JC Master · Listed Company Securities Compliance Column | Even in the presence of landmark cases, not all investors can obtain compensation through securities misrepresentation lawsuits—illustrated by the securities misrepresentation liability dispute involving Chang某 Group.

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 offices. Accurately aligning with regulatory guidance and fortifying compliance safeguards are critical enablers for companies 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 rationale 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.

Following the implementation in 2022 of the Supreme People’s Court’s “Several Provisions on the Trial of Civil Compensation Cases for False Statements in the Securities Market” (hereinafter referred to as the “Judicial Interpretation on False Statements”), in securities‑related false‑statement litigation, investors are no longer required to obtain an administrative penalty as a precondition before filing claims; instead, the focus has shifted to substantive review of three key elements: materiality, causation, and fault. However, in judicial practice, not every administrative penalty gives rise to a successful claim; courts continue to scrutinize such factors as whether a causal link exists between the transaction and the loss, and whether the investor acted in good faith. In this regard, the case of Wo Company v. Chang Group concerning liability for false statements in securities—issued by the Shenzhen Intermediate People’s Court—serves as a highly instructive precedent: although the listed company was penalized for financial fraud, meeting both the criteria of false statement and materiality, some investors had already obtained compensation for investment‑price losses through a model case. Nevertheless, the plaintiff, seeking to gain control, made large‑scale purchases of shares and, after acquiring those shares, nominated… Directors, supervisors, and senior management However, the court did not uphold the plaintiff’s claims. Drawing on this landmark case and judicial practice, this article systematically examines the types of sanctionable conduct that are actionable and likely to be sustained by the courts, the key criteria for determining such liability, and the common circumstances in which claims are dismissed, thereby providing practical guidance for investors seeking to protect their rights and for listed companies mounting a defense.
 

I. Summary of the Facts of the Case
 

1. In June 2016, Chang某 Group entered into a Share Transfer Agreement with Shanghai He Ying Industrial Development Co., Ltd. (later renamed Chang某 He Ying) and 15 other shareholders, acquiring an 80% equity interest in Chang某 He Ying. In July, Chang某 He Ying became a wholly owned subsidiary of Chang某 Group. Starting in August 2016, Chang某 Group included Chang某 He Ying within the scope of its consolidated financial statements. By means of various practices—including fabricating overseas sales, recognizing revenue prematurely, double‑counting revenue, and entering into “yin‑yang contracts”—Chang某 He Ying artificially inflated its performance, resulting in false and misleading financial information disclosed in Chang某 Group’s annual reports for 2016 and 2017.
 

2. On October 22, 2020, the Shenzhen Securities Regulatory Bureau issued an Administrative Penalty Decision, determining that the aforementioned conduct of Chang某 Group constituted a material false statement in securities matters and imposing administrative penalties, including fines, on Chang某 Group and the relevant persons held accountable.

3. The Shenzhen Intermediate People’s Court issued a precedent‑setting judgment, holding that the date on which Chang某 Group engaged in false statements was March 14, 2017—the date on which the false information was first disclosed. Correction Date As of December 25, 2018—the date on which Chang某 Group disclosed its correction of false financial data—the court ultimately ruled that Chang某 Group must compensate investors for the investment price difference losses incurred during the relevant period.
 

4. From January 24, 2014, to June 30, 2015, the plaintiff, Wo Company, and its concerted actors cumulatively purchased shares representing 27.4457% of Chang Group’s total share capital on the secondary market; on April 17, 2015, Wo Company nominated Sui Moumou to serve as a director of Chang Group. Non-independent director He, a certain individual, served as a supervisor. On March 14, 2017—the date the court determined to be the date when the false statement was made—Wang Company’s board of directors resolved to acquire shares in Chang Group held by persons acting in concert. On June 8, 2017, it further acquired 14.17 million shares held by Tong, the mother-in-law of Chang Group’s actual controller. Based on these facts, Wang Company filed a lawsuit, asserting that its two purchases in 2017 satisfy the conditions for compensation and that Chang Group should indemnify it for the losses arising from the difference in investment value.
 

5. After trial, the Shenzhen Intermediate People’s Court held that the financial fraud committed by Chang某 Group had already been sanctioned by the regulatory authorities, constituting a material misrepresentation, and thus the company was liable to compensate eligible investors for their price‑difference losses. However, the court found that Wò某 Company’s claims did not meet the statutory requirements for bringing a claim, and accordingly dismissed all of the plaintiff’s claims.

