First! Securities misrepresentation, signing insurance agent to bear joint and several liability, the first-instance judgment came

Investment bankers carry the "sword of Damocles" on their heads.

Recently, the Chinese reporter of the brokerage company learned from Wang Pujie, a lawyer from Beijing Guandu Law Firm, that at the end of June, the Beijing Financial Court issued a first-instance judgment in the case of a dispute over the liability for false statements of an investment institution against Bluemountain Technology Securities.

What has attracted much attention from the market is that in this case, the court held that the signing agent and the sponsor should bear joint and several liability within 40% of the transaction losses caused by the false record in the application materials of the Bluemountain Technology Select Layer Listing Project. Lawyer Wang Pujie said that this is the first judgment in mainland China in which the insurance agent bears civil liability for securities investors.

This is a wake-up call for the sponsor representative group, as the quality of practice not only determines whether an individual will face administrative penalties, but also determines whether he or she will bear huge civil compensation in the future.

A number of securities litigation lawyers told the Chinese reporter that the above-mentioned precedents are of great reference value, and the insurance agency should have borne joint and several liability. In the past, due to the limited ability of individuals to pay compensation, insurance agents were rarely included in the dock of securities misrepresentation cases under normal circumstances.

However, the reporter noted that in the above-mentioned precedent, although the sponsor was found to be jointly and severally liable, there was no causal relationship between the plaintiff's stock transaction and the false record in the application materials of the Blue Mountain Technology Select Layer listing project, so the sponsor and its sponsor did not need to actually compensate the plaintiff. In the future, once an investor suffers a transaction loss due to the false record of the listed project of Bluemountain Technology, the relevant signing agent may face the liability for compensation.

The alarm bell for investment banking practitioners is ringing

On June 28, the Beijing Financial Court made a first-instance judgment in the case of an investment institution suing Bluemountain Technology Securities for a dispute over liability for false statements. According to the judgment obtained by the Chinese reporter of the brokerage, one of the highlights of this case is that in addition to the intermediaries, the sponsor representative is also jointly and severally liable in the securities misrepresentation case. This is undoubtedly a great deterrent for practitioners in the securities industry.

The Beijing Financial Court (hereinafter referred to as the "Court of First Instance") held that due to the false records in the public offering documents of the selected layer of Bluemountain Technology, the two project signatories and the sponsor Hualong Securities that they worked for should be jointly and severally liable for compensation within the range of 40% of the investors' losses.

The basis for the determination of the above-mentioned liability stems from Article 85 of the Securities Law, which provides that "if there is a false record in the securities issuance documents announced by the information disclosure obligor, resulting in losses suffered by investors in securities transactions, the information disclosure obligor shall be liable for compensation; The sponsor, the underwriting securities company and its directly responsible personnel shall be jointly and severally liable with the issuer for compensation, unless they can prove that they are not at fault. The court of first instance pointed out that in the litigation in this case, the sponsor Hualong Securities and its sponsor failed to provide evidence to prove that it was not at fault for the misrepresentation.

In an interview with a Chinese reporter from a securities firm, a securities litigation lawyer in Shanghai said that legally speaking, the sponsor representative and the sponsor should bear joint and several liability, and this precedent has great reference value.

In this regard, a number of securities litigation lawyers told reporters that from the perspective of litigation, natural persons have limited ability to pay; Under normal circumstances, if the intermediary has solvency, then it is rarely considered to prosecute the practitioner for fear of delaying the progress of the case.

A securities litigation lawyer in East China revealed that in the Zeda Yisheng case, in fact, the sponsor representative was also sued, but the case was later settled through mediation.

It is worth mentioning that in the above-mentioned Blue Mountain Technology misrepresentation case, "some people are happy and some are worried". In addition to the sponsor representative being sued in court, the signing accountant, the signing lawyer, and the signing asset appraiser were also sued by the plaintiff investment institution. However, in the determination of liability, the court of first instance held that the above-mentioned accountants, lawyers, and asset appraisers were not liable.

According to the judgment combed by the Chinese reporter of the brokerage, the court of first instance stated that the acts of the relevant accountants, lawyers, and asset appraisers were all acts of duty, and the corresponding intermediaries should be held liable externally. At the same time, the 2019 Securities Law no longer stipulates that the signing accountants, the signing lawyers, and the signing asset appraisers are jointly and severally liable for compensation.

In this case, the insurance agency did not need to pay actual compensation

Although Hualong Securities and its insurance agent need to bear joint and several liability within 40% of the investor's trading losses caused by the false records in the application materials of the Bluemountain Technology Select Layer listing project, they are not required to actually compensate the plaintiff in the above-mentioned specific cases.

It is understood that there have been four false statements by Bluemountain Technology, that is, the 2017 annual report, 2018 annual report, 2019 annual report, and 2020 selection layer listing project application materials have false records, and they are all induced false statements.

The court of first instance stated that in this case, there was a causal relationship between the stock transaction of the plaintiff's investment institution and the false records in the 2017 annual report and the false record in the 2018 annual report, so the responsible entity for these two misrepresentations should be liable for the actual losses of the plaintiff's institutional investors.

According to the analysis and calculation rules adopted in the Expert Opinion on the Verification of Securities Investors' Losses (Sub-report) issued by Shanghai Gaofin Research Institute, the plaintiff, an investment institution, bought a certain number of shares from Bluemountain Technology from the date of implementation to the disclosure date due to the impact of false records in the 2017-2018 annual report; Due to the false records in the 2019 annual report and the 2020 selection layer listing project, the net purchase of Bluemountain Technology shares from the implementation date to the disclosure date was 0.

The court of first instance stated that the sponsor Hualong Securities and its insurance agent and other responsible entities only participated in the 2020 select-layer listing project, and did not participate in the false records in the 2017-2018 annual report, so they should not be liable for the actual losses of the plaintiff's securities trading of an investment institution.

Although in the above case, Hualong Securities and its insurance agent are not required to make actual compensation, there is still great uncertainty in the future. Lawyer Wang Pujie told the brokerage China reporter that this case was selected as a model case by the Beijing Financial Court.

This means that in the future, if the case is second-instance and the original judgment is upheld, once other investors suffer trading losses due to false records of the selected tier listing projects, they can claim compensation in accordance with the liability determination and judgment results in the judgment. The relevant signing agent is liable for compensation.

Editor-in-charge: Li Xuefeng

Proofreading: Wang Jincheng