Why Securities Class Action Lawsuits Have Achieved So Little (AI Translation)
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文｜财新周刊 王娟娟 全月
By Wang Juanjuan, Caixin Weekly, Quan Yue
随着新《证券法》的实施，中国版证券集体诉讼制度确立至今已有四年多。立法初衷是希望聚沙成塔，为投资者撑腰，威慑证券违法犯罪行为以及减轻各方诉累，但四年多来，真正落地的案例稀少，法院不愿意用、当事人积极性不高、最终执行金额低，集体诉讼制度尚未充分发挥对证券违法犯罪行为的震慑作用。
With the implementation of the new Securities Law, China's version of the securities class-action lawsuit system has been in place for over four years. The legislative intent was to pool resources in support of investors, deter securities-related illegal activities, and reduce litigation burdens. However, in the more than four years since its establishment, actual cases have been rare. Courts have been reluctant to utilize the system, parties involved have shown little enthusiasm, and the amounts ultimately enforced have been low. Consequently, the class-action lawsuit system has yet to fully demonstrate its deterrence against securities offenses.
2024年12月16日，连续多年财务造假的美尚生态（300495.SZ，已退市）和金通灵（300091.SZ）相继公告，因证券虚假陈述责任纠纷分别被投资者诉至深圳中院和南京中院；两家法院均决定，将适用普通代表人诉讼程序审理案件。12月20日，中证中小投资者服务中心（下称“投服中心”）就两案进展发声，称将依法分别接受50名以上投资者特别授权，申请参加诉讼并转换为特别代表人诉讼程序。
On December 16, 2024, Meishang Ecology (300495.SZ), which has been delisted, and Jintongling (300091.SZ), both accused of years of financial fraud, announced that they have been sued by investors over securities misrepresentation disputes. The cases have been filed with the Shenzhen Intermediate People's Court and the Nanjing Intermediate People's Court, respectively. Both courts have decided to apply the ordinary representative litigation procedure to handle the cases. On December 20, the China Securities Investor Services Center (hereinafter referred to as the "Investor Services Center") commented on the progress of the two cases, stating that it will legally accept special authorization from more than 50 investors in each case, apply to participate in the litigation, and switch to a special representative litigation procedure.
“普通代表人诉讼”和“特别代表人诉讼”是中国版集体诉讼的两大组成重器。前者包括起诉时人数确定的代表人诉讼和以“明示加入”为特征的起诉时人数尚未确定的代表人诉讼；后者规则升级，采取“默示加入、明示退出”的原则，有“一次胜诉，众人获赔”之效，被喻为证券集体诉讼的“核武器”。
The "ordinary representative litigation" and "special representative litigation" are two critical components of China's version of class-action lawsuits. The former includes representative litigation where the number of plaintiffs is defined at the time of filing and litigation characterized by an "opt-in" system where the number of plaintiffs is not initially determined. The latter involves upgraded rules, following an "opt-out" principle, meaning once a victory is achieved, all affected parties receive compensation. This mechanism is dubbed the "nuclear weapon" of securities class-action lawsuits.
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- China's securities class-action system aims to support investors and deter illegal activities but has seen limited use and effectiveness, with only a dozen cases since its inception in 2020.
- The "ordinary" and "special" representative litigation processes have complex initiation requirements and participation procedures, often leading to fewer class-action lawsuits than expected.
- Challenges such as assessing damages and determining liability for intermediaries, along with low compensation rates, hinder the effectiveness of China's class-action system compared to the more established U.S. model.
The implementation of China's new Securities Law introduced a class-action lawsuit system to pool resources for investor protection, deter securities-related illegal activities, and reduce litigation burdens. However, adoption has been limited with few cases, as courts have shown reluctance, and plaintiff interest has been muted. As of late 2024, two delisted companies, Meishang Ecology and Jintongling, face investor lawsuits for financial fraud.[para. 1][para. 2][para. 3][para. 4]
The system distinguishes between "ordinary" representative litigation, which requires at least 10 plaintiffs, and "special" representative litigation, which is broader and automatically includes affected parties unless they opt-out. Intended as a "nuclear option," special litigation applies only in significant cases. [para. 3][para. 4][para. 5]
Despite intentions for normalization, the system sees underutilization. Delisting and violations offer ample litigation opportunities yearly, yet the cases since 2020's judicial interpretation are sparse, with only a dozen civil cases using representative litigation. Meritorious challenges stem from local and departmental interests, stretching judicial resources and necessitating caution in litigation, resulting in sporadic "guerrilla" actions by individual investors.[para. 4][para. 6][para. 7]
Complexities in the adjudication process include defining claim scopes, calculating losses, and apportioning liability among intermediary agencies. China's system heavily relies on public enforcement compared to the U.S., where financial incentives motivate private enforcement. Participation in corporate governance by investors is encouraged as a proactive approach.[para. 8][para. 9][para. 10]
The distinction between Chinese and US systems demonstrates the reliance on public law for enforcement with mechanisms like the Investor Protection Center playing a crucial role. Few intermediary institutions have faced penalties, as cases remain isolated, and assessments of losses and responsibilities vary greatly. Incentive alignment and practical challenges can hinder effective litigation.[para. 10][para. 11][para. 12][para. 13]
A report notes that intermediary institutions often end up as primary entities liable for compensation as financially fraudulently companies become bankrupt. Recent judicial shifts towards proportional joint liability have emerged, although inconsistencies abound, revealing room for a more unified system to manage intermediary accountability.[para. 14][para. 15][para. 16]
Xiao Yu's study suggests that few investors pursue litigation, and the success rate is low. A focus on mediation and settlement could expand the system's applicability and efficacy in securities disputes, mitigating the lengthy and uncertain litigation process.[para. 17][para. 18][para. 19]
Institutional investors' participation in corporate governance is crucial for proactive fraud prevention, with the revised Company Law aiming to empower minority shareholders through enhanced rights and lawsuits possibilities. However, progress remains slow, with economics and complexities often dissuading retail investors from participation.[para. 19][para. 20][para. 21]
Institutional investors hold potential to be more effective guardians of governance, but the system's design and current law environment need further development to foster active engagement for robust securities market regulation.[para. 22]
- Meisheng Ecological Environment
美尚生态 - Meisheng Ecological Environment (300495.SZ), which has been delisted, was involved in a lawsuit for financial fraud. Investors sued the company for securities misrepresentation in Shenzhen Intermediate People's Court. The court decided to use the ordinary representative litigation process, while the China Securities Small and Medium Investors Service Center expressed its intention to switch it to a special representative litigation process.
