To thoroughly implement the Opinions of the Communist Party of China Central Committee on Strengthening Trial Work in the New Era, strengthen financial adjudication, and promote the healthy development of financial markets, the Shanghai Financial Court (SFC) held a press conference today (August 20) to release the Legal Risk Prevention Report on Disputes over Liabilities for Securities Misrepresentation (hereinafter referred to as the “Report”). The event coincided with the 100th day since the issuance of the Guiding Opinions on Strictly and Impartially Enforcing the Law and Administering Justice to Serve and Safeguard the High-Quality Development of the Capital Market jointly by the Supreme People’s Court (SPC) and the China Securities Regulatory Commission (CSRC), as well as the seventh anniversary of the Court’s establishment.
This marks the fourth consecutive year that the SFC has issued a financial legal risk prevention report following the establishment of the annual release mechanism for financial dispute legal risk prevention reports, after reports on private funds, bonds, and finance lease disputes. It is another important measure by which the Court leverages judicial authority to prevent financial risks and optimize the law-based business environment.
Over the seven years since its establishment, the SFC has accepted over 23,000 cases involving disputes over liabilities for securities misrepresentation. The Report released this time focuses on information disclosure in the capital market. In recent years, China’s capital market has expanded significantly. By the end of 2024, the number of listed companies had grown to 5,392, with a total market capitalization of RMB 85.98 trillion, and the governance of listed companies has continued to improve. However, misrepresentations by listed companies still occur from time to time, fueled by “primary wrongdoers” and “accomplices” , and the quality of information disclosure remains to be improved. As three-dimensional accountability across administrative, civil, and criminal enforcement continues to intensify, the number of newly sued listed companies or other securities issuers rises steadily each year.
The Report comprises five parts: analysis of securities market conditions; basic information on cases involving disputes over liabilities for securities misrepresentation; innovative working mechanisms of the SFC; types of disputes and disclosure of legal risks; and recommendations for legal risk prevention. It systematically reviews the characteristics of types of disputes over securities misrepresentation, identifies the causes of disputes and associated legal risks, and proposes countermeasures for legal risk prevention in the securities sector.
The Report provides a statistical analysis of cases involving disputes over liabilities for securities misrepresentation accepted by the Shanghai courts from 2018 to 2024, revealing the following characteristics:
1. Large case volume, with natural persons as the predominant plaintiffs
As of December 2024, the SFC had accepted 18,040 disputes over liabilities for securities misrepresentation, with the total disputed amount reaching 7.646 billion yuan and a total of 26,956 investors, of whom natural persons accounted for 99.74% and institutional investors only 0.26%.
2. Rising number of sued listed companies or other issuers, spanning multi-tier capital markets
A cumulative total of 77 listed companies and other issuers have been sued. Since the issuance of the new judicial interpretation, the number of sued listed companies has increased markedly each year, involving multiple market segments including the Shanghai and Shenzhen main boards, the STAR Market, the ChiNext board, the NEEQ, and the interbank market.
3. Diverse types of misrepresentations, with financial fraud standing out
Sued issuers often engage in multiple overlapping misrepresentation behaviors. Misrepresentations involving financial information account for more than one-third of cases, specifically including the fabrication of revenue, the falsification of costs and expenses, the manipulation of cash flows, and the abuse of accounting estimates to manipulate earnings, among others.
4. Balancing investor protection and listed company development, with “holding primary wrongdoers” and “punishing accomplices” being progressively implemented
While protecting investors’ lawful rights and interests in accordance with law, the SFC has accurately defined civil compensatory liability for misrepresentation, and in some cases has determined that the alleged misrepresentations were not established, lacked materiality, or lacked transaction causation.Beyond listed companies or other issuers, the number of lawsuits brought by investors against controlling shareholders, actual controllers, directors, supervisors and members of senior management, intermediaries, and parties knowingly assisting in financial fraud has increased substantially.
5. Relatively concentrated litigation types, with novel disputes arising continuously
Most investors’ claims focus on compensation for investment price differences, commissions, and stamp duty losses. In recent years, several new types of issues have emerged in judicial practice, including issues of applicable law and loss assessment across different segments of multi-tier capital markets; identification of forward-looking information and application of the “safe harbor” rule; standards for determining whether parties knowingly assist in financial fraud; and determination of legal liability for public commitments made by directors, supervisors and senior management of listed companies.
6. Three-dimensional accountability system remains to be improved, and coordination in fact-finding requires optimization
Civil compensation cases for securities market infringement are highly specialized. In cases without prior administrative penalties, establishing and determining facts related to misrepresentations is particularly challenging. Further improvement is needed in how civil litigation coordinates with administrative penalties and criminal liability in evidence collection, fact-finding, and liability determination.
Based on the above characteristics of securities misrepresentation liability disputes, the SFC has continuously innovated and improved in many aspects, including building a model for resolving securities group disputes, rights protection mechanisms for securities investors, and fostering coordination between financial adjudication and regulation. The Report summarizes the relevant innovative working mechanisms established by the Shanghai Financial Court since its founding.
