Since the Supreme People’s Court released interpretations regarding civil liability arising from false statements in securities markets in 2002, (1) a large number of investors have filed lawsuits against listed companies as soon as an administrative penalty decision is issued by China Securities Regulatory Commission ("CSRC"), or a criminal conviction is confirmed by the People’s Court for false statements. Under such circumstances, should the listed companies successfully utilize correct legal tactics, they do not necessarily have to bear the burden of civil compensation to the investors. In a recent case, Liu vs. CEC CoreCast Corporation Limited., the People’s Court dismissed all claims filed by the investor for compensation on the grounds of false statements against CEC CoreCast Corporation Limited.(2 )
CEC CoreCast Corporation Limited is a company listed on the Shanghai Stock Exchange. On 21 November 2006, CSRC initiated an investigation against CEC CoreCast Corporation Limited for violations of securities laws and regulations. On the second day, CEC CoreCast Corporation Limited published Acceptance Announcements. On 13 April 2009, CSRC delivered the investigation result, confirming CEC CoreCast Corporation Limited had engaged in acts of false disclosure and misrepresentation of information in the company’s interim and annual reports during the years of 2003 to 2006. CEC CoreCast Corporation Limited announced receipt of such administrative decision on the second day.
Individual natural person, Mr. Liu, had, since September 2007, engaged in buying and selling CEC CoreCast Corporation Limited shares, and had suffered losses of approximately RMB10,000. In October 2011, Liu filed a lawsuit against CEC CoreCast Corporation Limited for losses of RMB17,000 including capital losses, commissions and duties to the Beijing First Intermediate People’s Court.
II. Related Laws and Regulations
According to the Several Provisions of the Supreme People’s Court on Trying Cases of Civil Compensation Arising from False Statements in Securities Market ("Provisions"),(3) there is a causality between the false statement(4)and the losses of an investor if the investor purchased the securities on or after the date the false statement was disseminated(5)and before the disclosure date(6)or correction date(7), and the investor suffered losses from selling or holding the securities after the disclosure or correction date. If the investor sold the securities before the disclosure or correction date, or purchased the securities after the disclosure or correction date, or the losses or partial losses were caused by systematic risks related to the stock market, there is no causality between the false statement and the losses of an investor.(8)
III. Litigation Strategies and the Judgment of the People’s Court
Despite the small amount of compensation involved in this case, the identification of the disclosure or correction date by the People’s Court will have an important impact on the potential claims for compensation against CEC CoreCast Corporation Limited in the future. Therefore, the goal of the litigation is not only to dismiss the plaintiff’s claims but to avoid a large number of potential shareholder lawsuits on the same issue in the future.
A. Suspend the proceeding to avoid a large number of shareholder lawsuits
According to the Provisions, the People’s Court may suspend the proceeding if the party against whom the administrative sentence is made brings an administrative action. CEC CoreCast Corporation Limited has filed administrative lawsuit on 24 September 2009. In view that the case would possibly lead to a larger number of shareholder lawsuits, Zhongdiang Guangtong should apply for trial suspension.
B. The identification of a disclosure date was crucial to dismiss all compensation claims from the plaintiff
The plaintiff, Liu, was engaged in trading of stocks of CEC CoreCast Corporation Limited after September 2007. If the disclosure date was identified before September 2007, there was no causality between the false statement and the losses of Liu. Meanwhile, if the disclosure date was identified earlier, it could narrow down the scope of the investors who may demand civil compensation. Thus, identification of the disclosure date was crucial to dismiss the plaintiff’s claims.
False disclosure is an illegal activity that violates the disclosure regulation of Securities Law. CEC CoreCast Corporation Limited announced that it was investigated for violations of securities laws on 22 November 2006, which could be identified as the disclosure date. In addition, when determining the disclosure date, the People’s Court needs to consider the negative impact of the false statement on the stock price. On 22 November 2006, the stock price of CEC CoreCast Corporation Limited slumped and kept falling after a period of time. However, the stock price rose rather than fell when CEC CoreCast Corporation Limited received an administrative penalty on 14 April 2009. In view of this, 22 November 2006 should be determined the disclosure date when CSRC decided to investigate CEC CoreCast Corporation Limited.
Finally, the People’s Court identified 22 November 2006 as the disclosure date. Hence, there was no causality found between CEC CoreCast Corporation Limited’s false statement and the plaintiff’s losses. The People’s Court dismissed all of the claims from Liu as he traded the securities after the disclosure date.(9)
C. The losses were caused by systematic risks related to the stock market
In this case, the People’s Court directly dismissed the plaintiff’s claims once it identified the disclosure date. From the authors’ view however, evaluation of systematic risks should also play into the calculation of whether the listed companies are liable for the losses and the scope of the compensation. The Chinese stock market experienced tremendous turbulence in 2007 and 2008, and the plaintiff purchased stock of CEC CoreCast Corporation Limited at its peak in September 2007 and sold the stock in December 2008 and April 2009 respectively when the stock market declined. Therefore, the plaintiff’s losses resulted from systematic risks rather than CEC CoreCast Corporation Limited’s false statement.
Cases of civil compensation arising from false statements in securities market differ from traditional civil and commercial disputes. As related legal issues are cutting-edge and complex, the listed companies should retain counsel to take proper action. Even if the company faces administrative or criminal liability for false disclosure, it does not necessarily mean the company will have to compensate investors for false statements in lawsuits.
The article was originally written in Chinese, the English version is a translation. This article was first published in the firm’s periodical China Bulletin June Issue, 2011, Vol.49
1、The Notice of the Supreme People’s Court on the Relevant Issues Concerning the Acceptance of Cases of Disputes over Civil Tort Arising from False Statement in the Securities Market was promulgated on 15 January 2002; the Several Provisions of the Supreme People’s Court on Trying Cases of Civil Compensation Arising from False Statement in Securities Market was released on 26 December 2002 and became effective on 1 February 2003; the Reply on the Relevant Issues Concerning Cases of Disputes over Civil Tort Arising from False Statement in the Securities Market was issued by the Supreme People’s Court on 7 July 2003.
2、Kind & Wood was the attorney of CEC CoreCast Corporation Limited in the case.
3、See Article 18 of theProvisions.
4、The term "false statements in the securities market" refers to the action of any person, who has the obligation to disclose the information, violates the regulation of Securities Law, during the process of issuing and trading of securities, makes any falsehood, misleading statement or major omission of important issue, or any other illegal disclosure of information.
5、.The date of the false statement dissemination is defined in the Provisionsas the date when the false statement was made, or the date when the false statement occurred.
6、The disclosure date refers to the first day when the truth about false statement becomes publicly known or is broadcasted in the media such as newspapers, radio and television.
7、The correction date refers to the day when the person who disseminated the false statement in his own initiative in accordance with relevant procedure corrects the false information in the media assigned by China Securities Regulatory Commission.
8、See Article 19 of the Provisions.
9、The plaintiff did not appeal to the People’s Court and the judgment is now effective.