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1. Legal Basis of Disputes about Claims Related to False Statements in the Securities Market
1.1 Laws
According to the mainstream views in both theoretical and practical law areas of Chinese mainland, false statements in the securities market constitute a specific type of act of tort. Therefore, the elements of such acts and the determination of legal liabilities are governed by both the general provisions on “Tort Liability” in the Civil Code of the People’s Republic of China (referred to as the “Civil Code”) (the seventh edition) and special provisions of the Securities Law of the People’s Republic of China (referred to as the “Securities Laws”). The Securities Laws, as a special law, should take precedence over the general law -the Civil Code. In cases where the “Securities Laws” do not have relevant provisions, the provisions of the Civil Code shall apply.
The provisions on tort liability for false statements under the Securities Laws are mainly found in Article 85, which states: “Where any persons liable for information disclosure fail to disclose information in accordance with the regulations, or where the announced securities issuance documents, periodic reports, interim reports, and other information disclosure materials contain false records, misleading statements or material omissions, causing any losses to investors insecurities transactions, the persons liable for information disclosure shall be liable for compensation; the controlling shareholder, actual controllers, directors, supervisors, officers and other directly responsible persons of the issuer, as well as the sponsor, underwriting securities company and their directly responsible persons, shall bear joint and several liability with the issuer, except for those who can prove their innocence.”
1.2 Judicial interpretation
The securities market features publicity and non-face-to- face transactions. False statements in the securities market constitute a specific type of act of tort, with significant differences from ordinary acts of tort. Publicly listed companies made false
statements stand a dominant position compared to ordinary investors. Adjudicating such cases in accordance with the general provisions of “Tort Liability” in the Civil Code would burden the plaintiff disproportionately in terms of proving causation, leading to unfair trial outcomes. The provision in Article 85 of the Securities Laws is overprincipled and cannot be used to address those specific issues in the security market. In view of this, the Supreme People’s Court issued judicial interpretations specifically addressing the application of Article 85 of the Securities Laws in case trials. The judicial interpretation was enacted in 2013 (referred to as the “Old Judicial Interpretation”) and underwent a comprehensive revision in 2022 (referred to as the “New Judicature Interpretation”).
2. Key issues involved in the claims dispute by false statements insecurities market
2.1 Determination of false statements
Listed companies shall bear the responsibility of disclosing information comprehensively and accurately, which forms the basis of achieving fairness, justice and transparency in the securities market. Chapter VII, Special Chapter of the Securities Laws, stipulates the subjects, requirements for performance, regulatory authorities, and other aspects regarding information disclosure obligations in the securities market. However, violation of the information disclosure obligations under the Securities Laws does not automatically constitute civil liability in terms of tort of false statement. Article 4 and 5 of the New Judicature Interpretation provide definitions of false statements and specific manifestations.
In accordance with the provisions of Article 2 of the New Judicature Interpretation, if a plaintiff initiates such a lawsuit, he bears the burden of establishing that the defendant has engaged in false statement conduct. In practice, due to the inherent concealment of false statements, such conduct is often made public only after regulatory authorities have taken notice of or imposed penalties, or following coverage by the media. The plaintiff needs to rely on regulatory decisions or media reports as evidence to demonstrate the defendant’s false statement conduct. When determining whether false statement conduct has occurred, the court often considers whether the defendant’s actions have already been subject to regulatory measures or administrative penalties by the regulator. Generally, if these circumstances exist, the likelihood of the defendant’s actions being deemed to constitute false statements significantly increases.
2.2 Implementation date, disclosure date, base date, and base price of false statements
2.3 If the defendant’s conduct is deemed to constitute false statements, to determine the scope of the plaintiffs who can file a claim, it is necessary to establish the implementation date, disclosure date, base date, and base price of the false statements (referred to as the “Three Dates and One Price”). Articles 7, 8, and 26 of the New Judicature Interpretation provide specific provisions on how to define the “Three Dates and One Price”.
In the context of the “Three Dates and One Price,” the determination of the disclosure date is especially crucial. On the one hand, the disclosure of false statements often occurs as a process involving multiple factors such as market rumors, media reports and regulatory interventions, and the exact point to be considered as the disclosure date remains disputed; on the other hand, the determination of the disclosure date is closely related to whether the false statements are significant and the scope of plaintiffs who can file a claim, significantly impacting the final substantive outcome of the case. Amid the combined effects of these two factors, the determination of the disclosure date becomes the focus of dispute between the parties throughout the adjudication process of such cases.
2.4 Materiality of false statements
The materiality of false statements is a prerequisite for the defendant to bear liability for false statements. Therefore, the issue of materiality often becomes the focal point of dispute between the parties in such cases. In particular, following the revision of the New Judicature Interpretation in 2022, the plaintiff is no longer required to establish that a defendant has previously been subject to administrative or criminal penalties for false statements before initiating such litigation. In cases where false statements have not led to administrative or criminal sanctions, disputes over the materiality of false statements have gradually become more complex.
