Last week, a court session was held in the Qingdao Intermediate Court. The main facts of the case involved the disclosure of false information by listed companies and the failure to timely disclose information that should be disclosed. Throughout China's securities market, listed companies are frequently punished for misrepresentation. How can investors, as the biggest victims, protect their rights and interests? How to recover the resulting losses? Based on China's judicial practice and existing policies and regulations, the following is an explanation from the perspective of how investors protect their rights:

 

1、 What behaviors of listed companies may constitute false statements?

 

The term "false statements" in the securities market refers to improper acts committed by information disclosure obligors in violation of securities laws and regulations that violate the truth of facts in the course of securities issuance or trading, including recording, stating, and disclosing. Specifically, the following behaviors may constitute false statements:

 

First, false records. False records refer to the act of an information disclosure obligor to record nonexistent facts in the information disclosure document when disclosing information.

 

Second, misleading statements. A misleading statement refers to a statement made by a misrepresenter in an information disclosure document or through the media that causes an investor to make a false judgment about their investment behavior and has a significant impact.

 

Third, there are significant omissions when disclosing information. "Major omission" refers to the failure of the information disclosure obligor to fully or partially record the items that should be recorded in the information disclosure document. The documents that a listed company should disclose mainly include a prospectus, prospectus, listing announcement, periodic reports, and interim reports. Among them, periodic reports include annual reports, interim reports, and quarterly reports. The main content of the interim report is to disclose significant events that may have a significant impact on the prices of securities transactions.

 

Fourth, improper disclosure. Improper disclosure refers to the failure of the information disclosure obligor to publicly disclose the information that should be disclosed within an appropriate period of time or in a legal manner. The media for information disclosure shall be designated by the China Securities Regulatory Commission, and the disclosure obligor must ensure that the designated media is the media for the initial release of information.

 

2、 What legal responsibilities may a listed company bear for false statements?

 

First, administrative responsibility. The CSRC has the right to supervise, manage, and investigate the information disclosure behavior of listed companies.

 

In accordance with Article 197 of the Securities Law, if an information disclosure obligor fails to submit relevant reports or fulfill its information disclosure obligations in accordance with the provisions of this Law, it shall be ordered to make corrections, given a warning, and fined between 500000 yuan and 5 million yuan; The directly responsible person in charge and other directly responsible personnel will be given a warning and fined between 200000 yuan and 2 million yuan. "If the controlling shareholder or actual controller of the issuer organizes or instructs them to engage in the above illegal acts, or conceals relevant matters, resulting in the occurrence of the above circumstances, a fine of not less than 500000 yuan but not more than 5 million yuan shall be imposed;"; The directly responsible person in charge and other directly responsible persons shall be fined not less than 200000 yuan but not more than 2 million yuan.

 

"If the report or information disclosed by the information disclosure obligor contains false records, misleading statements, or significant omissions, it shall be ordered to correct, given a warning, and fined not less than 1 million yuan but not more than 10 million yuan;"; The directly responsible person in charge and other directly responsible persons shall be given a warning and fined not less than 500000 yuan but not more than 5 million yuan. "If the controlling shareholder or actual controller of the issuer organizes or instructs them to engage in the above illegal acts, or conceals relevant matters, resulting in the occurrence of the above circumstances, a fine of not less than 1 million yuan but not more than 10 million yuan shall be imposed;"; The directly responsible person in charge and other directly responsible persons shall be fined not less than 500000 yuan but not more than 5 million yuan.

 

Second, civil liability. The civil liability for false statements by listed companies is mainly the liability for compensation for losses borne by investors. The liability for loss compensation belongs to tort liability. When determining whether a listed company must bear the liability for loss compensation to investors, the court should analyze whether it meets the four requirements of infringement:

 

First, it depends on whether there is any misrepresentation. Generally, investors file infringement lawsuits after the CSRC has imposed penalties on listed companies, so the administrative penalty decision can be used as a basis for identifying false statements of fact.

 

Secondly, it depends on whether there are damaging results. The damage result is reflected in the actual loss of the investor.

 

Finally, it depends on the causal relationship. The causal relationship between misrepresentation and investment losses. It should be noted that the liability of listed companies for compensation for misrepresentation is a non fault liability, and the assumption of liability is not affected by their subjective circumstances.

 

Third, criminal responsibility. A listed company that conceals important facts or fabricates significant false content may constitute a crime of fraudulent stock issuance; Failure to disclose information in accordance with the law or regulations may constitute a crime of illegal disclosure or non disclosure of important information.

