The Art of War: security-fraud litigations in China
The CSRC'S crackdown on securities fraud have led to large numbers of ensuing disputes between listed companies and their shareholders, paving the way for rights defense lawyers and steering key judicial practices. Intensifying audits carried out by the China Securities Regulatory Commission (CSRC) in recent years have led to a surge in the number of listed companies that have been imposed administrative penalties for information disclosure violations, insider trading, and other acts of fraud.
Shareholders may take securities fraud actions demanding that the company compensates for the losses incurred. These legal actions have unique features that distinguish them from the other civil or commercial suits, and have contributed to the rise of a new profession: the rights defense lawyer. Increased support for litigation financing followed, as did the shaping of judicial practice.
THE OFFENSE:
Where there is a demand. there is a market. If a listed company has committed a fraudulent act, the affected shareholders can claim compensation according to relevant judicial interpretations of the Supreme People's Court (SPC). But the technically challenging nature of these rights defense cases calls for legal professionals with specific skills. These lawyers specialize in tracking the developments in administrative penalties on listed companies and, on this basis, recruit shareholders, establish an engagement relationship, and represent them in lodging claims against listed companies.
The emergence of the rights defense lawyers group has led to increased internal communication, unifying claims and encouraging information sharing among the lawyers that have brought cases against one Defendant Company for the same offense. The high number of plaintiffs means that courts conduct the trials and render the judgments by lot based on the dates the legal actions are instituted. If first instance rulings have been handed in some cases in which rights defense lawyers have represented the shareholders, they can share the judgment information with other rights defense lawyers, allowing them to identify which claims of the plaintiffs were supported by the courts and on which grounds the defendant mounted its arguments. Trial preparations can be effectively made in advance on this basis.
Dedicated recruitment platforms and channels are continuously being established A rights defense lawyer will usually charge on an all-contingent basis.
While most lawyers in other business have clients on a long-term basis or are limited by jurisdiction or industry in their practice. The shareholders of listed companies are scattered around the country and there are nearly no regular customers (unless they have traded in another penalized company). How, then, is a rights defense Lawyer to seek clients?
Firstly, the rights defense lawyer needs 1o lock in a defendant listed company. A securities fraud action will usually spring from when the CSRC launches an administrative investigation into a listed company. Once the company receives a case opening and investigation notice or a penalty decision from the CSRC, It is required to announce the same 1o investors. Thus, so long as a rights defense lawyer keeps labs on the relevant information disclosure websites and regularly conducts key word searches, he/she will be able 10 locate the listed companies that have had cases opened against them or have been handed penalties, and lock in a defendant.
Once a defendant has been locked in, the rights defense lawyer must recruit shareholders of the listed company that have the standing to lodge claims.
The lawyer will usually use an online platform to recruit shareholders. Until several years ago, most rights defense lawyers used existing public platforms such as Weibo and Weixin(WeChat), but with the increase in penalty cases in recent years, this business has developed rapidly and dedicated recruitment platforms and channels are continuously being established. For example, the Tonghuashun Shareholder Rights Defense Center cooperates with numerous law firms and media to provide shareholder recruiting services.
Lastly, another key is to expose the trial progress through media reports.
As there will inevitably be shareholders who are unaware that they are eligible to claim compensation, or have yet to come across a recruitment platform, a rights defense lawyer should maintain a certain degree of activity on the internet. This includes using online reports or carrying out publicity during the major stages of a development of a case, for instance when having: recruited several hundred shareholders; solicited a claim amount exceeding RMB 10 million; submitted materials to the court to institute a legal action; or been notified by the court of the trial, conclusion, or first instance ruling.
While a listed company will be facing multiple grounds for damages from multiple shareholders, it only needs to submit one set of claims to the court.
Litigation financing is a business that combines funding/investment and legal procedures. A litigation finance fund will usually advance expenses arising from a legal action such as court costs and attorneys’ fees for the plaintiffs, and once the plaintiffs prevail, it will deduct the advanced amount and the defendant will pay a certain percentage from the received compensation. Litigation financing first emerged in the UK and U.S. but is being increasingly utilized in China, especially in securities lawsuits.
A rights defense lawyer will usually charge on an all contingent basis (i.e. will not charge an initial attorney’s fee, and only by winning the case will he/she take a certain percentage from the amount paid by the defendant as the fee) and may even go as far as advancing the court costs. The participation of litigation finance funds combined with the advancement of court costs and partial attorney’s fees therefore can help keep expenses reasonable.
