Amid an accelerated drive to codify capital market regulation, China’s securities market governance has become increasingly systematic. It has progressively established a comprehensive, multi-layered accountability framework, combining regulatory and judicial efforts in a “public enforcement + private compensation + criminal sanction” model.
On 22 January 2022, the Several Provisions of the Supreme People’s Court on the Trial of Civil Cases for Damages for the Tort of Misrepresentation in the Securities Market came into force, abolishing the prerequisite for an administrative penalty and thus streamlining investor redress. Nearly four years on, the volume of securities misrepresentation liability disputes has witnessed sustained growth, manifesting distinctive characteristics including the diversification of defendants, the normalisation of accountability, frequent group litigation, diversified resolution mechanisms and refined adjudication standards.
Li Fang
Senior Partner
Tiantai Law Firm
Tel: +86 10 6184 8228
E-mail:
lif@tiantailaw.com
Courts nationwide have further clarified judicial parameters by publishing guiding cases and judicial white papers, while establishing information sharing and case deliberation mechanisms with regulators, collectively providing clearer judicial guidance for combating fraudulent issuance and financial falsification, precisely mitigating financial risks, and comprehensively protecting investors. Nevertheless, some practical challenges remain unresolved.
Law applicability. China’s multi-tiered capital market – comprising the Main Board, ChiNext, the Star Market, the New Third Board and the interbank bond market – faces a significant unresolved issue: Should the provisions designed for the stock market apply to bond misrepresentation disputes? Judicial opinions vary. Key distinctions also complicate this for the interbank bond market, where trading is predominantly bilateral and “over the counter”, with lower liquidity and less pronounced price volatility. This raises debates over whether bond prices effectively reflect all of an issuer’s public information (including any misrepresentations) and how to determine the materiality of misrepresentation.
Establishing misrepresentation. With the removal of the administrative penalty prerequisite, establishing misrepresentation now falls squarely to the courts. However, their fact-finding capabilities in civil proceedings are constrained by reliance on party-submitted evidence, often necessitating regulatory or even criminal investigations. This dependency creates procedural delays as civil claims await the outcomes of these external probes. In response, some courts are pioneering new methods – such as document production orders, evidence preservation rulings and collaborative mechanisms with regulators – to independently ascertain facts and achieve information synergy within the civil litigation framework.
Determining intermediaries’ liability. With intermediaries acting as the market “gatekeepers”, the core issue lies in defining the boundaries of “reasonable diligence” within an “assumed fault + rebuttal” framework. Judicial practice reveals divergent approaches due to the diversity of intermediary types and complex business operations.
For accounting firms, deficiencies in audit confirmation procedures represent the most common area of dispute. One judicial approach treats proper confirmation procedures as a fundamental duty, where any procedural failure automatically constitutes fault. A contrasting approach only recognises fault when confirmation deficiencies materially affect the reliability of audit conclusions.
For other intermediaries, common controversies include whether they “reasonably relied” on other professional opinions and whether they neglected their duties through inaction. Emerging jurisprudence imposes stricter obligations on lead underwriters and independent financial advisers, requiring substantive verification of financial data provided by accounting firms, with failure to do so constituting presumed fault.
Procedural co-ordination. A particularly significant issue arises when issuers implicated in misrepresentation enter bankruptcy proceedings, creating a complex interplay between restructuring and civil compensation claims. For investors who have accepted a restructuring plan and received distributions, a major practical controversy exists over whether they can still pursue intermediaries for damages, given that their losses may have been technically compensated through the bankruptcy process.
Observations indicate that bankruptcy courts typically uphold the compensation rate stipulated in the reorganisation plan, calculating investor losses based on this nominal recovery rate. In contrast, other civil courts tend to apply a substantive test, valuing assets distributed to investors at market or assessed value to determine the actual loss. When misrepresentation is uncovered only after a company’s restructuring is complete, new complications arise: Do investors who accepted debt-to-equity swaps retain standing to sue for misrepresentation? Did the misrepresentation influence the conversion price? And how should their losses be quantified?
The continued development of cross-border trading schemes such as the Stock Connect programmes and the Shanghai-London Stock Connect is likely to increase misrepresentation disputes involving overseas-listed issuers. Determining jurisdiction and applicable law in such cases may present novel judicial challenges. The digital economy has also fostered new forms of financial fraud, including “fictitious blockchain transactions” and “multi-layered structural fabrication”, characterised by their technical opacity, cross-platform nature and complex data. Key questions are set to emerge regarding how to prove new types of misrepresentation, and how to establish intermediary liability for failing to detect such sophisticated schemes.
Securities misrepresentation disputes are characterised by their complexity, technical nature, multiple stakeholders and diverse resolution mechanisms. As capital market innovation deepens and global interconnectedness grows, these disputes will inevitably continue to evolve in form. Emerging variants may transcend traditional boundaries of misrepresentation, continually testing the existing legal framework – a trend warranting ongoing attention.
Li Fang is a senior partner at Tiantai Law Firm. She can be contacted by phone at +86 10 6184 8228 and by email at lif@tiantailaw.com
