Securities market misrepresentation judicial interpretation understanding and interpretation of the third: transaction causality clause


On January 21, 2022, Several Provisions of the Supreme People’s Court on The Trial of Cases of Civil Compensation for False Statements in the Securities Market (hereinafter referred to as “This Judicial Interpretation”) were promulgated and formally implemented on January 22.Full text is divided into “general rules”, “false statement that”, “significant sex and trading causality” and “fault recognition”, “responsibility main body”, “loss recognized”, “prescription” and “supplementary provisions” eight sections, is false statement in securities issued by the judicial interpretation in 2003 conducted a comprehensive update, for a period of time in the future,It is of substantial guiding significance for people’s courts at all levels to try cases of false statement in securities market.Lawyer Hong Peng, head of the capital market team of Zhejiang Zhiren Law Firm, understood and interpreted several important clauses in the judicial interpretation based on judicial practice and case agency experience.Article 12 the people’s court shall determine that the causality of the transaction is not established if the defendant can prove one of the following circumstances :(1) the transaction of the plaintiff took place before the implementation of the false statement, or after the disclosure or correction;(2) The plaintiff knew or should have known the existence of a false statement at the time of the transaction, or the false statement has been widely known by the securities market;(3) The trading behavior of the plaintiff is influenced by the acquisition of the listed company, major asset reorganization and other major events that occurred after the implementation of the false statement;(4) the trading acts of the plaintiff constitute illegal securities acts such as insider trading and manipulating the securities market;(5) other circumstances in which there is no causal relationship between the transaction of the plaintiff and the false statement.Understanding and interpretation (I) The plaintiff’s transaction occurred before the implementation of the false statement, or after the disclosure or correction;Several Provisions of the Supreme People’s Court on the Trial of Civil Compensation Cases Caused by False Statements in the Securities Market in 2003 (hereinafter referred to as the “judicial Interpretation of 2003”) does not clearly distinguish between transaction causality and loss causality.In judicial practice, the court is usually based on the principles of causality presumption, as long as investors buy and hold stock in certain interval, false statement to influence the market and after exposed by selling securities or continue to produce loss, court presumed false statement behavior and investors lost a causal relationship between,Similar cases include (2020) Huminzhong 294 Shanghai Putian Postal Communication Technology Co., LTD. Securities false statement case, (2020) Jingminzhong 530 Beiqi Langu New Energy Technology Co., LTD. Securities false statement case, and the recent representative lawsuit judgment of Kangmei Pharmaceutical co., LTD.We understand that there is a significant difference between the wording of this provision and that of the 2003 judicial interpretation, which uses the “parentheses” formulation, that is, investors who bought between the implementation date and the disclosure date and held on to the disclosure date are eligible.The “out of parentheses” clause adopted in this article, namely the principle of reverse reasoning, is related to the exclusion of part of the transaction causality clause in this judicial interpretation.It can be understood that the judicial interpretation in 2003 is simple and generalized, while this judicial interpretation adopts partial exclusion.This provides the basis for the defense defense, the future defense will be closely around the following four clauses, excluding transaction causality.Therefore, in judicial practice, the latter four provisions will be the battle field.In major omissions false statement only after revealing the change of the trading price and trading volume, but also may not lead to the change of the trading price and trading volume, because from the implementation date to expose day period is longer, the secondary market can change a lot, a lot of the time bad bullish continuous rotation, cause even if bad, what the secondary market, there is no change,If the implementation of this clause in practice how to deal with and evidence facing difficulties and disputes.(2) The plaintiff knew or should have known the existence of a false statement at the time of the transaction, or the false statement has been widely known by the securities market;I. Knowledge at the time of transaction generally refers to insider personnel who are aware of false statements made by listed companies, issuers and related related parties.Ii. The transaction shall be made known to the defendant if the professional institutions, funds and asset management companies have conducted necessary due diligence since the purchase and found clues, including the staff of the intermediary institutions participating in the services of the listed company. Such circumstances shall be provided by the defendant.Three, false statement has been widely known in the securities market, we understand is to point to the listed company may implement a number of false statement behavior, false statement behavior has been ahead of the market, although the follow-up and false statement behavior, but you are in the false statement behavior revealed before buying, can do not belong to the compensation scope.A typical case is kangmei Pharmaceutical Case. In The Administrative Penalty Decision (no. 24 [2020]) issued by CSRC, kangmei Pharmaceutical was identified as having the following illegal facts:There are false records in the Annual Report of 2016, Annual Report of 2017, Semi-annual Report of 2018 and Annual Report of 2018, including false increase in operating income, interest income and operating profit, false increase in monetary capital, false increase in fixed assets, construction under construction and investment real estate.There are major omissions in the 2016 Annual Report, 2017 Annual Report and 2018 Annual Report, failing to disclose related transactions of non-operational funds occupied by controlling shareholders and their affiliated parties as required.Kangmei pharmaceutical’s annual reports from 2016 to 2018 continued to be falsified. The 2016 annual report was disclosed on April 20, 2017, and the 2018 annual report was disclosed on April 30, 2019.In guangdong (2020) 01, 2171 in the early days of the special representative litigation judgment, then think of guangzhou, exposing false statement refers