Lawyer Sheng Bang of the Legal System | Li Xiujiao: Interpretation of the Revised Key Points of the "Several Provisions of the Supreme People's Court on Trial of Civil Compensation Cases for Misrepresentation Infringement in the Securities Market" (1)

On January 21, 2022, the Supreme People's Court issued the "Several Provisions of the Supreme People's Court on the Trial of Civil Compensation Cases for Misrepresentation Infringement in the Securities Market" (hereinafter referred to as the "New Regulations" or "Regulations"), which came into effect on January 22.

On January 21, 2022, the Supreme People's Court issued the "Several Provisions of the Supreme People's Court on the Trial of Civil Compensation Cases for Misrepresentation Infringement in the Securities Market" (hereinafter referred to as the "New Regulations" or "Regulations"), which came into effect on January 22.


The Regulations are divided into eight parts and a total of 35 articles, which are divided into eight chapters in sequence: general provisions, determination of false statements, materiality and transaction causality, fault determination, liability subject, loss determination, statute of limitations, and supplementary provisions. They provide detailed provisions on the legal application issues in civil compensation cases of securities market false statement infringement by the people's court.


For the new regulations, the author found the following major breakthroughs:


1. The scope of judicial interpretation has expanded from the three stock exchanges in Shanghai, Shenzhen, and Beijing to relevant regional equity trading markets (Article 1);


2. The prerequisite has been abolished, but relatively strict provisions have been made for major issues (Articles 2 and 10);


3. Special provisions have been made for predictive information (Article 6);


4. Classification provisions have been made for causal relationships, including transactional causal relationships and loss causal relationships (Articles 11 and 12), fault and fault liability (Article 13), and defenses against attribution and exemption, including defenses against insider fault (Article 14), defenses against directors, supervisors, and senior executives (Article 15), defenses against independent directors (Article 16), and defenses against underwriting and recommendation institutions (Article 17) The determination of fault liability by securities service institutions (Article 18) and the defense of exemption from liability by accounting firms (Article 19);


5. Detailed provisions have also been made on joint liability for infringement and recovery between joint and several liability parties, including joint liability with the issuer, liability for the first offender, liability for assisting counterfeiters, and liability for participants in major asset restructuring (Article 20, Article 21, Article 22, Article 23);


6. For the first time, regulations have been made on the accounting treatment of false statements, multi account transactions, and repeated buying and selling, as well as the determination of loss calculation methods and causal relationships for losses (Articles 11, 24 to 31);


7. Make new provisions on the statute of limitations for litigation (Article 32).


The author believes that the introduction of the new regulations will have a profound impact on further promoting the improvement of the legal environment in the securities market and protecting the rights and interests of investors. Based on years of experience in handling disputes over the liability for false statements of listed companies, the author provides some personal opinions on the innovative provisions of the new regulations.


1、 Relaxing the jurisdiction of cases has both advantages and disadvantages


Although the new regulations in principle stipulate that the jurisdiction shall be exercised by the intermediate people's courts of provinces, autonomous regions, and municipalities directly under the central government, cities specifically designated in the state plan, and special economic zones, as well as the Shanghai Financial Court and Beijing Financial Court established during the implementation of the old regulations, special representative litigation shall be governed by the court of the place where the securities trading venue is located in accordance with the "Provisions of the Supreme People's Court on Several Issues Concerning Representative Litigation in Securities Disputes". But there are also two changes in the jurisdiction of the case, which may have a significant impact on the trial of the case.


(1) All cases shall be under the jurisdiction of the court with jurisdiction in the place of residence of the issuer. According to the old regulations, if some investors only sue other responsible parties other than the issuer, the case can be under the jurisdiction of the court with jurisdiction in the location of other defendants, while if other investors sue the issuer, they need to be under the jurisdiction of the intermediate people's court or financial court in the location of the provincial government where the issuer is located. This has resulted in many jurisdictional disputes and may lead to waste of judicial resources and inconsistent judicial practice. The new regulations establish the rule that regardless of whether the issuer is sued or not, it shall be under the jurisdiction of the court with jurisdiction in the issuer's place of residence. This provision can unify and centralize jurisdiction, improving judicial efficiency.


(2) The new regulations take into account the differences in the trial capabilities of financial cases in different regions and expand the scope of courts with jurisdiction. Each higher people's court can determine other intermediate people's courts that have jurisdiction over civil compensation cases of securities false statements infringement in the first instance based on the actual situation of their jurisdiction, and report them to the Supreme People's Court for filing.


The author believes that in the trial of such cases, the intermediate courts and specialized courts in the provincial government's location have the highest level of trial and experience. However, there is still a significant gap in the trial level of courts in inland and economically underdeveloped regions compared to coastal and economically developed regions. For example, in some provinces, there have only been individual cases in which investors have won the case in recent years, and the protection of investors is relatively weak. If the high courts in these regions determine the case to be tried by other intermediate courts, the quality of the trial may be difficult to guarantee, and investor protection will be impossible to talk about.