Addressing common legal disputes in judicial practice, the Report categorizes securities misrepresentation liability disputes by the subject of the alleged infringing act, covering the following five major categories:
1. Disputes arising from misrepresentations by listed companies or other issuers
These mainly comprise seven types: misrepresentations involving financial information; misrepresentations involving mergers and acquisitions and restructuring; misrepresentations involving controlling shareholders and actual controllers; misrepresentations involving related parties and related-party transactions; misrepresentations involving material contract and material litigation; misrepresentations involving forward-looking information; and other types. The Report focuses on analyzing disputed issues such as standards for determining the materiality of misrepresentations, whether accounting errors constitute misrepresentations, the relationship between administrative penalties and civil liability, and principles for defining forward-looking information.
2. Disputes arising from misrepresentations by internal personnel
Main alleged conduct includes: controlling shareholders or actual controllers organizing, directing, or intentionally concealing information in connection with misrepresentations; misrepresentations resulting from directors, supervisors and members of senior management failing to perform their duties with due diligence; and directors, supervisors and senior management failing to fulfill public shareholding increase commitments without reasonable grounds.
The Report provides risk alerts regarding defenses raised by directors, supervisors and senior management, such as not actively participating in fraud, lacking expertise in relevant fields, limited compensation, and differences in the scope of duties between internal and external directors. It also clarifies the legal nature of public shareholding increase commitments by directors, supervisors and senior management, the elements of liability, and judicial principles for identifying liable parties.
3.Disputes arising from misrepresentations by securities intermediaries
Main alleged conduct includes: sponsors and underwriters failing to perform the obligation of prudent verification in opinions of professional institutions; accounting firms failing to comply with professional standards and rules, with material defects in audit procedures and failure to maintain due professional care; law firms failing to exercise special care regarding legal matters and failing to maintain necessary professional skepticism toward unusual circumstances; asset assessment agencies failing to strictly follow assessment standards, failing to properly selecting assessment methods, and failing to fully verify the legality of the business of the evaluation object and the reliability of forecasts; credit rating agencies failing to conduct prudent verification of third-party data and carry out necessary investigation and review, insufficient to dispel professional skepticism and establish reasonable reliance; and independent financial advisors failing to adequately verify the authenticity, accuracy, and completeness of restructuring documents, and failing to focus on the fairness of transaction pricing and the achievability of profit forecasts. The Report clarifies that intermediaries bear joint and several compensatory liability in proportion to their fault.
4.Disputes involving counterparties in a material asset restructuring and parties knowingly assisting in financial fraud
Main alleged conduct includes: counterparties in a material asset restructuring providing false information; suppliers and customers of listed companies providing false transaction contracts, goods transfer records, and vouchers for goods flow, accounts receivable, and accounts payable; and financial institutions such as banks issuing forged bank confirmation letters, bank receipts, and bank statements.
The Report emphasizes that counterparties in a material asset restructuring who provide false information, resulting in misrepresentations in announcements of material asset restructuring by listed companies, shall bear full joint and several liability for compensation. Liability of parties knowingly assisting in financial fraud is premised on their knowing that the issuer engaged in financial fraud; whether the knowing requirement is satisfied may be determined through comprehensive analysis of the specific objective conduct of those who facilitate fraud.
5.Disputes over the right of recourse
These mainly include: listed companies, after bearing the compensatory liability for securities fraud, seeking recourse against responsible controlling shareholders, actual controllers, and directors, supervisors and members of senior management, or the China Securities Investor Services Center (hereinafter referred to as the “ISC”) exercising recourse on their behalf in accordance with law; listed companies claiming damages for breach of contract against intermediaries based on mandate contracts; and intermediaries, after making advance compensation or bearing joint and several compensatory liability for misrepresentation, seeking recourse against listed companies, directors, supervisors and members of senior management, and other liable parties. The Report notes that relevant liable parties in securities misrepresentation cases may face recourse claims from listed companies, other issuers, or intermediaries even if they were not sued by investors; where listed companies fail to timely exercise their rights after making compensation, the ISC may also bring a shareholder derivative lawsuit for recourse; and beyond misrepresentation compensatory liability, intermediaries also face the legal risk of breach of contract actions.
Based on the above dispute types and legal risks, the Report provides corresponding recommendations for market participants including securities issuers, controlling shareholders and actual controllers, directors, supervisors and members of senior management, parties related to material asset restructuring, securities intermediaries, and issuers’ suppliers, customers, and financial service institutions.
Ten cases involving securities misrepresentations were also jointly released by the SFC and the Shanghai Bureau of the CSRC, clarifying judicial positions and enforcement standards, strengthening market rule expectations, guiding standardized market conduct, and continuously purifying the capital market ecosystem.
Vice President Shan Suhua of the Shanghai Financial Court stated: “ The Shanghai Financial Court will continue to follow the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, thoroughly implement Xi Jinping Thought on the Rule of Law, and, in accordance with the relevant deployment requirements of the CPC Central Committee, the CPC Shanghai Municipal Committee and the superior courts, further improve the annual release mechanism for financial dispute legal risk prevention reports, continue to strengthen financial risk early warning, prevention, and resolution, and provide stronger judicial safeguards for the construction of Shanghai as an international financial center and the coordinated development of the ‘Five Centers’. ”
Journalists from nearly 20 news outlets involving People’s Daily, CCTV, Legal Daily, Shanghai Securities News, Securities Daily, and other media outlets attended the press conference.
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