Liquor-Maker Pays for Misleading Investors

A Chinese court has recently ordered a Shenzhen-listed liquor-maker to pay investors a hefty 22.93 million yuan ($3.41 million) in compensation for inflating profits, as China continues to increase payouts to curb corporate misconduct.

The company, Gansu Huangtai Wine-Marketing Industry Co. Ltd., was found guilty by the securities regulator in December 2016 for inflating its 2015 net profit by 5 million yuan ($744,146). As the liquor-maker has already projected a net loss of 22-26 million yuan for the first half of 2017, the compensation, to be disbursed to the 10 suing investors, could put the company in a negative equity position — meaning it wouldn’t be able to pay all of its debts even if it sold all of its assets at market prices.

High compensation may be one reason behind the growing popularity of investor-led lawsuits in recent years. Misstating profits is no longer a low-cost crime in China, as more investors take their grievances to court.

The number of securities disputes involving allegations of misrepresentation rose to 1,109 in 2016, up from 435 in 2015, according to China Judgments Online, an online portal that reports cases of securities fraud. Courts in Shanghai, home of the country’s largest stock exchange, dealt with 1,567 securities-related disputes in 2016, way up from 557 in 2015.

Nearly all securities fraud cases being litigated involve amounts over 10 million yuan, said Xie Liang, a lawyer with Guangdong International Business Law Firm.

This should serve as a warning to listed firms to accurately disclose information, he told Caixin.

Under China’s Securities Law, investors can seek compensation for any damage resulting from false reporting, insider trading, market manipulation and other illegal acts. But they cannot do so until the securities regulator rules that the company has broken the law.

Investors often wait for years before the rulings come in. The situation is different in the U.S. and Europe, where investor actions are not linked to regulatory decisions.

Contact reporter Liu Xiao (liuxiao@caixin.com)