to the false statement be aware of and understand the market, are not required to achieve comprehensive, complete and accurate program, as long as the trading market for revealing article obvious reaction, aware of false statements can be identified market behavior,In the end, the court held that October 16, 2018, when we media questioned kangmei Pharmaceutical’s financial fraud, should be the disclosure date of the misstatement.The disclosure date was even earlier than kangmei’s 2018 annual report disclosure date.That is to say, guangzhou Intermediate People’s Court for Kangmei Pharmaceutical’s financial fraud in 2018 because it has been revealed previously, did not identify the causal relationship between investors and the false statement, and did not support the loss of investors caused by the false statement.In the case of Liu Chao (ordinary investor) vs. Kangmei Pharmaceutical Co., LTD., no. 726, Minchu, Yue01 (2021), Guangzhou Intermediate People’s Court held that there were false records and major omissions in the 2018 Annual Report disclosed by Kangmei Pharmaceutical co., LTD.However, in this case, on And after October 15, 2018, a number of media published a large number of articles questioning the authenticity of the financial information disclosed by Kangmei Pharmaceutical.On December 29, 2018, Kangmei Pharmaceutical announced that it was investigated by China Securities Regulatory Commission for suspected information disclosure violations.On April 30, 2019, Kangmei Pharmaceutical co., Ltd. published its 2018 Annual Report, which set out the qualified opinion of the auditor, Guangdong Zhongzhong Pearl River Certified Public Accountants Co., LTD. (Special General Partnership), on the annual report.On May 1 and 6, 2019, Kangmei Pharmaceutical announced that Shanghai Stock Exchange conducted regulatory inquiries for Kangmei Pharmaceutical.The above caused Kangmei pharmaceutical’s share price to fall by the daily limit for five consecutive trading days, a cumulative decline of 40.94%.After that, Liu chao still bought kangmei pharmaceutical stocks, which was an investment behavior of “accepting risks” when he knew that kangmei pharmaceutical’s annual report 2018 disclosed false information.According to article 19 of Several Provisions of the Supreme People’s Court on the Trial of Civil Compensation Cases caused by false statements in the Securities Market, there is no causal relationship between the economic loss suffered by Liu Chao and the act of false statements in this case, so Kangmei Pharmaceutical company does not undertake compensation liability for Liu Chao’s economic loss.(3) The trading behavior of the plaintiff is influenced by the acquisition of the listed company, major asset reorganization and other major events that occurred after the implementation of the false statement;This clause is an important one for the defendant to be exempted from liability for compensation, and there will be disputes in practice.It usually takes a long time for listed companies to be investigated and finally punished by CSRC, with an average time of 1.5-2 years.During the period from the implementation date to the disclosure date, listed companies have a lot of business activities, such as listed company acquisition, and material assets reorganization.This clause is an important one for listed companies to exclude transaction causality.We hold that: 1. The term “acquisition and material Asset Reorganization of listed companies” in this article shall be strictly defined, and its business activities shall be governed by the definition and conceptual connotation in the Measures for the Administration of Acquisition of Listed Companies and the Measures for the Administration of Material Asset Reorganization of Listed Companies, and shall not be expanded in scope.How to apply this clause in “active” false statements is an issue to be discussed.During the period from the implementation date to the disclosure date, the acquisition or material asset reorganization of the listed company does occur, so how can we judge whether the trading behavior of the plaintiff is affected by the foregoing?Investors often buy stocks for many reasons, some are several reasons together, just make the purchase behavior.It may be the false statement, the acquisition of the listed company or the reorganization of major assets, or the investors may think it is due to two of the reasons, or even other reasons.At this time, it is often difficult, inaccurate and objective to distinguish the motivation of “acquisition of listed companies and major asset reorganization”.For example, the listed company law releases the announcement of significant asset acquisition within a few days of purchase can exclude the scope of claims?Three days, seven days or ten days, or as long as there is acquisition of listed companies or material asset reorganization during the period, the subsequent purchase will not be counted?Explanation of other major events.In practice, the scope of the impact of major events is difficult to identify.This clause does not specify how to determine the specific scope of the impact of a major event, leaving the court room for discretion. Once the court applies this clause to deny the transaction causality, some investors will inevitably lose the right to receive compensation.How to evaluate the impact of major events, which interval to exclude from the implementation day to the day of disclosure, and how to determine the range of the interval are all difficult.(4) the trading acts of the plaintiff constitute illegal securities acts such as insider trading and manipulating the securities market;It is understandable that insider trading and manipulation of the securities market are themselves targets to be attacked by the market, so it is natural to exclude their claim rights.In practice, also encountered relatively few.(5) other circumstances in which there is no causal relationship between the transaction of the plaintiff and the false statement.This clause is a “backstop” clause that opens the door for the market. It needs to be summarized in practice and reached consensus.In general, we believe that the scope of its application should not be expanded from the perspective of investor protection.Education background: LLM from Guanghua Law School of Zhejiang University, Master of Business Administration from School of Management of Zhejiang University, LLM from Chicago-Kent College of LawEquity investment and financing, private equity fund litigation, capital market, securities/bond litigation, listed companies false statement litigation, mergers and acquisitions, corporate governance and legal risk management, services for all kinds of private equity funds, securities companies, investment institutions and asset management institutions.

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