 

Article 160 of the Criminal Law [Crime of Fraudulent Issuance of Securities] Whoever conceals important facts or fabricates significant false content in prospectus, subscription form, company or enterprise bond offering methods, or issues stocks or company or enterprise bonds, depositary receipts, or other securities recognized by the State Council according to law, if the amount involved is huge, the consequences are serious, or there are other serious circumstances, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention, Impose a fine or a single penalty; "If the amount involved is especially huge, the consequences are especially serious, or if there are other especially serious circumstances, they shall be sentenced to fixed-term imprisonment of not less than five years and shall also be fined.".

 

"Controlling shareholders or actual controllers who organize or instigate the implementation of the acts mentioned in the preceding paragraph shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention, and shall also, or shall only, be fined not less than 20% but not more than one time the amount of illegally raised funds;"; "If the amount involved is especially huge, the consequences are especially serious, or if there are other especially serious circumstances, they shall be sentenced to fixed-term imprisonment of not less than five years and shall also be fined not less than 20% but not more than one time the amount of illegally raised funds.".

 

Article 161 of the Criminal Law [Crimes of Illegal Disclosure and Non Disclosure of Important Information] A company or enterprise that is legally obligated to disclose information provides false financial and accounting reports or conceals important facts to shareholders and the public, or fails to disclose other important information that should be disclosed according to law, causing serious harm to the interests of shareholders or others, or has other serious circumstances, The directly responsible person in charge and other directly responsible persons shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and shall also, or shall only, be fined; If the circumstances are especially serious, he shall be sentenced to fixed-term imprisonment of not less than five years but not more than 10 years and shall also be fined.

 

"If a controlling shareholder or actual controller of a company or enterprise specified in the preceding paragraph commits, organizes, or instigates the commission of the acts specified in the preceding paragraph, or conceals relevant matters, resulting in the occurrence of the circumstances specified in the preceding paragraph, punishment shall be imposed in accordance with the provisions of the preceding paragraph.".

 

"If the controlling shareholder or actual controller who commits the crime mentioned in the preceding paragraph is a unit, the unit shall be fined, and the directly responsible person in charge and other directly responsible persons shall be punished in accordance with the provisions of the first paragraph.".

 

3、 Who else is legally responsible for false statements?

 

In addition to listed companies, there are several types of subjects that can become defendants in civil compensation cases involving misrepresentation of securities:

 

First, actual controllers such as sponsors and controlling shareholders. The initiators, controlling shareholders, and other actual controllers of a listed company have the obligation to provide, inform, and cooperate in the disclosure of information under certain specific circumstances. For example, if there is a significant change in shareholding, the board of directors should be actively informed and cooperate in information disclosure;

 

Second, responsible directors, supervisors, and senior executives. According to the "Measures for the Administration of Information Disclosure by Listed Companies", the directors, supervisors, and senior executives of listed companies should faithfully and diligently perform their duties to ensure the authenticity, accuracy, completion, timeliness, and fairness of the disclosed information. Among them, the directors and senior executives of the company should sign a written confirmation opinion on the periodic report, and the board of supervisors should provide a written review opinion. If the directors, supervisors, and senior executives cannot guarantee or have objections to the authenticity, accuracy, and completeness of the report content, they shall state their reasons, express their opinions, and disclose them;

 

Third, securities underwriters. Securities underwriters are also commonly referred to as securities dealers. "When underwriting securities, a securities company shall verify the authenticity, accuracy, and completeness of the public offering documents. If any illegal act such as false records is found, it shall not engage in sales activities.". If it has already been sold, immediately stop the sales activity and take corrective measures;

 

Fourth, securities listing recommenders. A securities listing recommender is what we commonly refer to as a sponsor. A sponsor should express professional opinions in accordance with business rules, industry execution standards, and ethical standards to ensure the authenticity, accuracy, and completeness of the documents issued. If any false records or other significant illegal acts are found in the disclosed materials, the listed company shall be required to supplement and correct them;

 

Fifth, professional intermediary services such as accounting firms, as well as direct responsible persons. Certified public accountants should adhere to the risk oriented audit philosophy, obtain sufficient and appropriate evidence, and reasonably publish witness conclusions.;

 

Sixth, other institutions or natural persons who make false statements. For example, news media that publish reports. If the media disseminate false or misleading information about listed companies to investors, causing losses to investors, they shall bear the liability for compensation according to law.

 

4、 Who has the right to claim civil compensation and how to claim compensation?