2、 Abolishing pre processing has historical significance


The new regulations stipulate that if the plaintiff files a civil compensation lawsuit for securities false statement infringement, as long as it complies with Article 122 of the Civil Procedure Law and submits corresponding evidence, the people's court should accept it; At the same time, after accepting a case, the people's court shall not rule not to accept it solely on the grounds that false statements have not been subject to administrative penalties by regulatory authorities or have been recognized as invalid criminal judgments by the people's court.


On January 15, 2002, the Supreme Law issued a notice on issues related to accepting civil infringement disputes caused by false statements in the securities market, which for the first time stipulated the pre procedure for securities false statements. The old regulations also stipulated that investors who file civil compensation lawsuits for false statements in securities must submit administrative penalty decisions or announcements, or criminal judgment documents from the people's court. The civil compensation cases for infringement in the securities market have the characteristics of numerous parties, difficulty in obtaining evidence, and complex professional knowledge. In the early stages of the development of China's securities market, in order to reduce the burden of proof on investors, according to the legislative and judicial practice at that time, the pre procedure played an important role in reducing the burden of proof on plaintiffs, preventing excessive litigation, and unifying administrative penalties and judicial judgment standards.


After the reform of the registration system implemented by the court in April 2015, the pre procedure system for securities false statement cases should theoretically be abolished. However, in practice, some courts still implement the pre procedure and refuse to accept them on the grounds that they do not meet the pre conditions, or after accepting them, rule to dismiss the lawsuit on the grounds that they do not meet the acceptance conditions, such as cross-border false statement dispute litigation cases.


The new regulations have completely abolished the pre procedure for securities false statement cases, and corresponding modifications have been made to issues such as the determination criteria for materiality and the starting point of litigation statute of limitations.


The author believes that the abolition of the pre procedure for securities false statement cases is a win-win situation for investors and relevant responsible persons. For investors, they can quickly protect their rights and reduce losses without waiting for the lengthy administrative investigation and punishment process of the securities regulatory department. For those responsible for false statements, they can quickly resolve claims disputes with investors through mediation, litigation settlement, and other means, thereby more effectively responding to market changes. Overall, the abolition of pre procedures provides greater protection for investors' litigation rights, but only by better protecting investors can we better protect the securities market.


3、 New regulations on statute of limitations for litigation may have significant loopholes


The pre procedural provisions in the old regulations stipulate that administrative penalties and criminal judgments are the starting points for the statute of limitations in practice. The new regulations cancel the pre procedure and correspondingly stipulate that the statute of limitations for litigation starts from the date of disclosure or correction. If the date of disclosure and correction are inconsistent, the earlier shall prevail.


The modification of the statute of limitations by the new regulations may lead to a series of difficulties in trial practice. The disclosure date or correction date of a false statement dispute lawsuit can only be determined by the court after the trial, which may lead to possible variables, i.e. the starting date of the statute of limitations for the lawsuit is uncertain before the effective judgment. The provisions of the new regulations on the statute of limitations for litigation will basically result in a de facto shortening of the statute of limitations for litigation, because the time of disclosure is often earlier than the time of publication of the penalty decision. In most cases, the court needs to determine the time of disclosure based on the penalty decision, and it is normal for the disclosure date to be more than one year earlier than the date of publication of the penalty decision.


For example, in the recent case of Kangdexin, the disclosure date may be January 22, 2019, when the China Securities Regulatory Commission announced the filing of the case, and September 27, 2020, when the administrative penalty was announced. Currently, the Nanjing Intermediate People's Court has not yet started accepting cases of investors' false statements and disputes over Kangdexin. If the statute of limitations for litigation is calculated from the date of disclosure, the three-year statute of limitations for Kangde Xin's dispute over false statements will have expired when the new regulations come into effect on January 22, 2022. More extreme is the case of false statements by Fukong Interactive. Fukong Interactive announced on January 19, 2018 that it was investigated by the China Securities Regulatory Commission. It was preliminarily determined that this date was the date of disclosure of its false statements. However, Fukong Interactive announced that it received the "Administrative Penalty Decision" from the China Securities Regulatory Commission on December 31, 2021. If the old regulations were followed, the statute of limitations for litigation would only begin on December 31, 2021, but according to the new regulations, the statute of limitations for litigation had already expired before the official punishment by the securities regulatory authority was introduced on January 18, 2021.


The author believes that due to the abolition of the pre conditions for litigation in the new regulations, investors should know or should know that their rights and interests have been infringed upon after the disclosure date, and the statute of limitations for litigation should be calculated, which is consistent with legal principles. The key lies in the fact that after the implementation of the new regulations, cases that have been filed for investigation by the securities regulatory authorities in the early stage, or cases that have been punished but are still in litigation, in accordance with the old rules during the statute of limitations period. If the new regulations are applied, the litigation rights and interests of these investors will be damaged. The author believes that there is still a need for the Supreme Law to further clarify the issue of the convergence of statute of limitations in the implementation of new and old regulations.


The new regulations have made more detailed provisions on the constituent elements and investigation mechanisms of civil compensation liability for securities false statements, as well as the fault identification standards and exemption defenses for various responsible parties; And in combination with market development and judicial practice, systematically improve the rules for determining losses, and more scientifically and reasonably determine the scope of compensation liability. We will provide professional interpretations of these two aspects in stages, please pay attention.