Moreover, since the odds of the plaintiffs prevailing in a securities fraud action—where judicial interpretations are strictly applied in determining the scope of claims and calculating damages—are relatively high, the fund is also more likely to recover its costs and reap a profit, making investing in these cases attractive.
These factors help to protect the rights and interests of investors, promote the development of the legal market for rights defense lawyers, and diversify financing opportunities.
THE DEFENSE:
The shareholders’ enhanced awareness of rights protection, the emerging market of rights defense lawyers, and the participation of litigation financing mean that a penalized listed company will often face paying hefty damages claimed by a large number of shareholders. The claim amounts in recent cases, such as those of Foshan Electrical and Lighting and DZH, have exceeded RMB 100 million, putting huge pressure on listed companies.
But listed companies themselves have resources that far exceed those of small and medium-sized shareholders and, when under pressure from massive claims, can invest more into responding to a legal action, such as by engaging the securities litigation teams of professional and reputable law firms, combining securities houses and accounting firms to calculate systemic risks, and consulting public relations agencies to help shape their public image.
There is a limit on the number of plaintiffs a rights defense lawyer can represent for a securities fraud litigation case involving the same listed company. He/she will most likely also simultaneously be handling cases involving other companies, meaning less time and research can be devoted to each individual suit.
In contrast, while a listed company will be facing multiple grounds for damages from multiple shareholders, it only needs to submit one set of claims to the court. This allows the defendant companies to coordinate resources and research arguments of a single case in a concentrated fashion.
For example, judicial interpretations specify that if losses are caused in whole or in part by systemic risks in the securities market (stock price fluctuations across the entire market due to macro factors), the defendant listed company will not be held liable for losses caused by such systematic risks. A listed company may research and analyze the source of systemic risks during the period the claims are filed (e.g. a global financial crisis or changes in interest rate or macroeconomic policies) and what percentage of the losses claimed by the plaintiffs was directly caused by these risks.
The intermediate people’s court of the capital of the province in which a listed company is located usually has first instance jurisdiction in securities fraud litigation cases.
As listed companies are able to wield superior resources and thus conduct thorough research, a relatively large number of their defense arguments have been broadly accepted by the courts and have set precedents.
Although China is not a case law jurisdiction, decisions or rulings of the higher people’s courts and the SPC still bear substantial referential significance for other courts trying similar cases. Judicial interpretations state that the intermediate people’s court of the capital of the province in which a listed company is located usually has first instance jurisdiction in securities fraud litigation cases. In appeal, the provincial high people’s court has jurisdiction. Previous rulings in securities fraud suits will therefore usually have strong reference value for subsequent cases.
Further, as listed companies are mostly located in first-tier cities, the intermediate people’s courts in jurisdictions such as Shanghai and Shenzhen have tried a large number of similar cases. In contrast, the intermediate people’s courts of remote provinces that have a smaller presence of these companies may lack experience in trying such cases. Add to that the fact that these cases are highly technical and call for expertise, making it inevitable that, when trying such a case for the first time, a court will need to refer to the criteria set in judgments rendered by courts with more experience.
So, once the arguments put forward by defendant listed companies are accepted by the courts and a judgment is rendered and published, they will influence trials of similar cases by subsequent courts, causing the probability and scope of the courts’ support of the defense arguments put forward by listed companies to continuously increase, thus driving the development of judicial practice.
In short, in the specialized legal field of securities litigation, the effect brought about by the professional division in the legal industry is amply manifested, e.g. the continuous optimization of the services for specific clients, the carrying out of targeted publicity and the bringing in the aid of other resources. Under such a professional division, both the offense and defense jointly promote the progress of judicial practice and drive the development of the industry.
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刘思远律师毕业于清华大学法学院，先后获得法学学士学位、法学硕士学位。
刘思远律师2017年加入北京市竞天公诚律师事务所并成为证券部合伙人。刘律师的主要执业领域为证券合规、证券诉讼。执业期间，曾办理光大证券乌龙指内幕交易、雅百特信息披露违法、恒康医疗大股东操纵市场、方正证券虚假陈述民事赔偿诉讼等六十余件证券类案件，并为中信证券、苏宁易购、毕马威、景林资产提供证券合规服务。通过刘思远律师的专业服务，多位客户在被中国证监会行政调查后，最终免予行政处罚；多家上市公司在证券虚假陈述民事赔偿诉讼中全面胜诉；多家金融机构建立了更加完善的合规体系。
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