October 2019
Although an investor purchases a stock before a false financial report is released, still the investor may be injured for failure to sell the stock after the purchase due to misbelief in the financial report; and therefore, it is still inappropriate to draw a conclusion unfavorable to the investor on such basis (Taiwan)
Teresa Huang
The Supreme Court rendered the 107-Tai-Shang-846 Decision of March 27, 2019 (hereinafter, the "Decision"), holding that although an investor purchases a stock before a false financial report is released, still the investor may be injured for failure to sell the stock after the purchase due to misbelief in the financial report; and therefore, it is still inappropriate to draw a conclusion unfavorable to the investor on such basis.
According to the facts underlying this Decision, the stock of Appellee Company A was listed on September 11, 2000. Obviously knowing that Claim A had been obtained by its subsidiary, Company B, in an auction, Company A purchased the claim on September 5, 2006 after jacking up its price through different levels of resale via Company X and falsely increased its cost by transferring the account title relating to "real estate investment" to the "fixed asset" account title in its financial report and recognizing a value of NT$1.7 billion by the cost method. In addition, Company A also engaged in other acts of false financial reporting, such as the concealment of the fact that it had issued a check for NT$1.3 billion to provide a guarantee for Company C's loan from a bank to pay for Claim A, and failed to disclose it in its financial report. After the above material falsehood in the financial report was disclosed on June 3, 2009, Company A's shares plummeted, resulting in investors' losses. The Appellant, which is the Securities and Futures Investors Protection Center, was empowered by such investors to exercise the right of action by the investors in accordance with the Securities Investor and Futures Trader Protection Act and pursued joint and several liabilities against Company A and its directors and supervisors.
According to this Decision, the legislative objective of Article 20-1, Paragraph 1 of the Securities and Exchange Act seeks to address the issue that false or incomplete financial information does not allow securities investors to make correct investment decisions and may lead to securities fraud. Therefore, if matters which should be disclosed or annotated in a financial report prepared by an issuer are not annotated or disclosed without justification to the extent that such matters can affect a reasonable investor's decision on the market prices for buying or selling securities or exercising rights, there is hardly any justification for concealment.
It was further pointed out in this Decision that whether none of the material false information in the above financial report should have been disclosed or annotated in the financial report and whether the absence of such annotation or disclosure had no impact on stock investors is not without question. Failing to conduct in-depth investigation and examination, the original trial court rashly made a questionable determination unfavorable to the Appellant merely on the ground that Appellee Company A had recognized Claim A by the cost method. Since Article 20-1 of the Securities and Exchange Act specifically provides that a bona fide purchaser, seller or holder of a listed stock who is injured due to false financial reporting may claim damages, although an investor purchases a stock before a false financial report is released, still the investor may be injured for failure to sell the stock after the purchase due to misbelief in the financial report. Therefore, it is still inappropriate to jump to a conclusion unfavorable to the investor on the ground that the investor who relies on a false financial report issued after the stock is purchased is not injured. Since the appeal was held to be well-grounded in the Decision, the original decision was reversed and remanded to the Taiwan High Court.
The Supreme Court rendered the 107-Tai-Shang-846 Decision of March 27, 2019 (hereinafter, the "Decision"), holding that although an investor purchases a stock before a false financial report is released, still the investor may be injured for failure to sell the stock after the purchase due to misbelief in the financial report; and therefore, it is still inappropriate to draw a conclusion unfavorable to the investor on such basis.
According to the facts underlying this Decision, the stock of Appellee Company A was listed on September 11, 2000. Obviously knowing that Claim A had been obtained by its subsidiary, Company B, in an auction, Company A purchased the claim on September 5, 2006 after jacking up its price through different levels of resale via Company X and falsely increased its cost by transferring the account title relating to "real estate investment" to the "fixed asset" account title in its financial report and recognizing a value of NT$1.7 billion by the cost method. In addition, Company A also engaged in other acts of false financial reporting, such as the concealment of the fact that it had issued a check for NT$1.3 billion to provide a guarantee for Company C's loan from a bank to pay for Claim A, and failed to disclose it in its financial report. After the above material falsehood in the financial report was disclosed on June 3, 2009, Company A's shares plummeted, resulting in investors' losses. The Appellant, which is the Securities and Futures Investors Protection Center, was empowered by such investors to exercise the right of action by the investors in accordance with the Securities Investor and Futures Trader Protection Act and pursued joint and several liabilities against Company A and its directors and supervisors.
According to this Decision, the legislative objective of Article 20-1, Paragraph 1 of the Securities and Exchange Act seeks to address the issue that false or incomplete financial information does not allow securities investors to make correct investment decisions and may lead to securities fraud. Therefore, if matters which should be disclosed or annotated in a financial report prepared by an issuer are not annotated or disclosed without justification to the extent that such matters can affect a reasonable investor's decision on the market prices for buying or selling securities or exercising rights, there is hardly any justification for concealment.
It was further pointed out in this Decision that whether none of the material false information in the above financial report should have been disclosed or annotated in the financial report and whether the absence of such annotation or disclosure had no impact on stock investors is not without question. Failing to conduct in-depth investigation and examination, the original trial court rashly made a questionable determination unfavorable to the Appellant merely on the ground that Appellee Company A had recognized Claim A by the cost method. Since Article 20-1 of the Securities and Exchange Act specifically provides that a bona fide purchaser, seller or holder of a listed stock who is injured due to false financial reporting may claim damages, although an investor purchases a stock before a false financial report is released, still the investor may be injured for failure to sell the stock after the purchase due to misbelief in the financial report. Therefore, it is still inappropriate to jump to a conclusion unfavorable to the investor on the ground that the investor who relies on a false financial report issued after the stock is purchased is not injured. Since the appeal was held to be well-grounded in the Decision, the original decision was reversed and remanded to the Taiwan High Court.
