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China News Service, July 19 (Ding Dan) Recently, the Judgment Documents Network published a "Civil Judgment of the Second Instance in the Property Damage Compensation Dispute between Liao Mou, Mou Zheng and Mou Company".

The verdict shows that the plaintiff, Ms. Liao, accused a securities company's Xinjiang branch and Zhao of illegally concealing product risks and promising her returns, using her account to subscribe to investment products without authorization, etc., and demanded a total compensation of more than 2.56 million yuan.

China News Service noted that the judgment contained statements such as "Hualong Securities is a sales agency" and "Before Liao bought a certain fund, Hualong Securities disclosed the risks through the customer service phone." So is the securities company involved in the lawsuit Hualong Securities? China News Service sent a letter to Hualong Securities on the 18th to verify, but no response was received by the other party as of press time.

　　Promises to protect principal several times, "returns of about 7 to 8 times"

The verdict stated that Ms. Liao had started trading stocks in 2007 and had purchased fund products worth millions of yuan many times. In the fund risk assessments conducted by a securities company eight times, Ms. Liao was assessed as AA (aggressive) three times, C5 aggressive (high) three times, A (relatively aggressive) once, and C3 stable (medium) once each.

In March 2017, Ms. Liao invested 2 million yuan to purchase a private equity fund in Beijing. The fund manager was Shengkang Century Investment Holding (Beijing) Co., Ltd. (hereinafter referred to as Shengkang Century Company), and the sales agency was Hualong Securities. The duration of the fund was 18+18 months. After the expiration of three years, the fund failed to settle as scheduled. Shengkang Century Company issued three fund liquidation announcements on March 31, 2020, December 1, 2020, and June 1, 2021 to explain and provide solutions. According to the data provided by Shengkang Century Company, as of March 23, 2023, the net value of the fund was 0.7097, and the market value of the fund held by Ms. Liao was 1.4194 million yuan (2 million yuan multiplied by 0.7097), which means that Ms. Liao had a floating loss of nearly 600,000 yuan.

Ms. Liao believes that the transaction of financial products was largely the result of "promotion" by securities sales agencies. A securities company in Xinjiang deliberately raised her risk level, causing her to purchase high-risk investment products that exceeded her risk tolerance. Zhao, as the former head of a securities company's Urumqi Penghu Road Securities Business Department, promised Ms. Liao to guarantee principal and profits, which has resulted in her being unable to recover her principal and making no profit to date.

　　The verdict shows that Zhao promised many times to guarantee principal during the sales process, and even said that the product would generate returns of about 7 to 8 times. The relevant facts were reflected in the WeChat chat records between Zhao and Ms. Liao.For example, in a WeChat chat on the afternoon of March 19, 2019, Zhao told Ms. Liao that "I am sure I will not lose money"; in a WeChat chat on April 7, 2021, Ms. Liao said, "When I sold it, you said you would guarantee me the safety of my funds and pay me back when the time comes." Zhao replied, "I know I haven't forgotten it, sister." On March 6, 2022, Ms. Liao told Zhao that "when you sold the product, you told me that the return was 7 to 8 times higher." Until a conversation between the two on March 11, 2022, Zhao still said, "When the return is good, how can it be only twice as much?"

Ms. Liao filed a lawsuit with the first instance court, requesting that a certain securities company's Xinjiang branch and Zhao be jointly held responsible for the loss of 2 million yuan in principal and approximately 425,800 yuan in interest caused to her by illegally concealing product risks and promising her returns.

　　Alleged unauthorized manipulation of customer securities accounts

Ms. Liao also accused Zhao of using her account to subscribe to a product called "A Certain Industry Rotation Mix" without her permission in March 2018, with an amount of 1 million yuan. In August of the same year, Zhao redeemed the product through Ms. Liao's account, with a transaction amount of about 884,200 yuan and a handling fee of 4,420.79 yuan, resulting in an actual loss of about 120,300 yuan.

Although Zhao later compensated Ms. Liao with 50,000 yuan, Ms. Liao was not satisfied. She filed a lawsuit with the court of first instance, requesting that the Xinjiang branch of a securities company and Zhao bear the principal loss of about 120,300 yuan and interest loss of about 19,000 yuan caused to her by buying and selling securities for clients without authorization.

Regarding Ms. Liao's prosecution request, the court of first instance held that the relevant evidence proved that a certain securities Xinjiang branch did not mislead or defraud in the transaction involved in the case, and should not bear the loss liability claimed by Ms. Liao; Zhao did not commit fault, intentional negligence in the civil behavior of accepting Ms. Liao's entrustment to operate the sale of securities, and should not bear the loss liability claimed by the latter. The facts determined by the court of first instance showed that in the important reminder of the fund contract, the fund manager reminded investors of the "buyer beware" principle of fund investment; a certain securities company made a follow-up call to Ms. Liao 24 hours after the cooling-off period for the purchase of the fund expired, and Ms. Liao confirmed that she subscribed to the fund herself, signed the materials herself, read the risk disclosure, the product rating was high-risk and her risk tolerance was high-risk matching, the product income distribution method and the possible investment losses in the future.

The first instance court ultimately rejected all of Ms. Liao’s claims. Ms. Liao was dissatisfied with the first instance judgment and appealed to the Urumqi Intermediate People’s Court.