 

1. Investors have the right to claim civil compensation.

 

2. Requirements for investors to file a lawsuit:

 

"If an investor files a civil compensation lawsuit against a person who has made a false statement based on the administrative penalty decision of the relevant authority or the criminal judgment document of the people's court on the ground that he has been infringed upon by the false statement, and it complies with the provisions of Article 108 of the Civil Procedure Law, the people's court shall accept it.".

 

3. Evidence to be submitted by investors in civil compensation actions:

 

In addition to submitting an administrative penalty decision or announcement, or a criminal judgment document issued by a people's court, an investor who files a civil compensation lawsuit for misrepresentation of securities must also submit the following evidence:

 

（1） "If the original identification document of a natural person, legal person, or other organization cannot be provided, a notarized copy thereof shall be submitted;";

 

（2） Evidence of investment losses such as vouchers for transactions.

 

4. Who should be named as the defendant:

 

The defendant in a civil compensation case involving misrepresentation of securities shall be the perpetrator of the misrepresentation, including:

 

（1） The actual controllers such as the promoters and controlling shareholders;

 

（2） The issuer or listed company;

 

（3） Securities underwriters;

 

（4） Recommender for securities listing;

 

（5） Professional intermediary service institutions such as accounting firms, law firms, asset evaluation institutions, etc;

 

（6） The responsible directors, supervisors, managers, and other senior management personnel in the units referred to in Items (2), (3), and (4) above, as well as the directly responsible persons in Item (5);

 

（7） Other institutions or natural persons that make false statements.

 

5. Limitation of action:

 

The limitation period for civil compensation brought by an investor against a person who commits a misrepresentation shall be calculated according to the following different circumstances:

 

（1） The date on which the China Securities Regulatory Commission or its representative office announces the decision to punish the person who makes false statements;

 

（2） The date on which the Ministry of Finance of the People's Republic of China, other administrative organs, and institutions with the power to impose administrative penalties announce the decision to impose penalties on the perpetrators of false statements;

 

（3） "If the perpetrator of a false statement has not been subjected to administrative penalty, but has been found guilty by a people's court, the criminal judgment shall come into effect on the date of its making.".

 

To impose two or more administrative penalties on different false statements for the same false statement; "If there are both administrative penalties and criminal penalties, the date on which the first administrative penalty decision is announced or the criminal judgment made becomes effective shall be the date on which the limitation of action commences.".

 

6. Jurisdiction of civil compensation actions for misrepresentation of securities:

 

Civil compensation cases involving misrepresentation of securities shall be under the jurisdiction of the intermediate people's courts of the cities where the people's governments of provinces, municipalities directly under the Central Government, and autonomous regions are located, cities specifically designated in the state plan, and special economic zones.

 

If an investor files a securities civil compensation lawsuit against multiple defendants, the jurisdiction shall be determined according to the following principles:

 

（1） Shall be under the jurisdiction of the intermediate people's court with jurisdiction in the place where the issuer or listed company is located. Except for the circumstances specified in Paragraph 2 of Article 10 of these Provisions.

 

（2） A lawsuit brought against a false statement actor other than an issuer or a listed company shall be under the jurisdiction of the intermediate people's court with jurisdiction in the place where the defendant is located.

 

（3） A lawsuit brought solely by a natural person as a defendant shall be under the jurisdiction of the intermediate people's court having jurisdiction in the place where the defendant is located.

 

7. How can investors prove the causal relationship between false statements and investment losses?

 

Investors must provide evidence on the following facts to prove the causal relationship between false statements and investment losses:

 

First, the stocks purchased by investors are securities that are directly related to false statements. This is relatively easy to prove, and investors can prove it through ticket purchase records;

 

"The investor purchased the stock on or after the implementation date of the false statement, before the disclosure date, or the correction date;";

 

"After the disclosure date or correction date of the false statement, the investor incurs a loss due to selling the securities, or incurs a loss due to continuing to hold the securities.". This is the biggest difficulty in proving causality. Because the securities market itself has great volatility. The factors that affect the fluctuation of securities prices are not only misrepresentations, but also other factors such as the overall market situation. However, in judicial practice, the court will not unduly criticize the degree of proof provided by investors in this part. In general, investors fulfill the burden of proof as long as they can roughly prove the existence of losses. If a listed company argues that its share price is affected by other factors, it should be demonstrated by the listed company.

 

Finally, I solemnly remind investors that there are risks in investing and that they must be cautious when entering the market. Once falling into the trap of false statements by listed companies, it is necessary to choose the correct way to safeguard rights and reduce losses.

 

(This article is translated by software translator for reference only.)