II. Core Interpretation of the Ruling
 

In the adjudication of this case, the court not only examined the false statements and their materiality but also focused on whether a causal link exists between the transaction and the loss, and whether the investor was a bona fide investor. By conducting a piercing‑through analysis of W Company’s trading objectives and its status as a bona fide investor, the court determined that its trading conduct differed fundamentally from the investment behavior of ordinary investors based on publicly available information, thereby rejecting the establishment of causation and dismissing the plaintiff’s claims.
 

Key Review Point 1: Determination of Misrepresentation and Materiality—Satisfying the eligibility criteria for claims, but not a sufficient condition for success.
 

The court held that the Long Group’s fabrication of financial performance, which resulted in false statements in its annual reports, constitutes a “false record” as defined under the Judicial Interpretation on False Statements. Moreover, this conduct has already been sanctioned by the Shenzhen Securities Regulatory Bureau, and the regulatory authorities have explicitly determined it to be material—meaning that the false information was sufficient to influence the investment decisions of ordinary investors—and that, following the correction of the information, both the stock price and trading volume exhibited significant volatility, thereby satisfying the dual criteria for materiality.
 

This judicial view clarifies the foundational prerequisite for securities fraud‑related claims: the basis for liability must satisfy both “false statement” and “materiality,” neither of which can be dispensed with. At the same time, it makes clear that “materiality” serves only as a threshold for bringing a claim; the mere presence of this element does not guarantee success. Courts must still conduct a further examination of core factors such as causation and the investor’s standing—this, in turn, constitutes the key reason why the plaintiff in this case ultimately lost.
 

Key Review Point No. 2: Piercing the Purpose of the Transaction—Distinguishing Between a Control‑Acquisition and an Ordinary Equity Investment, and Dismissing the Transaction’s Reliance Basis
 

During the proceedings, the court found the following facts: Since 2014, Wo Company and its concert parties have progressively acquired nearly 30% of the shares, nominated directors and supervisors, and participated in the company’s governance. Subsequently, a contest for actual control of the listed company arose between Wo Company and the de facto controller of Chang Group. In January 2018, Wo Company even issued an announcement stating that it had reached a settlement with Chang Group regarding the dispute over control. On this basis, the court determined that the transaction was not an ordinary secondary‑market equity investment based on publicly disclosed financial information of Chang Group; rather, it constituted a deliberate, purpose‑driven acquisition of control, with the core rationale underlying the trading decision being the need to secure control, rather than reliance on materially false or misleading statements.
 

This judicial view reflects the court’s “ Penetrative Trial Under this line of reasoning, rather than confining itself to a superficial review of the timing of the investment, the court places primary emphasis on the investor’s true transactional purpose, clarifying that transactions aimed at “controlling a listed company” differ fundamentally from ordinary stock trading: while ordinary investors base their investment decisions on publicly available information, the decision‑making of those seeking control hinges on factors such as the listed company’s internal governance and equity‑related strategic maneuvering, which bear no necessary causal relationship to the false information disclosed publicly by the company. Accordingly, the court rejected the transaction’s reliance‑based foundation.
 

Review Focus No. 3: Disruption of Causation in Transactions — Applicability Catch-all clause , clearly stipulating that a contest for control of a listed company falls within the scope of legally prescribed grounds for blocking.
 

Relying on Article 12, Paragraph 5 of the Judicial Interpretation on False Statements—“other circumstances where no transactional causal relationship exists”—the court held that WO Company’s trading activities were driven by a struggle for control and were not induced by the false statements. Consequently, the court determined that the requisite causal link between the false statements and the trading behavior was absent, thereby severing the causal connection between the two and dismissing the company’s claim.
 

This judicial view for the first time explicitly incorporates “contests over control” into the catch-all provision of Article 12, Paragraph 5 of the Judicial Interpretation on False Statements, thereby filling a regulatory gap in judicial practice regarding how to determine causation in transactions not undertaken for ordinary investment purposes. The court clarified that the essence of causation lies in the investor’s reliance on the false statement to enter into the transaction; if the transaction’s purpose is unrelated to the false statement, even the existence of such a false statement will not suffice to establish causation. This ruling also provides a useful reference for the filing and adjudication of similar cases.

