On Securities Fraud Litigation

With globally well-noted achievements, the Chinese stock market has been established for over ten years, during which it has irrefutably pushed forward the national economy and construction of the capital market. However, due to rapid development of the market and immaturity of systematic legislations, as well as the leading concern of providing assistance to state-owned enterprises when setting up the stock market, the market is comparatively lack of investor protection mechanism. The market takes a regulatory strategy of "crossing the river by fumbling the stonesunderneath" during its development, and spoils a distorted attitude of speculating for profits among the stock market participants, which leads to flooded securities frauds like fraudulent money grabbing by listed companies, insider control by securities companies and etc. This has seriously harmed the interest of small and medium size investors. Therefore, apart from strengthening regulatory of the stock market by the regulatory body, proceedings for the purpose of protecting legitimate interest of small and medium size investors should be launched. Currently both the fields of legal theory and judicial practice shall be encouraged to face the problem of compensation claims raised by those investors being victims of securities frauds. The statute and procedural legislations relevant to securities fraud litigation are novelties in a legal system, which displays discrepancies even contradictions in the legal system. On onehand, it reflects the conflict between highly developed social economic activities during the reform and opening process and earlier promulgated and therefore comparatively lagged behind legislations; on the other hand, although it appears to be a single issue of protecting investors in a stock market, concerning the cornerstone function of a stock market in the overall national economy, and any slight change of the stock market may lead to severe consequence of the latter, the solution of securities fraud litigation is by no means an isolated question.The Some Regulations on Civil Damages Cases in the Stock Market Caused by Misrepresentations was promulgated by the Supreme People's Court on January 9, 2003 and effective as of February 1, 2003 ("Regulations"), so as to guide its counterparts in various local levels in accepting and trial of such cases either under trial or to be filed in the future. The promulgation of the Regulations is a symbol and commencement of judicial interference into stock market disputes, which is also in line with the urgent demand of synchronization of justice and economic progresses. Despite the possibility of solving a misrepresentation case by filing a litigation, it is fairly weak with regard to accepted cases and trial of such cases. The general conditions to protect investors are not optimistic in that there is so far not a single case has been judged. If we take a view of the legal system construction in those countries with developed capital markets, as regarding those contents of investor protection in securities market, the judicial remedial measures are one of the strategies to realize such protection. Due to existence of such contents, the claims from investors may far increase the cost of violation of law, investors' interest is able to be protected through litigation mechanism and breach of law is deterred to some extent. Following further improvement of the stock market, it has evolved from an era of irrational enrichment. of securities companies to an era of stable development, and protection of investors has also been promoted to an unprecedented height. However, subject to loopholes of the legislations and practicality problems, protection of investors was in fact not realistic. Although the promulgation of the Regulations provides the shareholders who are victims of misrepresentations with certain channels, to be exact, it is not an utterly fresh concept, but rather an application of civil law and civil proceedings regarding tort cases in acceptance and trial of fraud cases in stock market, the jurisprudence beneath such tort litigations has also been long established. It is therefore by no means reasonable for the Supreme People's Court to suspend acceptance of misrepresentation cases in stock market.As a result, this dissertation takes litigations arising from stock market frauds as the research target. It studies specific problems involved in such proceedings from the angles of fraud analysis, types of securities frauds and comparison of litigation types. By making references to the relevant rules in those countries and regions with developed stock markets and in the meantime taking into account the objective practice in the Chinese stock market, this dissertation also tries to study in depth the fundamental theory and technical design of securities fraud litigation rules. Therefore, it focuses on study of how to initiate judicial remedies so as to protect investors. This dissertation does not restrict the study to the recently promulgated Regulations, but rather, based on comparison of domestic and foreign securities litigation mechanisms and a serious insight into current Chinese situation, probes into questions like scope of the parties, jurisdiction, burden of proof, limitation of time, applicable proceedings, enforcement, anti-abuse of litigation and etc. which may normally be involved in securities fraud cases of misrepresentation, market control and insiders trading. The dissertation further makes analysis on shortcomings of current legislations and tries to set up the Chinese proceedings of securities fraud litigation which, upon launching, shall assure for all the parties convenience, efficiency and cost effectiveness, so as to achieve the goal of providing real protection to investors.Preamble - generally covers the background, value and theoretical principles of this dissertation, current situation in the domestic and foreign research of this topic as well as the methodology.Chapterâ… Compares the concepts of fraud and securities fraud and their respective elements, and defines the research target and the research scope of this dissertation.Chapterâ…¡Introduces, in the form of comparing with foreign mechanism, various types of securities fraud related to this dissertation, i.e. market control, misrepresentation and insiders trading, and further elaborates formation and recognition of these acts of securities fraud.Chapterâ…¢Gives brief analysis to the Chinese securities fraud litigation. The topics elaborated in this chapter include the history and current situation of securities fraud litigation, the value to execute and the basis to set up such mechanism.Chapterâ…¤Foreign Securities Fraud Litigation Mechanism - mainly focuses on introduction of relevant rules in the American securities legislation which acts as the model for global securities legislation.Chapterâ…£As well as makes a systematic comparison between methods of litigation like class litigation and group litigation in the current foreign mechanism.Chapterâ…¦Formation and Development of Chinese Securities Fraud Litigation Rules - is the key parts of this dissertation and tries to act as development and helpful supplements to current Chinese mechanism. Taking the proceeding rules as the main structure, it elaborates in details fresh design of theories in the fields of jurisdiction, litigation method, scope of parties, limitation of time, burden of proof and enforcement of judicial rulings.This dissertation designs and constructs the Chinese securities fraud litigation mechanism from a practical angle, which has certain importance both practically and theoretically in that, it not only provides full protection to legitimate interest of stock market participants, but also fills a blank of the civil tort claim mechanism in the Chinese stock market. This dissertation starts from the system theory, by making comprehensive use of theories in the subjects of civil proceedings, civil law and commercial law and taking the methodology of qualitative research, analyses the reference materials and judicial practice. It benefits from the domestic and foreignresearch results in the field, and probes into the idea of designing proceedings thorough the methodology of comparison of developed mechanisms in foreign cotmtries. Starting from a practical angle, this dissertation first of all states the active influence and social impact to establish the mechanism, and secondly makes a comparison to the mechanisms in the countries with developed capital market, with the aim of taking use of the elements which can be improved and used by the Chinese litigation mechanism, smoothing relations among litigation parties and litigation procedures, as well as improving litigation proceedings and getting rid of misuse of litigation. This dissertation also talks about how to set up the Chinese proceeding rules for securities fraud litigation based on the phenomenon of increased securities disputes, so as to improve protection over investors' interest. Based on the above methods, this dissertation has in principle covered the context of setting up litigation rules in securities tort cases and safeguard mechanism to ensure payment of compensations.