Taihe · Listed Company Securities Compliance Column | What Is Systemic Risk in Securities Misrepresentation Cases?
Release Date:
2026-07-16
The high-quality development of the capital market hinges on the compliance foundation of listed companies. As the registration-based system is fully implemented and regulatory frameworks are iteratively refined, securities compliance has become a central pillar for the stable operation of listed firms. Accurately aligning with regulatory guidance and fortifying compliance safeguards are critical enablers for enterprises to navigate market cycles.
To this end, we have established this dedicated column, focusing on the core areas of securities compliance for listed companies: summarizing the key points of new regulatory rules, deconstructing the logic behind typical enforcement actions, dissecting the essence of court rulings, and thoroughly examining the practical challenges of compliance. Adopting a legal‑professional perspective, we employ clear, pragmatic language and scenario‑based analysis to interpret compliance requirements, map out risk pathways, and provide actionable guidance, helping companies strengthen their internal control systems, mitigate compliance risks, and enhance the effectiveness of their compliance management.
When compliance thrives, enterprises thrive; when compliance is stable, development is stable. We hope this column will serve as a trusted professional partner for listed companies—helping them discern regulatory trends, address compliance challenges, mitigate compliance risks, and strengthen the foundations of sustainable growth—so that together we can foster the sound and healthy development of the capital market.
At the heart of securities misrepresentation disputes lies the question of whether investors’ losses were directly caused by unlawful disclosure practices. However, stock prices are influenced not only by firm-specific information but also by external factors such as macroeconomic conditions, policy adjustments, broad market indices, and industry cycles; the price volatility arising from these factors constitutes systemic market risk. In 2022, the Supreme People’s Court issued the “Several Provisions on the Trial of Civil Compensation Cases for False Statements in the Securities Market” (hereinafter referred to as the “New Judicial Interpretation”), which explicitly recognizes systemic risk as a statutory circumstance that breaks the causal link, thereby establishing a loss‑exclusion rule.
This article elaborates on and clarifies the scope of application of systemic risk in cases involving false statements, thereby elucidating the criteria for identifying and applying systemic risk.
I. Legal Definition and Regulatory Basis of Systemic Risk
(1) The Concept and Legal Characteristics of Systemic Risk
Systemic risk in the securities market, also known as overall market risk, refers to risks arising from macro-level, exogenous factors that exert widespread, synchronized adverse effects on the entire securities market or on the security prices of the vast majority of industries. Its core characteristics are non-diversifiability, systemic nature, and externality.
In contrast, there is non-systematic risk—such as operational risk, credit risk, and internal control risk—that affects only a single company or a specific stock and can be mitigated through portfolio diversification. In cases involving false statements, only the former type of risk can break the causal link, whereas the latter cannot serve as a basis for exemption from liability.
Systemic risks as identified at the judicial level generally exhibit the following characteristics:
1. The macroscopic nature of the inducing factor: The risks stem from macroeconomic downturns, monetary policy tightening, significant adjustments to industry regulatory policies, sharp fluctuations in international markets, pandemics, and other systemic contingencies, rather than from the company’s own operational issues.
2. The breadth of the impact: The decline was not confined to the stocks involved; it also dragged down the broader market index and sector‑specific indices, resulting in a broad-based sell-off.
3. Objectivity of occurrence: The risk exists independently of the listed company’s false statements and is not directly triggered by its unlawful disclosure practices.
4. Uncontrollability of the outcome: Investors cannot mitigate such losses through diversification; they constitute risks borne by the market as a whole.
(II) The Direct Legal Basis for Systemic Risk
1. Provisions of the New Judicial Interpretation on the Exclusion of Causation
Article 31 of the New Judicial Interpretation provides: “People’s courts shall ascertain the causal relationship between the false statement and the plaintiff’s losses, as well as other underlying facts of the case, such as other causes that contributed to the plaintiff’s losses, in order to determine the scope of liability for damages. If the defendant can produce evidence demonstrating that part or all of the plaintiff’s losses were attributable to market manipulation by third parties, risks inherent in the securities market, the securities market’s overreaction to specific events, or other factors related to the internal or external operating environment of the listed company, the people’s court shall accordingly reduce or exempt the defendant’s liability for damages.”
This provision explicitly lists risks in the securities market as statutory grounds for mitigating or exempting liability, with systemic risk constituting the core component of such market risk.
2. The Logic of Distinguishing Causal Relationships
Tort liability for false statements adopts a presumption of causation: if an investor suffers losses from trading securities within the statutory period, the law automatically presumes that those losses were caused by the false statement. However, this presumption is not conclusive; the defendant may adduce evidence of intervening factors to demonstrate that part of the loss was attributable to systemic risk, thereby severing that portion of the causal link.
