securities Misstatement Liability Dispute）Supreme
Peoples’ Court, No 5524
❑ The determination of the exposure day should not only
be based on whether all the contents of misstatements
are exposed for the first time, but also on whether the
exposure has an impact on the market and whether
the misstatements are identified by the regulatory
authorities

59
Measure of damages
◼ s 25: the damages is limited to the actual loss
❑ Investment loss;
❑ Commissions and stamp duty
◼ S26: what is the “base day”（基准日）?
❑ Refers to the expiry date stipulated after the misstatement is
exposed or corrected, for the sake of determining the reasonable
period for calculating the loss in order to limit the compensation to
be received by the investors within the scope of losses caused by
the misstatement.
❑ It is the day when the accumulative trading volume of the
securities reaches 100% of the total amount of tradable shares
after the exposure/correction day;
❑ …
❑ The average price between the exposure/correction day and the
base day is called “base price” （基准价格）
❑ …

60
60
◼ S27: calculate the investment loss in cases where the
plaintiffs bought shares due to misstatements
❑ Where an investor sells securities on the base day or before, his
loss in investment margin shall be calculated with, the margin
between the average price for buying the securities and that for
selling, being multiplied by the quantity of securities which the
investor holds.
❑ Where an investor does not sell securities on or before the base
day, his loss in investment margin shall be calculated with, the
margin between the average price for buying the securities and
the base price, being multiplied by the quantity of securities which
the investor holds.
◼ S28: calculate the investment loss in cases where the
plaintiffs sold shares due to misstatements
❑ …

61
◼ S31: exclusion of other factors such as
systemic risk
❑ If the loss or part of the loss is caused by the
market systemic risk, the defendant need not pay
❑ But how?

62
Nantong Zongheng Case (南通纵横)
◼ Facts:
❑ NZ was listed in Shanghai
❑ 30 March 2001: NZ issued 2000 annual report
◼ Misstatement day
❑ 30 May 2002: NZ announced that it was under investigation by
CSRC for alleged misstatement
◼ Exposure day
❑ 21 August 2004: NZ announced CSRC’s penalty decision and
apologized for misstatement
❑ Mr Su, the plaintiff,
◼ Bought shares between 5 July 2001 and 24 October 2001
◼ Sold part of shares on 27 August 2001; other shares not sold
◼ First instance:
❑ NZ should pay the whole investment loss

63
◼ The defendant appealed:
❑ From 5 July 2001 to 30 May 2002,
◼ Shanghai Composite Index dropped 30.17%;

◼ The index of the industry to which NZ belongs dropped

26.26%
❑ How to decide the amount?
◼ Need to look at all relevant indices, not one single index
◼ Held that 26% of the price drop was attributable to the market
systemic risk and thus should be excluded from the
compensation

64
4. Procedural issues
◼ Prerequisites: ss 5, 6 of 2003 SPC Circular (repealed)
❑ The imposition of an administrative or criminal
sanction on the defendants
◼ CSRC;
❑ Majority
◼ Ministry of Finance;
❑ Hua Shen Da case（华盛达）(issuing false bank drafts)
◼ Criminal
❑ Dongfang Dianzi （东方电子）
❑ Debate on the prerequisite:
◼ unduly limits the scope of private securities litigation?
◼ Need to be abolished immediately?

65
◼ S2 of 2022 SPC Circular: abolition of the
prerequisite
❑ When the plaintiff brings a securities civil
compensation case and has provided the following
evidence, the court should accept the case:
◼ Documents showing the identity of the plaintiff;
◼ Evidence showing misstatements of the obligator of disclosure
duty
◼ Evidence showing the plaintiff’s trading and loss caused by
the misstatement;
❑ The court shall not reject the case merely because the
impugned misstatement has not yet been confirmed
by the regulator’s administrative penalty or the court’s
criminal judgment

66
◼ How to get evidence?
❑ Notice on the Application of the 2022 Circular《关于适用<最高人
民法院关于审理证券市场虚假陈述侵权民事赔偿案件的若干规定>
有关问题的通知》(jointly issued by the SPC and the CSRC)
❑ S2: the court can collect evidence from the CSRC;
❑ S4: the court can consult the CSRC, stock exchanges, self-
regulatory industry associations and investor protection bodies…
❑ S5: the court can invite experts to serve as 人民陪审员(People’s
assessors)
◼ Comments:
❑ How will it work?
❑ Will it really be good for investors?
❑ Robin Hui Huang, ‘Private Enforcement of Securities Law in
China: A Ten-year Retrospective and Empirical Assessment’
(2013) 61(4) American Journal of Comparative Law 757-798