- Jin Tongling
金通灵 - Jin Tongling (300091.SZ) is involved in a securities false statement dispute and has been sued by investors at the Nanjing Intermediate Court. The court has decided to use the ordinary representative litigation procedure, and the China Securities Investor Service Center intends to participate with special authorization from over 50 investors, converting it into a special representative litigation case.
- Bank of Beijing
北京银行 - The article mentions that in the Kangde Xin case, Bank of Beijing was one of the 40 defendants involved. The case began in early December 2024 and is expected to set records for claims size and amounts. Bank of Beijing's involvement is due to its cooperation with Kangde Xin, along with other parties, in a securities lawsuit concerning false statements.
- Feirui Audio
飞乐音响 - The article does not mention "Feirui Audio." It discusses the challenges and developments in China's securities class action system, highlighting various cases and regulations. If you meant another company, such as "Feilu Audio" or any other term, please clarify.
- LeTV
乐视网 - LeTV (LeEco) is involved in a collective litigation case related to false statements. It has been delisted, and in 2023, its legal proceedings included a judgment where individuals like Jia Yueting faced full joint liability. Other directors' liabilities ranged from 0.05% to 2%. Ping An Securities was held 10% joint liability, while three accounting firms faced liabilities between 0.5% and 1.5%.
- Dongxu Optoelectronic
东旭光电 - Dongxu Optoelectronic is mentioned as one of the companies involved in ordinary representative litigation cases in the context of securities collective lawsuits in China. It is listed among other companies like LeTV and Kangde Xin that have faced legal proceedings due to issues like false statements in securities.
- Kangde Xin
康得新 - Kangde Xin's case, initiated in early December 2024, involves 40 defendants, including Beijing Bank. It is anticipated to set records in claim scale and amount, with 2,910 stock investors claiming compensation of 8.26 billion yuan in 2023. Despite being a potential landmark case, it highlights China's challenges in securities class-action litigation due to its complexity and scale.
- Lanfeng Biochemical
蓝丰生化 - Lanfeng Biochemical (002513.SZ) is involved in ongoing or completed ordinary representative litigation cases in the A-share market regarding securities false statement disputes.
- Etong Century
宜通世纪 - Etong Century (stock code 300310.SZ) is mentioned as a company involved in a collective securities lawsuit in China. It is among the cases where ordinary representative litigation is in process or has concluded. The specifics of their involvement or the proceedings' outcomes are not detailed in the provided article text.
- China Merchants Securities
招商证券 - China Merchants Securities was involved in the "Zhong'an Security False Statement Case," where it was initially held responsible for all joint liabilities alongside Ruihua Accounting Firm. In May 2021, the Shanghai High Court's second-instance judgment revised their liability proportion to 25% and 15%, respectively, which was later upheld in a re-investigation by the Supreme Court.
- Ping An Securities
平安证券 - Ping An Securities was involved in the LeTV case, where it was held accountable with a 10% joint liability. The case's first instance at the Beijing Financial Court demanded substantial litigation fees, which some investors were unable to afford, possibly affecting participation in the second instance. The case highlighted challenges in determining compensation liability among intermediaries.
- Guosen Securities
国信证券 - In the article, Guosen Securities, along with Ruihua Accounting Firm, was initially adjudged responsible for 40% and 60% joint liability, respectively, in the Huazhe Cobalt and Nickel case. However, in a revised judgment during the second trial, they were ordered to bear 100% joint liability. This revision occurred due to a change in the revelation date within the case proceedings.
- March 1, 2020：
- The new Securities Law, including ordinary and special representative litigation, takes effect
- July 2020：
- The Supreme People's Court issues the judicial interpretation on representative litigation in securities disputes
- December 2020：
- The first special representative litigation case involving Kangmei Pharmaceutical's false statement is accepted
- April 2021：
- Investor Service Center formally accepts special authorizations from 56 rights holders for Kangmei Pharmaceutical's case
- July 27, 2021：
- The Guangzhou Intermediate Court opens the trial for Kangmei Pharmaceutical
- November 2021：
- Verdict reached in Kangmei Pharmaceutical's special representative litigation case
- December 2023：
- Zeda Yisheng case concludes
- March 2024：
- Feile Acoustics case concludes with compensation awarded to approximately 2,000 investors
- July 2024：
- The new Company Law, with systems to protect minority shareholders, comes into effect
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