Circumventing regulatory rules in disguise, new types of securities infringement disputes are emerging!

Recently, the Shanghai Financial Court released a report on its adjudication work for 2025 (hereinafter referred to as the “Report”).

The Report summarizes the characteristics and trends of cases in the securities industry. It states that new types of securities-related infringement disputes continue to arise, effectively breaking through regulatory rules—for example, by unlawfully reducing holdings through mechanisms such as lending securities for trading. The “multi-party joint accountability” situation is prominent: the number of cases in which investors list sponsoring institutions, underwriting institutions, or securities service institutions as defendants has increased. Cases involving financial fraud by listed companies are also highly frequent.

In 2025, the Shanghai Financial Court’s case docket covered sectors across the financial industry. Among civil and adjudication-type cases, the top three case causes by number of filings were: securities false statement liability disputes, with 3,610 cases, accounting for 38.06% of total filings, with a claim amount of 1.1B yuan; financial loan contract disputes, with 912 cases, accounting for 9.62% of total filings, with a claim amount of 48.89B yuan; and financial leasing contract disputes, with 387 cases, accounting for 4.08% of total filings, with a claim amount of 10.02B yuan.

New types of securities infringement are emerging

The Report says that as trading tools and trading structures become increasingly complex, risk forms in the capital market are exhibiting more covert characteristics. The continued emergence of new types of securities infringement disputes poses new challenges to the characterization of conduct, the logic of assigning liability, and the determination of losses.

First, the number of “structural avoidance” arrangements is increasing, which effectively circumvents regulatory rules and amplifies identification and detection costs. Some market participants embed the purpose of avoidance into complex trading pathways through nested constructions of trading chains. For example, in a case adjudicated by the Shanghai Financial Court—the nation’s first lawsuit alleging infringement against an actual controller of a listed company for illegal reduction of holdings—in which the actual controller lent out the securities source through an employee shareholding plan to sell via securities lending for trading, and combined with derivative contracts arrangements such as over-the-counter options and swaps of returns, thereby substantially locking in profit from price differences in advance and effectively evading the restrictions on the lock-up period.

Second, a tendency toward “tooling” public commitments has become apparent, and the market’s expectations management mechanism faces the risk of weakening. In practice, some senior executives (directors/supervisors) or controlling shareholders use public commitments such as increasing holdings as strategy tools to stabilize share prices and repair expectations. However, after making the commitments, they repeatedly delay, change them, or ultimately fail to perform them, eroding the basis on which investors rely on information disclosure. For example, in a civil compensation liability case adjudicated by the Shanghai Financial Court—the nation’s first case involving failure to fulfill a publicly announced commitment to increase holdings—at the time a certain listed company’s senior executives first made the holding-increase commitment, they had not prepared funds. During subsequent extension periods, they also did not actively raise funds. When faced with inquiries from the stock exchange, they used “bridge funds” to create “false” deposit proof, seriously misleading the securities market and investors’ expectations. For such new types of securities infringement, issuers should strengthen internal control compliance and prior review mechanisms, strengthen performance management and accountability constraints, and increase the cost of breaching commitments.

Increased transparency-based recovery claims in asset-management disputes

The Report holds that against the backdrop of multi-layer nesting in asset-management disputes, once risks in underlying assets are exposed, there are more lawsuits in which investors break through the relative effect of contracts.

First, the scope of parties to pursue claims is expanding, and the paths for asserting rights are becoming more diversified. Investors no longer assert rights only against the contractual counterparty. Instead, they extend their requests to related parties such as underlying-asset debtors, custodians, and financial advisers, attempting to pursue accountability through different paths—such as holding liable for infringement, exercising subrogation rights, or bringing derivative lawsuits—to make up for losses.

Second, multiple factors often combine as causes of risk, making the judgment of fault allocation and causation complexity. Asset-management risk events are usually formed by the interweaving of multiple factors, such as deficiencies in information disclosure, inadequate due diligence, absence of post-investment management, and volatility in external markets. It is necessary to further determine whether the wrongdoing of different participating parties is sufficient to affect the authenticity and completeness of information disclosure, and whether it constitutes a fault-based cause attributable to investors’ trading decisions. For such transparency-based asset-management disputes, the responsibility elements that can be “pierced,” the basis for claims, and the rules of proof should be further clarified, in order to achieve the balance of protecting investors’ rights and interests, preventing risks in financial markets, and maintaining stability in trading structures.

