（By Li Xiang）Article Six of the Regulations of the Supreme People’s Court on Hearing Civil Compensation Cases Arising from False Statements in Securities Markets (“Regulations”) states that “courts should accept and hear litigation cases brought by investors claiming damages for themselves arising from a false statement on the basis of decision made by an administrative authority or a criminal court”. According to this, administrative or criminal punishment is the preliminary process for filing a civil compensation case arising from a false statement.

The preliminary process for infringement cases arising from false statements is based on the current legal system and practice for civil tort in Chinese securities markets. First, Chinese securities markets are at the crossroads and have a lot of problems that need to be solved. On the one hand, action should be taken to protect small investors from securities frauds. On the other hand, without restrictions on the number of litigation cases of false statements in securities markets, fluctuation would occur to the securities markets, affecting their stable growth. Second, without the preliminary process, there would be too many entities and individuals (including listed companies) making false statements and activities and events that could cause false statements. Millions of investors decide in different ways whether a false statement really exists. Allowing investors who allege that a false statement could cause a loss to them and sue to a court would cause a great increase in the number of this type of cases and impose much pressure on and affect the efficiency and performance of legal authorities which have limited resources that can be used to hear and decide cases. Third, the preliminary process can really help to solve the difficulties in finding evidence in securities markets. As per the preliminary process investors don’t need to judge whether an act of making a false statement constitutes a civil misconduct and only need to provide proof of actual loss caused by the false statement according to valid decision made by the administrative or criminal authority.

For these reasons the preliminary process for infringement litigation cases arising from false statements is necessary for special cases. With increasing awareness of securities investors protecting their rights, the number of infringement cases arising from false statements in securities markets is increasing. Allowing investors to file a civil action on the condition that an administrative action or a criminal court decision has been taken could be against the investors’ interests. Many people are beginning to doubt if the preliminary process is reasonable and if it should be canceled or limited.

The Supreme People’s Court published the Opinions on the People’s Courts Promoting the Registration-based Case Filing System Reform (“Opinions”) in April 2015 to give the guideline for the reform that “any case filed must be accepted and any claim be heard”, which means that “any case that meet the legal conditions must be heard as required by law and no entities or individuals can prevent a court from accepting and hearing such case for any reason”. The registration-based case filing system poses a challenge to infringement cases arising from false statements. A wide range of people question the preliminary process of the case filing system.

On December 24th, 2015 Yang Linping, head judge of No.2 Court of Civil Cases of the Supreme People’s Court gave her opinions on specific issues connected with hearing and deciding commercial cases. Her opinions were published by the Supreme People’s Court and contained in documents used by the two supreme authorities. The Specific Issues Connected with Hearing and Deciding Commercial Cases (“Specific Issues”) stated that “by legal interpretations of the registration-based case filing system administrative action taken by the regulatory authority and valid criminal court decision are no longer included in the conditions of the official acceptance of civil compensation cases arising from false statements, backdoor dealings or market rigging”. The Specific Issues seemed to give a positive and definite answer to the issue of filing infringement cases arising from false statements. Some optimists even believe that the preliminary process will be abolished. I don’t think things are as easy. I suggest at least taking factors below into consideration when deciding whether to replace the preliminary process with the registration-based case filing system.

First, the Regulations is a legal document of legal interpretations now in effect used by courts as the basis for making decisions and sets out the preliminary process for civil compensation for securities-related false statements that has not been amended or abolished. The force of the Opinions is not above that of legal interpretations. The Specific Issues only mentions that the head of a branch of the supreme court said in a speech that the preliminary process would be canceled, indicating the trend of the judicial system but not effectively modifying or superseding existing legal interpretations.

Second, the registration-based case filing system can help to solve the “difficulties in filing cases”. With the conditions of filing the cases lowered, the conflict between a sharp increase in the number of cases and limited resources of legal authorities will become obvious. More entities and individuals in securities markets are likely to make false statements. With an increasing awareness of protecting their rights, investors take infringement action as quickly as possible. In contrast resources that legal authorities in China can use to hear and decide cases are limited. Most courts are overburdened, especially ones in coastal areas where there are a lot of listed companies and a large number of civil cases. If the preliminary process is completely abandoned, an alarmingly huge number of compensation litigation cases in securities markets would come into existence. The registration-based case filing system is open to abuse of power to file lawsuits for illegal benefits, resulting in a waste of legal resources.

Third, if the preliminary process is canceled, investors would find it difficult to gather evidence. According to the Civil Proceedings Law of China, the conditions of filing a lawsuit include claims and facts. Securities markets in China are much less transparent than ones of western countries. Securities deals are different from traditional ones in which one person deals with another one person. In securities markets, especially secondary ones, an investor deals with other investors, not entities making false statements such as listed companies and securities dealers. Millions of transactions are done on the internet. There are so many things that could affect securities markets that it is difficult for investors to find proof of their loss caused by a fraud.

Fourth, filing a lawsuit without the administrative action taken by the regulatory authority or valid criminal court decision could harm investors’ interests. In fact investors usually claim damages by suing to a court when the regulatory authority just begins to investigate the listed company. Investigating the listed company doesn’t mean it has done something illegal. Even doing something illegal doesn’t mean meeting the conditions of making a false statement that discloses important information. Not all investors who have made a false statement are qualified for claiming damages. There are many things in securities markets that could cause loss to investors. In order to confirm that a loss is caused by a false statement, it is necessary to exclude other possible causes of the loss. Investors who don’t know this are very likely to lose the lawsuit. Investors especially small ones will be frustrated affecting healthy growth of securities markets if courts don’t support their true and reasonable claims.

I believe the preliminary process for litigation cases of civil compensation for securities-related false statements cannot now be abandoned completely. The litigation case filing system reform should accommodate to the actual situation. The implementation of the registration system for filing litigation cases is a step to protect the right to file lawsuits and makes it “easier to file litigation cases”. However, it happens more frequently that people disagree with judges on whether to accept the filing of a case. The conflict between a sharp increase in the number of cases and limited resources of legal authorities becomes more obvious. New problems such as abuse of the power to file lawsuits and action filed in bad faith are to be solved. Chinese securities markets are emerging and at the crossroads and lack the ability to control themselves in the absence of sound legal system and running mechanism. Civil compensation cases in securities markets have special quality that other civil cases don’t have, which should be considered when deciding the process of filing lawsuits. It is a hasty action to apply the registration-based case filing system to false statement cases in securities markets with the problems in the system remaining unsolved. It is advisable to gradually use the registration-based case filing system while using the preliminary process.

Moreover, a well-established system that contains different ways of dispute resolution is needed, in which it is recommended that civil compensation cases arising from false statements in securities markets be resolved through mediation or settlement. Article Four of the Regulations states that “the people’s courts should try to resolve civil compensation cases arising from false statements in securities markets through mediation and help parties involved to settle”. A case on securities usually involves a group of people taking collective action. Resolving collective cases as quickly and completely as possible is important for economic and social stability and development. Mediation and settlement results are subject to voluntary agreement between parties involved. Resolving matters and issues in dispute completely means confirming civil rights and obligations connected therewith. This helps resolve disputes quickly and prevent conflicts from being aggravated. The civil compensation for infringement system for securities markets cannot be as accurate as systems for general markets. Mediation or settlement results cannot be accurate but are acceptable to each party involved. In these cases, litigation is a costly, time consuming and unpredictable process and mediation or settlement is the most efficient way that takes less time and money to resolve disputes and helps to protect each party’s interests, promote economic and social stability and relieve the burden on courts. In a word, it is advisable to resolve false statement cases in securities markets through mediation and settlement.

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