In short, when false statements and systemic risk jointly cause a decline in stock prices, the court must apportion the losses and order the tortfeasor to bear only the portion attributable to the false statements.
II. Criteria for Identifying Systemic Risk and Allocation of the Burden of Proof
(1) General Criteria for Determination in Judicial Practice
In light of the Supreme People’s Court’s guiding cases and the adjudicatory approaches adopted by higher people’s courts across the country, courts generally hold that systemic risk exists only when all three of the following conditions are met:
First, Temporal Coincidence The sharp decline in the broad market and sector indices largely overlaps with the post‑disclosure period of false statements. Systemic risk can only be deemed to have been at play if a general market downturn occurs during the same time frame.
Second, Trend Consistency The stock price movements of the securities involved are broadly aligned with those of the broader market index and the SW industry indices, and there is no significant divergence between individual stock declines and index declines. If the overall market experiences a mild pullback while individual stocks plunge sharply, such a scenario generally cannot be classified as systemic risk.
Third, Externalities of Incentives During downtrends, clear macroeconomic negative events can serve as triggers for systemic risk, such as weakening economic data, interest-rate adjustments, new industry‑specific regulatory measures, international financial crises, or sudden public health emergencies.
(II) Rules on the Allocation of the Burden of Proof
1. The burden of proof rests with the defendant.
Under the principle of allocation of the burden of proof, the plaintiff need only establish the false statement, the trading loss, and the statutory trading period to satisfy the initial evidentiary burden of proving causation. The burden of proof for alleging systemic risk rests entirely with the defendants, including listed companies and their directors, supervisors, and senior management. The defendant may not rely solely on “market downturn” as a defense; it must present a complete evidentiary chain demonstrating the systemic and objective nature of the risk.
2. The defendant’s core evidentiary materials
In judicial practice, the evidence deemed admissible by the courts typically includes: historical price‑performance data for the Shanghai Composite Index, the Shenzhen Component Index, the ChiNext Index, and the STAR Market Index; candlestick charts and price‑change figures for the industry‑sector indices to which the stocks at issue belong; as well as macroeconomic reports, regulatory policy documents, authoritative financial media coverage, and industry statistical data.
3. The plaintiff’s direction of rebuttal evidence presentation
The plaintiff may rebut the claim from three perspectives: first, by demonstrating that the stock’s decline significantly exceeded that of the broader market and the industry index, indicating that the drop was primarily driven by company‑specific negative factors; second, by showing that the market remained broadly stable during the period of the decline, with no overarching macro‑systemic adverse developments; and third, by establishing that the decline in the industry index was triggered by the exposure of false statements made by the defendant company, thereby reversing the presumed sequence of risk transmission.
(3) Common Methods for Calculating Loss Deductions
After the court has determined that systemic risk exists, it generally adopts Index Comparison Method The calculation of the deductible loss ratio is generally divided into two mainstream approaches:
1. Relative Proportion Deduction Method
Using the decline of the broad market or sector index between the date of disclosure and the benchmark date as the measure of systemic risk, the investor’s losses are reduced proportionally. For example, if the index falls 20% over the same period, 20% of the loss is borne by the market, while the remaining portion is compensated by the defendant.
2. Absolute Difference Method
The actual decline of an individual stock is compared with the decline of the broader market or sector index; any excess is deemed to represent losses attributable to false statements and shall be compensated by the tortfeasor.
Both methods are widely employed by courts across the country; among them, the index‑comparison method, owing to its strong objectivity, has become the prevailing approach in adjudication.
III. Analysis of Typical Judicial Cases
Case One: Amid a deep market correction, the court recognized systemic risk and reduced losses proportionally.
1. Basic Facts of the Case
Company A, a publicly listed entity, was subject to administrative penalties by the China Securities Regulatory Commission for artificially inflating its profits over several consecutive years. Investors who purchased shares between the date of the false statement and the date of disclosure saw the stock price continue to decline after the disclosure, prompting them to file civil compensation lawsuits. In response, Company A argued that the period following the disclosure coincided with a broad, deep correction in the A-share market, during which the Shanghai Composite Index fell sharply; thus, the decline in the stock price was primarily attributable to systemic risk, and its liability for damages should be substantially reduced.
The defendant submitted daily data on the Shanghai Composite Index and the relevant sector indices, covering the period from the disclosure date to the benchmark date, along with related reports highlighting the macroeconomic downturn and lack of investor confidence in the capital markets. The data show that, during this period, the broader market declined by more than 25%, with sector indices falling in tandem, and the price declines of the securities at issue broadly tracked the overall market trend.