III. Types of Conduct Entitling to Claims
 

In light of the court’s interpretation of “causes of action for damages” in this case, as well as the consistent judicial practice of upholding claims in several specific categories, investors may, pursuant to law, bring claims arising from the following types of false‑statement conduct:
 

1. Financial Statement Fraud: This category occurs most frequently and includes practices such as inflating or deflating revenue and profits, fabricating overseas sales, recognizing revenue multiple times, using dual‑track contracts, engaging in improper accounting, overstating assets, and concealing liabilities.
 

2. Matters of Significant Importance That Were Not Disclosed or Were Disclosed in Violation of Regulations: Specifically includes failure to disclose material litigation or arbitration, substantial guarantees, related-party transactions, disposal of core assets, changes in the actual controller, or a significant decline in performance, as well as improper disclosure practices such as late disclosure, selective disclosure, or violations of disclosure channels.
 

3. Fraud in Major Asset Restructuring and M&A: Commonly referred to as “deceptive restructuring” or “deceptive M&A,” this category encompasses practices such as artificially inflating the performance of the target asset, falsifying valuation reports, failing to meet promised performance targets, and making false disclosures regarding the restructuring. Article 21 of the Judicial Interpretation on False Statements provides that, in addition to listed companies being able to bring suit, any party to a restructuring transaction who provides false information resulting in inaccurate disclosures by the listed company shall bear liability for damages.
 

4. Fraudulent Conduct Directed by Controlling Shareholders or Actual Controllers: This category specifically encompasses instances where the actual controller organizes and directs the listed company to engage in financial fraud, unauthorized guarantees, misappropriation of funds, and other false statements—what regulatory authorities often refer to as “going after the principal offender.”
 

5. Intermediary Institutions Assisting in Fraud: Specifically, this category includes accounting offices, securities companies, law offices, and other intermediary institutions that, failing to exercise due diligence, issue false audit reports, sponsorship opinions, legal opinions, and other fraudulent documents, thereby assisting listed companies in engaging in false statements.
 

Other serious violations of information disclosure include improperly disclosing the use of raised funds, making materially false earnings forecasts, and concealing risks of delisting. Such conduct may be deemed material by regulators and subject to administrative penalties; however, whether courts will uphold investors’ claims remains a matter for case-by-case determination.
 

IV. Practical Guidelines for Investor Claims (Drawing on the Lessons from This Case’s Adverse Judgment)
 

In this case, the plaintiff, Wo Company, lost its lawsuit because it failed to establish a causal link between the alleged misrepresentation and the transaction. Drawing on the lessons of this case and prevailing judicial practice, investors seeking compensation for false statements should pay particular attention to the following points to avoid losing their claims due to deficiencies in the elements required to establish liability:
 

1. Identifying claim‑eligible grounds for penalties: Prioritize the five categories of conduct that consistently give rise to compensation, with particular attention paid to verifying whether regulatory penalty notices explicitly characterize such conduct as “material misrepresentation.” Without a determination of materiality, it will be difficult to obtain judicial support for the penalty.
 

2. Precise matching of the trading time window: Shares must have been purchased between the “date of the false statement” and the “disclosure/correction date,” and subsequently sold or held after the disclosure/correction date, resulting in losses; at the same time, transaction records, stock statements, and other relevant evidence should be properly preserved.
 

3. Demonstrate that you are a “good‑faith ordinary equity investor”: First, exclude situations such as holding large shareholdings, participating in the governance of the listed company (e.g., nominating directors, supervisors, or senior management), or having an affiliated relationship with the listed company. Instead, focus on providing evidence that your trading is based on publicly disclosed information, rather than on non‑ordinary investment objectives such as “internal arrangements” or “controlling‑interest disputes,” thereby ensuring that your transactions rest on a reliable and trustworthy basis.
 

4. Reasonably determine the scope of losses: Loss calculations must be conducted strictly in accordance with the Judicial Interpretation on False Statements, encompassing investment‑price differentials, transaction commissions, stamp taxes, and other related expenses. At the same time, losses attributable to non‑false‑statement factors—such as market risk and industry cycles—must be deducted to prevent claims for excessive damages.
 

5. Clarify the liable parties: Based on the administrative penalties imposed, the actual controller of the listed company, its directors, supervisors, senior management, and relevant intermediary institutions may all be named as defendants. In particular, holding the actual controller and certain designated intermediaries accountable can effectively mitigate the risk of future enforcement actions being unenforceable due to lack of assets.

Lawyer Shi Qiao

(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 JC Master Law Office. This disclaimer is hereby made.)

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