67
Jurisdiction rule: s3 of 2022 Circular
❑ An intermediate-level court at the capital city of the
province, the planned separately-listed city, or the
economic special city, where the defendant is located
◼ Basic-level courts have no jurisdiction
❑ Specialized court
◼ Shanghai Financial Court
◼ Beijing Financial court
❑ Other intermediate-level courts designated by the high
court of the province
◼ NOTE:
❑ Centralized jurisdiction
❑ Prevent local protectionism

68
◼ Statute of limitations （诉讼时效）
❑ Starts from the date of exposure or the date of
correction
❑ Civil Code: 3 years

69
◼ Forms of litigation in China
❑ Individual suits
❑ Joint suits: s52 of Civil Procedure Law
◼ A joint action means that one side or both sides of a civil
action consist of two or more persons, the subject matter of
action for each party is same or is of the same kind and the
people's court deems that the disputes of all the parties may
be tried concurrently, to which all the parties agree.
❑ Representative suits:
◼ S53: Where the parties on one side of a joint action is
numerous, such parties may recommend a representative or
representatives to participate in the action.
◼ S54: Where the subject matter of action for each party is of
the same kind, the parties on one side of an action are
numerous, but the exact number of such parties is uncertain
when the action is instituted, the people's court may publish a
notice to describe the case and claims and notify right holders
to register with the people's court within a certain period of
time.

70
Securities representative suits
◼ S95 of Securities Law2019
❑ 1) When an investor files a lawsuit for civil compensation
on securities against false statements, among others, the
subject matter of the lawsuit is of the same kind, and the
parties on one side of a lawsuit are numerous, they may
legally elect a representative to participate in legal
proceedings.
❑ 2) For a lawsuit filed according to the provisions of the
preceding paragraph, if there may be many other investors
who have the same claim, the people's court may issue an
announcement to state the case facts of the claim, and
notify investors to register with the people's court within a
certain period. The judgments or rulings rendered by the
people's court shall be valid for the registered investors.
❑ Note: ordinary representative suits
◼ Similar to ss53 & 54 of Civil Procedure Law

71
❑ 3) An investor protection institution may, as entrusted by
50 or more investors, participate in legal proceedings as a
representative, and shall register the obligee confirmed
by the securities depository and clearing institution at the
people's court in accordance with the provisions of the
preceding paragraph, unless the investors have clearly
expressed their unwillingness to participate in legal
proceedings.
◼ A new mechanism
◼ China Securities Investor Services Centre (CSISC)

❑ Note: Special representative suits

◼ Also called “Chinese-style securities class action”
◼ opt-in + opt-out

72
Kangmei Yaoye（康美药业） Case
◼ 31/12/2020:
❑ 11 investor plaintiffs brought ordinary representative suits before
the Guangzhou Intermediate Court
◼ 26/03/2021:
❑ The court issued an announcement for more plaintiffs to register
til 25/04/2021
◼ 08/04/2021:
❑ CSISC received authorization of 56 investor plaintiffs and then
applied to bring special representative suit
◼ 16/04/2021:
❑ The court issued an announcement for plaintiffs to opt out of the
suit within 15 days after the expiry of the announcement
(16/05/2021)
❑ 9 investors opted out

73
◼ 16/07/2021:
❑ The court engaged China Securities Investor Protection
Fund Corporation Limited as third-party expert to calculate
the investment loss
❑ Note: the defendants and the CSISC proposed different
experts and could not reach agreement
◼ 27/07/2021:
❑ Publicly heard the case
❑ CSISC represented a total of 55326 plaintiffs! After taking
into account systemic risks, 3289 plaintiffs were excluded,
leaving 52037 plaintiffs who suffered net losses and could
receive compensation
❑ Final amount of compensation: RMB 2.46 billion!
◼ 3 independent directors: 10%; 2 others 5%

74
LeTV（乐视网）case

◼ 2004：established
◼ 2010: listed on GEM
◼ 2017: went to the US…
◼ 2020:
❑ May: delisted from GEM and went to NEEQ
❑ Sep: punished by CSRC for fraudulent IPO and
misstatements therein
◼ April 2021:
❑ Punished by CSRC Beijing Branch for misstatements
from 2007 to 2016

75
◼ Sep/2023:
❑ Beijing Financial Court ordered a total
amount of RMB2.04 billion in
compensation for investors
◼ 2496 plaintiffs
❑ Executive directors/managers
participating in the misconduct: 2%
❑ Executive
directors/supervisors/managers: 0.5%
❑ Independent directors: 0.05%
◼ 5-6 times their annual salary:
consistent with my suggestions
◼ Independent directors do not actually
pay the compensation in the Kangmei
case, but the situation may be
different in this case…

76
❑ (semi) Public enforcement for private good
◼ inspired by Taiwan experience
◼ Cf s213 action by SFC in Hong Kong
◼ Advantages and disadvantages?