2. Court’s Ruling Viewpoint
The court, after deliberation, held that during the same period in which the stock price at issue declined, the A‑share market experienced a broad-based downward trend. The causes of this decline were external macroeconomic factors, satisfying the criteria for systemic risk. By comparing the declines of individual stocks, the broader market index, and sector indices, the court determined, on a comprehensive basis, that systemic risk accounted for 28% of the losses. Accordingly, it ruled to deduct this portion from the investors’ total losses and held the listed company and the relevant liable parties jointly and severally liable for the remaining damages.
When an individual stock’s price movement is highly synchronized with the broader market and sector indices, courts typically accept the systemic risk defense and allocate liability through a proportional deduction approach—this constitutes the most common adjudicatory pattern in judicial practice.
Case Two: When an individual stock’s decline significantly deviates from the broader market, the court does not recognize systemic risk.
1. Basic Facts of the Case
Company B, a listed company, was sanctioned by regulators for a material omission, prompting investors to file a lawsuit seeking damages. Company B argued that the decline in the broader market during the same period constituted systemic risk. However, after the court obtained relevant data, it found that following the disclosure, the Shanghai Composite Index fell by only 4%, whereas the stocks at issue experienced consecutive daily trading limits down, with declines exceeding 40%, their performance diverging sharply from the overall market trend.
The plaintiff contends that the precipitous decline in the stock’s price was directly caused by market panic triggered by the exposure of financial fraud, constituting a direct consequence of the false statements rather than an event attributable to systemic market risk.
2. Court’s Ruling Viewpoint
The court held that systemic risk requires individual stocks to move in tandem with the overall market trend. In this case, while the broader market exhibited only mild volatility, individual stocks experienced extreme declines; the primary cause was the exposure of the company’s own false statements, rather than macroeconomic market risks. Accordingly, the court rejected the defendant’s defense based on systemic risk and ordered the defendant to compensate for all reasonable losses.
When an individual stock’s price movement is independent of the broader market and experiences an irrational, cliff‑like plunge, courts typically reject the systemic risk defense, meaning the defendant cannot use it to mitigate liability.
IV. Practical Strategies for Parties in Litigation
(1) The Plaintiff Investors’ Litigation Strategy
1. The key evidence demonstrates that the decline in the stock’s price significantly diverged from that of the broader market and sector indices, highlighting that false statements were the primary driver of the price drop.
2. By reviewing the company’s negative announcements before and after the disclosure, it is demonstrated that the direct catalyst for the decline was the exposure of false statements.
3. Cross-examined the index data and macroeconomic news submitted by the defendant, pointing out that they lack comprehensiveness and general applicability.
(II) Defense Strategies of Listed Companies and Their Directors, Supervisors, and Senior Management
1. Collect, in advance, complete market‑wide and sector‑specific index data from the disclosure date to the base date, and generate trend comparison charts.
2. Collect macroeconomic policies and industry reports issued by authoritative financial media and regulatory authorities during the same period to demonstrate the external nature of the risk sources.
3. If multiple risks are present, request a professional institution to issue an opinion on the analysis of loss causes and to quantify the proportion of systemic risk.
4. Distinguish between the systemic risk defense and the due diligence defense, provide evidence for each separately, and avoid logical inconsistencies in the defenses.
Systemic risk, as a statutory ground for mitigating liability in securities misrepresentation cases, fundamentally upholds the principle of the relativity of causation, preventing investors from shifting the entire burden of normal market volatility onto listed companies and relevant liable parties, thereby ensuring that fault is proportionate to responsibility. From a legal‑logical perspective, the essence of systemic risk lies in severing certain causal links rather than absolving tort liability; its application must be grounded in comprehensive and objective evidence.
In judicial practice, as volatility in the A‑share market intensifies and macroeconomic policy adjustments become more frequent, defenses based on systemic risk are likely to grow increasingly common. For listed companies and their directors, supervisors, and senior executives, it is essential both to skillfully invoke systemic risk as a means of safeguarding their legitimate rights and interests and to avoid overreliance on such defenses at the expense of fulfilling their statutory obligations to disclose information. Meanwhile, investors should rationally distinguish between investment risks and losses arising from unlawful conduct, and seek appropriate compensation within the bounds of the law.
Attorney Shi Qiao specializes in legal services for listed companies, legal advisory work for administrative agencies and state-owned enterprises, corporate compliance, complex commercial litigation, the design of supply-chain finance structures—including financial leasing and factoring—and associated risk mitigation, fund formation and equity investment, as well as the recovery and commercial disposition of non-performing bank and construction‑related claims. He provides a full range of both non-litigation and litigation services in these areas.
(This article reflects the author’s personal views and is intended solely for informational purposes; it does not constitute legal advice or an interpretation of the law by Taihe Law Firm. This disclaimer is hereby made.)
This article is published by Jiangsu Taihe Law Firm. The author is Jiangsu Taihe Law Firm, and the copyright belongs to the author. Please cite the original source when reprinting; violations will be prosecuted.
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