Model Securities Crime Cases Jointly Released by the Supreme People’s Procuratorate and the China Securities Regulatory Commission (Mainland China)

Di Wu

On November 6, 2020, the Supreme People’s Procuratorate and the China Securities Regulatory Commission (the “CSRC”) jointly released a number of model cases of securities crimes and summarized a specific case related to a fraudulent offering as follows.

Case: fraudulent offering and illegal disclosure of material information by X Co., Ltd., Wen and Liu

1. Basic facts: X was a listed company on ChiNext of the Shenzhen Stock Exchange. To cause X to be eligible for listing, Wen, the actual controlling person of X, and Liu, the finance director, setup personnel to falsify X’s collection of its accounts receivable from 2011 to June 2013 through offsetting the receivables at the end of the reporting period (end of the year and half-year) with external loans, the use of own funds or forged bank documents, and then restoring them back at the beginning of the next accounting period.  The above false information were recorded in the application documents and prospectus submitted to the CSRC for the initial public offering and listing on the ChiNext, thereby defrauding the CSRC into approving the IPO of RMB 257 million.  After X was listed, the aforementioned persons engaged in the same falsification of financial figures for July 2013 to December 2014 to inflate the company’s finances, while also disclosing false information and concealing material facts from the public with its 2013 annual report, 2014 first half report and the 2014 annual report on April 15, 2014, August 15, 2014 and April 25, 2015, respectively.

2. The litigation process: The procuratorial agency believed, as a result of its review, that X used falsified financial data and other means to fabricate material financial information in its prospectus and issue shares so that it can achieve its objective to become listed. As an entity with an obligation to disclose information, the false information and concealment of material facts to the shareholders seriously undermined the shareholders’ interest.  Wen and Liu were deemed as the management directly in charge.  On April 20, 2017, the People’s Procuratorate of Dandong, Liaoning Province issued a public indictment of X, Wen and Liu for the alleged fraudulent offering, illegal disclosure and non-disclosure of material information.

On April 23, 2019, the Dandong Intermediate People’s Court rendered the first instance decision in which the defendant organization X was fined RMB 8.32 million for the crime of fraudulent offering; and defendants Wen and Liu were penalized for multiple offenses including fraudulent offering, illegal disclosure or non-disclosure of material information.  Wen was sentenced to three years in prison and fined RMB 100,000, while Liu was sentenced to two years in prison and fined RMB 80,000.  The defendant organization and individuals did not appeal and the decision came into effect.

On July 5, 2019, the CSRC imposed an administrative penalty on X, and the Shenzhen Stock Exchange decided to delist the company.  After X was delisted, the lead underwriter set up a special fund for advance compensation, and the investors involved in the case were compensated accordingly for their losses.

3. Significance of the case:

(1) Strictly punishing financial fraud in the capital market. Financial falsification in the offering and ongoing information disclosure by listed companies seriously erodes the integrity of the capital market, undermines market confidence and harms investors’ interests, thus making severely punishment necessary.

(2) Fully enabling administrative law enforcement and criminal justice functions. Financial falsification and information disclosure violations may violate legal norms under administrative law and criminal law, thereby simultaneously triggering administrative penalties and criminal prosecution procedures.

(3) Focusing on safeguarding the rights and interests of investors.  The newly amended Securities Law, which came into effect in March 2020, further improves the investor protection system.  Its provisions on advance payment of compensation, securities representative litigation and others provide the legal basis for better protecting the rights and interests of investors.