There is little doubt that private litigation now serves as an indispensable part of the securities enforcement system. In addition to the contentious securities class action system in the United States, civil-law jurisdictions also see an emerging and blooming practice of securities private suits. German courts, for instance, have been adjudicating several unprecedented securities fraud cases, such as the Deutsche Telekom case. Asian jurisdictions like Japan, Korea and Taiwan have been constantly striving to devise new litigation mechanisms for investor disputes arising from securities fraud.
In the context of this trend of promoting investor protection globally, China has recently started to implement a general policy which underscores investor protection in the development of capital markets. This has led to increasingly strenuous securities enforcement in recent periods by the China Securities Regulatory Commission (‘CSRC’), followed by a growing volume of private suits. Shanghai DZH Ltc., famous for its service as a financial information supplier, was recently sued by more than one thousand investors for its fraudulent acts of accelerating revenue recognition and deferring costs, and the total claimed damages have so far amounted to more than 200 million Renminbi (‘RMB’). At the same time, the CSRC imposed a historically highest fine, 3.47 billion RMB, on the chairman of P2P Financial Information Service Co. Ltd. for his appalling violation of disclosure obligations and market manipulation.
Distinct from the systems in other jurisdictions, Chinese securities litigation still features a dependence on public enforcement. In 2002, the Supreme People’s Court of China issued a judicial stipulation, which provides that filing a civil case requires the submission of a decision or an announcement of administrative penalty decisions by a relevant organ, or a criminal judgment by a court. As a result, both private actors and courts rely heavily on the decisions made in the preceding administrative or criminal procedures in determining the civil liability of public companies. Nonetheless, obtaining an order or decision from public authorities does not always ensure compensation; some filings have been dismissed even when administrative sanctions were offered. Why?
An analysis of litigation data retrieved from judgments, public companies’ reports and personal interviews indicates that multiple factors contribute to shaping the outcomes of securities false statement cases in China. Market performance is one of them: when judgments are issued during a market downturn, courts are more prone to reject plaintiffs’ cases. A second factor is the potential social impact of the cases. The engagement of more plaintiffs is associated with higher chances of favourable results in their lawsuits. As the number of plaintiffs filing lawsuits increases, the likelihood of indemnification for losses grows. In addition to that, regions with different numbers of public corporations also exhibit different outcomes of securities false statement cases, in the sense that a prosperous local economy enhances the likelihood of monetary recovery. Local protectionism is not severe in urban courts, but, in contrast, court decisions in less better-off areas are susceptible to local protectionism. After all, the development of public companies has a greater impact on local economies in less developed areas.
However, enterprise ownership is not as influential in today’s corporate litigation as may have previously been expected. The unique historical development of the Chinese economy has featured state ownership, and domestic economy in China is mainly composed of economic activities developed by state-owned enterprises (‘SOEs’). However, government also exerts control over privately-owned enterprises (‘POEs’). Therefore, if state-controlled companies make use of their connections to avoid civil liability in those cases, private ones are probably doing the same.
Chinese private false statement litigation, which has been long regarded as simply a method of civil compensation in the aftermath of public enforcement by the CSRC, may be reshaped to become more independent and liberalized. More cases will be filed, but there seems to be a shared consciousness among lawyers that investors have fewer chances of winning. To address investor protection within the transforming environment, China is also exploring the possibility of endowing a specialized institution to sue on behalf of investors. The Chinese Securities Regulatory Committee has lately established a non-profit organization, China Securities Investors Services Center Ltd. (‘ISC’), which is to undertake ‘support litigation’ for investors. However, the potential issue with the system is that the institution, established by the government, can hardly get rid of systematic constraints and political dynamics deeply embedded in securities enforcement.
Looking to the future, three aspects should be focused on. First, more efforts should be invested in specifying rules to elevate adjudicative sophistication and consistency. Specifically, legal rules should address the issues of jurisdictional differences and local protectionism. Second, a more efficient litigation system should be launched, targeting both the mass-claim and the expertise features. Third, we should further stress the reform of the current private false statement litigation as a mechanism for both seeking redress and deterring offenders. This might involve redistributing regulatory powers, raising the standard of legal governance, and even transforming the current public offering system.
Li Huang is a research assistant at Stanford University Law School and a PhD candidate at the Fudan University Law School.