In theory, the judgment of materiality is subject to both subjective and objective criteria. Subjective criteria refer to the impact of false statements on investors’ investment decisions. Objective criteria, on the other hand, focus on the impact of false statements on the trading price and volume of the relevant securities. According to Article 10 of the New Judicature Interpretation regarding materiality, when courts analyze and assess materiality issues, besides referring to statutory provisions,
the fundamental criterion is the response of the securities market to the disclosure of false statements, which constitutes the objective standard. In judicial practice, courts typically consider the changes in trading volume and prices for the disclosure day and several subsequent trading days. However, the specific criteria for determining “significant changes in the trading price or volume of the relevant securities” are not definitively addressed in the New Judicature Interpretation, and a standardized judicial scale has not yet emerged in practice. Therefore, until further provisions are stipulated in relevant judicial interpretations, debates on materiality issues are expected to persist.
2.5 Regarding transactional causation and loss causation From the perspective of tort liability law, the party harmed by the tortious act must bear the burden of proof to demonstrate the causality between the tortious act and their loss. New judicature interpretations further distinguish causality into transactional causation and loss causation. Transactional causation refers to the causality between an investor’s trading of specific stocks and false statements. Loss causality refers to the causality between an investor’s investment loss and false statements. In order to reduce the burden of proof on investors, new judicature interpretations provide specific guidelines on the standard of proof for investors to prove these two types of causality.
According to Article 11 of the New Judicature Interpretation, an investor only needs to prove that relevant transaction actions were taken after the date of false statement, but before the disclosure or correction date, thus fulfilling the burden of proof regarding the existence of a transactional causation. The burden of proof to deny the loss causation shifts to the defendant. Unless the defendant can demonstrate the specific circumstances defined in Article 12 of the New Judicature Interpretation, the court will determine the existence of a transactional causation based on the plaintiff’s evidence.
According to Article 31 of the New Judicature Interpretation, the court shall ascertain the causality between false statements and the plaintiff’s losses, as well as other fundamental facts leading to the plaintiff’s losses, in order to determine the scope of liability for compensation. In judicial practice, if investors can prove the existence of a transactional causation, the court will presume that there is a causality between the investor’s losses and the false statement behavior. However, regarding other causes contributing to the plaintiff’s losses, the court will also investigate according to the defendant’s evidence and the method of loss calculation by commissioned professional institutions.
The fluctuation in the price of securities is affected by false statements and the factors such as the issuer’s operational performance, specific industry cycles and overall market conditions. The losses caused by these factors should not be borne by the defendant. However, quantifying and identifying the losses resulting from these factors presents a challenge in the current adjudication process of such cases. In judicial practice, courts often entrust third-party professional organizations to assess the investor losses attributed to these other factors, providing a calculation report as a basis for the final judgment.
2.6 Other entities other than the security issuer
According to Article 85 and Article 163 of the Securities laws, as well as relevant provisions in the New Judicature Interpretation, entities other than the security issuer that may bear civil liability for false statements include: the actual controllers and controlling shareholders of the issuer; the directors, supervisors, senior management, and other directly responsible person of the issuer; underwriting and sponsor institutions, along with their directly responsible person; accounting firms, law firms, credit rating agencies, asset valuation agencies, financial advisors, and other security service institutions; the counterparties in significant corporate asset restructuring transactions; the issuer’s suppliers, customers and financial institutions that knowingly assist the issuer in financial fraud activities or deliberately conceal material facts, leading to false statements in the issuer’s disclosure documents. Among the aforementioned entities, the issuer’s controlling shareholders, actual controllers, directors, supervisors, senior management personnel, and other directly responsible persons, as well as the sponsors, underwriting securities firms, and their directly responsible persons, are all subject to the doctrine of presumption. Unless these entities can provide evidence to prove their innocence.
3. Key procedural issues concerning claims disputes caused by false statements in the securities market
3.1 Jurisdiction
According to Article 3 of the New Judicature Interpretation, civil compensation cases for securities market false statement torts fall under the jurisdiction of the intermediate people’s court of the city where the issuer is domiciled, the autonomous region, or directly administered municipality, or a specialized people’s court in a district under the jurisdiction of the intermediate people’s court or a special economic zone.
3.2 Representative action
Given that disputes regarding false statements in the securities market often involve numerous investors, to facilitate investors in initiating and participating in litigation and reduce the cost of safeguarding their rights, Article 95 of the Securities Laws specifically stipulates the representative action system. Where investors institute civil actions for damages caused by misrepresentation, related to securities, they may legally recommend and select representatives to participate in the actions if the subject matters of the actions are of the same kind and the parties on one side of the actions are numerous. In accordance with the above provisions of the Securities Laws, the Supreme People’s Court has issued the Provisions of the Supreme People’s Court on Several Issues Concerning Representative Actions in Security Disputes to provide further regulations on the specific procedures of representative litigation.
3.3 Demonstration judgment mechanism
To efficiently resolve disputes given the characteristics of such cases, the courts have also explored innovative trial mechanisms in judicial practice, such as the demonstration judgment mechanism. In this mechanism, when dealing with collective security disputes, the court selects representative cases for preliminary trial and judgment. For parallel cases with similar circumstances to the demonstration judgment, mediation is first attempted based on the demonstration judgment results. If mediation fails, a simplified trial procedure is followed to improve trial efficiency.
Author: Chen Tong