During the second instance, Ms. Liao submitted a piece of evidence to the court, which was the Administrative Penalty Decision No. (2023) 2 made by a regulatory bureau of the China Securities Regulatory Commission.

In the judgment, regarding the administrative penalty decision submitted by Ms. Liao as evidence, a securities company in Xinjiang believed that the penalty document clearly mentioned that Ms. Liao sent her account and transaction password to Zhao via WeChat, and Zhao's act of wealth management on behalf of customers was not a job-related act, but an act with Ms. Liao's personal permission. The branch also argued that securities investment is not principal-guaranteed wealth management, and Ms. Liao's claim for interest loss has no contractual or legal basis.

The second instance court confirmed the authenticity and legality of the administrative penalty decision submitted by Ms. Liao, but did not confirm its relevance to the case. The court held that the Xinjiang branch of a securities company fulfilled the suitability obligations and notification obligations of a sales agency in the process of selling a Beijing private equity fund to Ms. Liao, and was not at fault for Ms. Liao's investment losses and did not need to bear compensation liability.However, Zhao personally promised investors to guarantee principal and returns, and was at fault for Ms. Liao's investment losses, and should bear certain compensation liability.However, the court also pointed out that as an investor with ten years of stock investment experience, Ms. Liao should have been able to foresee the risks of stock and fund transactions. She trusted Zhao's promise to protect principal and profits and did not make an independent judgment on the fund risks. She was also at fault and should bear part of the responsibility for her losses.

In the end, the second-instance court rejected Ms. Liao’s appeal and upheld the original verdict.

　　Hualong Securities Xinjiang Branch has carried out rectification

China News Service noted that in June 2023, the Xinjiang Securities Regulatory Bureau issued the "Administrative Penalty Decision No. 2 [2023]". This penalty book pointed out that Zhao Ming joined Hualong Securities Urumqi Yangtze River Road Securities Sales Department (now Hongshan Road Sales Department) on June 22, 2011, and served as Hualong Securities Account Manager, Investment Advisor, Investment Advisory Department Manager, Deputy General Manager of the Sales Department (in charge of work) and other positions. He resigned from Hualong Securities on September 13, 2022. During his tenure at Hualong Securities, Zhao Ming privately accepted clients' commissions to buy and sell securities, and held and bought and sold stocks in the name of others. The Xinjiang Securities Regulatory Bureau decided to order Zhao Ming to correct his behavior of privately accepting clients' commissions to buy and sell securities, give a warning, and impose a fine of 30,000 yuan; for Zhao Ming's behavior of holding and buying and selling stocks in the name of others, he was ordered to deal with illegally held stocks in accordance with the law, confiscate nearly 26,000 yuan of illegal income, and impose a fine of 30,000 yuan.

Source: Xinjiang Securities Regulatory Bureau

It is worth mentioning that Zhao Ming has been fined more than once. On July 21, 2022, the Xinjiang Securities Regulatory Bureau took regulatory talks with Zhao Ming. It was found that during Zhao Ming's tenure at Hualong Securities Urumqi Hongshan Road Securities Sales Department and Urumqi Penghu Road Securities Sales Department, he failed to strictly regulate his own professional conduct, and privately accepted clients' commissions to buy and sell securities, held and bought and sold stocks in the name of others, and illegally operated clients' securities accounts. On the same day, the Xinjiang Securities Regulatory Bureau issued a warning letter to Hualong Securities Xinjiang Branch, stating that Zhao Ming, the former head of the Urumqi Penghu Road Securities Sales Department under the jurisdiction of the branch, had privately accepted clients' commissions to buy and sell securities, held and bought and sold stocks in the name of others, and other illegal and irregular problems, "reflecting that your branch's internal supervision and management is insufficient, and it has failed to effectively prevent staff from using their position to engage in illegal and irregular behavior."

Public information shows that Hualong Securities was established in May 2001 and is headquartered in Lanzhou, Gansu Province. Its total assets were 32.756 billion yuan by the end of 2023. Information disclosed on the official website of the Shanghai Stock Exchange shows that Hualong Securities' IPO application on the Shanghai Stock Exchange Main Board was accepted in March 2023, and the current review status is "inquiry has been made".

In the reply opinions of the issuer and sponsor of Hualong Securities disclosed on the official website of the Shanghai Stock Exchange on June 29 this year, Hualong Securities’ rectification measures for its Xinjiang branch were mentioned. The cause was the warning letter issued to it by the Xinjiang Securities Regulatory Bureau on July 21, 2022.

Source: Hualong Securities issuer and sponsor's reply

The rectification measures pointed out that on August 15, 2022, Hualong Securities Xinjiang Branch submitted the "Rectification Report on Strengthening Compliance Management of Xinjiang Branch of Hualong Securities Co., Ltd." (Hualong Xinjiang [2022] No. 23) to the Xinjiang Securities Regulatory Bureau, and took rectification measures such as improving internal management, strengthening employee control, and timely eliminating risks and hidden dangers. "Hualong Securities Xinjiang Branch has completed the rectification."

(For more reporting clues, please contact the author of this article, Ding Dan: [email protected]) (China News Service APP)

　　(The views in this article are for reference only and do not constitute investment advice. Investment is risky and you should be cautious when entering the market.)

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