High frequency of financial fraud by listed companies

The Report shows that the number of cases involving securities false statement liability disputes is steadily increasing. In such cases, lawsuits in which listed companies’ financial information is distorted account for a relatively large proportion.

First, false statements involving financial information remain a high-frequency type. Some listed companies artificially inflate business revenue or profits through methods such as fabricating business activities, conducting financing-type trade, recognizing revenue in advance, and deferring expense recognition. For example, in a securities false statement liability dispute case involving an investor that was accepted by the Shanghai Financial Court, the controlling subsidiary of the listed company smuggled in the goods involved by underreporting prices and misreporting the origin, evading more than 11 million yuan in tax payable. As a result, over a four-year period, the listed company’s operating revenue and profit were seriously inconsistent with the facts.

Second, some disputes fall within the “boundary zone” between financial fraud and accounting errors. Whether an accounting error rises to the level of a false statement often becomes a focal point of contention. Listed companies often argue that common accounting errors—such as recording bad-debt provisions based on accounts receivable—are merely general negligence without subjective intent to defraud, or that the relevant records lack materiality.

Finally, disputes triggered by predictive information disclosure account for a certain proportion. Compared with historical financial data, predictive information relies more on the disclosure assumptions and business premises before disclosure. The key compliance risk is not whether the “result is achieved,” but whether the disclosure is built on reasonable grounds, and whether timely supplemental disclosures or correction obligations are fulfilled when the relevant grounds undergo major changes. For example, in a securities false statement case involving a listed company on the Sci-Tech Innovation Board that was accepted by the Shanghai Financial Court, the listed company voluntarily disclosed its 2024 business outlook information in December 2023, but when its business performance experienced significantly adverse changes in the first half of 2024, it failed to timely make supplemental disclosure. Whether it violated the requirement of the sustainability of voluntary information disclosure and constituted a false statement became the focus of the dispute. In response, it is necessary to further strengthen issuers’ internal control and information disclosure responsibilities. While respecting professional accounting judgments, such cases should be evaluated strictly in accordance with the law when accounting standards are seriously deviated from, in order to enhance the effectiveness of protecting capital market investors.

The “multi-party joint accountability” situation is prominent

The Report states that the healthy and orderly operation of the stock market depends on listed companies, intermediary institutions, and relevant personnel taking their due responsibilities—each performing their duties. At present, the number of situations in which investors sue “multiple parties together” in false statement disputes has increased noticeably.

First, the number of cases in which investors sue controlling shareholders, actual controllers, and senior executives (directors/supervisors), among others, has increased. Some investors believe that during the process of securities issuance and trading, the above-mentioned parties organize, instruct, and cause the issuer to engage in fraudulent issuance or make false statements. Controlling shareholders, actual controllers, senior executives, and others often claim that they were unaware of the false statements, that they have diligently fulfilled their duties, or that they should bear responsibility only within a certain compensation scope.

Second, the number of cases in which investors list sponsoring institutions, underwriting institutions, or securities service institutions as defendants has increased. Some investors argue that the above intermediaries failed to fulfill their “gatekeeper” obligations, or conspired with the issuer to fabricate evidence, and therefore request that they bear joint liability for the false statement acts together with the issuer. Whether an intermediary has established and effectively carried out verification procedures that match the nature of its business, and whether it maintains necessary professional skepticism regarding major abnormal matters, has become a focal point of dispute. For example, in a securities false statement case involving a company listed on the National Equities Exchange and Quotations (NEEQ) that was accepted by the Shanghai Financial Court, it was found that the accounting firm did not strictly control the process for obtaining audit confirmation letters, allowed the listed company to collect the confirmation letters, and also did not maintain professional skepticism regarding abnormal fund flows such as large advance payments. The lead underwriter did not conduct prudent, necessary investigation and verification of disclosures such as financial information during the stage of recommending the listing and quotation of shares. In response, listed companies should improve internal supervision mechanisms and strengthen the independence and supervisory functions of the board of directors, the board of supervisors, and the internal audit department. Intermediary institutions should continuously strengthen their “gatekeeper” responsibilities, and strengthen process traceability around key links such as the identification of major abnormal matters.

Proofreading: Pandá