77
5. Model case regime

◼ Shanghai Financial Court

❑ Established in August 2018
❑ January 2019: experiment with the model case
regime

78
◼ 8/11/2019:
❑ 《全国法院民商事审判工作会议纪要》Minutes of
the National Courts' Civil and Commercial Trial
Work Conference
◼ Also known as 九民纪要 (9th Conference Minutes)
◼ 12 parts
❑ company law, contract law, securities law, insurance law,
trust law…
◼ 130 provisions
❑ Actually more, because many paragraphs are not
numbered
◼ Not judicial interpretation (and thus NOT law)
❑ BUT more useful/important than law…

79
❑ s80. [Methods of case trial]
◼ In terms of the methods of case trial, in addition to the
traditional “docketing each case, separate trial” method,
some people's courts have carried out reforms such as
consolidating the trial of some cases and entrusted
mediation on the basis of model judgments and
preliminarily realize intensiveness of case trial and
economy of litigation.
◼ On the basis of conscientiously summarizing trial
practices and experience, local people's courts with
good conditions may select cases to be tried by the
representative litigation method as set forth in
Article 54 of the Civil Procedure Law and gradually
carry out a pilot program.
❑ Comments: this has long been available, but never
used…wait and see

80
◼ s81. [Case docketing]
❑ Where more than one investor brings actions for the same false
statement in the people's court, and the case can be tried by the
representative litigation method, the people's court may docket
the case by treating the investors as co-plaintiffs…
◼ s82. [Case identification and procedural decision]
❑ If any people's court decides to try a case by the method
specified in Article 54 of the Civil Procedure Law, whether the
conduct of defendant constitutes a false statement, whether the
investor's transaction direction is consistent with the false
statement inducing short trade and long trade, the making day,
disclosure day, and correction day of the false statement, and
other basic facts of the case shall be reviewed before an
announcement has been made

81
◼ s83. [Selection of representatives]
❑ After the period for registration of rights has expired, the people's
court shall so notify as to enable the parties to complete the
selection of their representative(s) within a specified period.
❑ If no representative is selected, the people's court may determine
a representative in consultation with the parties. When proposing
a candidate, the people's court shall regard the claim typicality
and the share of interest claims of the parties as factors for
consideration and ensure that the representation can be a
full and fair expression of the claims of investors.
❑ If an investor protection institution established by the state
brings an action in its own name, or as authorized by investors,
appoint any of its employees or authorizes an attorney to
participate in the trial of a case, the people's court may determine
the institution or the party it represents as the representative by
consultation.
◼ Investor Services Center, CSRC

82
◼ s84. [Determination of exposure day or
correction day]
❑ In principle, if the market clearly responds to
information such as case filing and
investigation by regulatory authorities and
revealing articles published by authoritative
media outlets…
❑ Comments:
◼ Consistent with my empirical findings
◼ The key is market reaction: how big should the reaction
be?

83
◼ s85. [Determination of materiality elements]
❑ In trial practice, some people's courts are confused
about materiality elements and reliance elements
and negate the materiality of illegal acts on the
grounds that the illegal acts of information disclosure
determined by administrative punishment have no
effect on investors' trading decisions, to which
attention should be paid.
❑ “Materiality” means information that may have an
important effect on investors making investment
decisions. A false statement already
administratively punished by the regulatory
authorities shall be regarded as a material illegal
act.

84
❑ Comments:
◼ Reliance element is not an issue, owing to the ‘fraud on
the market’ rule
◼ Materiality element essentially keeps the procedural
prerequisite
❑ Without a prior admin penalty, can be uncertain over
materiality
❑ In practice, the prerequisite has proved win-win-win for
▪ The court: less cases, easier trial
▪ the defendants: less cases
▪ investor plaintiffs and their lawyer: easier work; more
certainty on the outcome

85