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the attention aroused by the first-instance trial of the dispute over liability for manipulation of the securities market by former private equity tycoon xu xiang and others continues.

on september 4, wenfeng world chain development co., ltd. (referred to as "wenfeng shares", 601010.sh) announced that recently, the company received a "civil judgment" [(2021) su01 minchu 2281] delivered by the nanjing intermediate people's court of jiangsu province (hereinafter referred to as "nanjing intermediate court"). the nanjing intermediate court made a first-instance judgment on the case of the plaintiffs liu moumou, zhou moumou and other four natural person investors and xu xiang, xu changjiang, and wenfeng shares for manipulating the securities market liability dispute, requiring the defendants xu xiang and xu changjiang to compensate for a total loss of 1.102 million yuan; wenfeng shares shall bear joint and several liability for the above-mentioned compensation obligations, and shall have the right to claim compensation from the defendants xu xiang and xu changjiang after actually assuming the liability.

wenfeng co., ltd. stated that it will appeal the case to the jiangsu higher people's court.

"it is not uncommon for listed companies to be defendants or compensation entities in securities law violation cases. however, in civil compensation cases involving market manipulation, there has never been a judgment that classified a listed company that has not been subject to criminal or administrative penalties for manipulating the securities market as manipulating the securities market and held it jointly liable." lawyer zhao bing of shanghai haoxin (beijing) law firm explained to the paper why the case in which four investors sued former private equity tycoon xu xiang and others for liability for manipulation of the securities market has attracted the attention of industry insiders.

it is worth noting that this case is not only the first case in which a listed company bears civil tort liability in a securities market manipulation case, but also the first case of civil claims in a series of suspected market manipulation cases involving xu xiang, xu changjiang and others.

the nanjing intermediate people's court accepted the case in july 2021 and held trials in march 2022 and may 2024. the trial of the case spanned more than three years and was highly complex. the paper noted that in its verdict, the nanjing intermediate people's court summarized four major controversial issues in the case, including whether xu xiang, xu changjiang, and wenfeng shares had engaged in the manipulation of the securities trading market as claimed by investors and whether they should bear the corresponding civil liability; whether there was a causal relationship between the losses claimed by investors and the manipulation of the securities trading market involved in the case; how the period of the manipulation of the securities trading market involved in the case should be determined; and how the losses of investors should be calculated.

among them, what is particularly concerned is whether xu xiang, xu changjiang and wenfeng co., ltd. have engaged in manipulation of the securities trading market as claimed by investors and whether they should bear corresponding civil liability.

the criminal penalty against xu xiang, xu changjiang and others for suspected manipulation of the securities market was made in 2017; in the recent penalty made by the nanjing intermediate people's court, more attention was paid to whether wenfeng co., ltd., as a listed company, had engaged in the manipulation of the securities trading market as claimed by investors and whether it should bear the corresponding civil liability.

the paper noted that wenfeng holdings argued in the first instance that the company did not have the subjective intention to manipulate the stock market, nor did it objectively manipulate the stock market, and was not an infringer identified by criminal judgments or administrative penalties. wenfeng holdings said, "as the object of manipulation, the company is also a victim and should not be listed as a defendant."

the nanjing intermediate people's court wrote in the first instance judgment that wenfeng shares should bear the liability for compensation for the losses caused to investors by the manipulation of the stock market in the case. first, wenfeng shares, in accordance with the instructions of xu changjiang, its then chairman and actual controller, selected opportunities to release favorable information such as equity transfer and "high transfer" in the stock market in the name of the company. its behavior is an important part of the manipulation of the stock market in the case, and it is also an important factor for xu xiang and xu changjiang to achieve illegal profit by manipulating the stock market. second, wenfeng shares released favorable news under the control and instruction of xu changjiang without the collective decision of the board of directors. the failure of its internal control system led to the release of information that had a significant impact on its stock price at the time required by xu xiang and xu changjiang, and failed to effectively and equally protect the legitimate rights and interests of small and medium-sized investors. it was at fault for the occurrence of the manipulation of the stock market in the case.

at the same time, the judgment of the above-mentioned court also recognized wenfeng shares as a "victim". the judgment mentioned that xu xiang controlled the account group to continuously trade wenfeng shares, and xu changjiang abused his position as chairman and actual controller to control wenfeng shares to release information. both of them made huge profits. their actions damaged the legitimate rights and interests of wenfeng shares. therefore, xu xiang and xu changjiang should be the ultimate responsible parties for the manipulation of the securities trading market involved in the case. wenfeng shares has the right to seek compensation from xu xiang and xu changjiang after actually assuming the compensation liability to investors.

in this regard, wenfeng shares' agent, jiangsu yicheng law firm's lawyers chen yang and huang zhen, said that equity transfer, high dividends and transfers, and the lack of internal control systems do not constitute the manipulation of the securities market under the securities law of the people's republic of china (amended in 2014). wenfeng shares, under the control of xu changjiang, released positive news without the collective decision of the board of directors, indicating that wenfeng shares did not participate in conspiracy to manipulate the securities trading market; "the determination of civil tort requires the existence of tortious acts, damage facts, subjective fault and causal relationship. the premise of proving fault is that the act is established."

professor zheng yu of the school of international financial law at east china university of political science and law told the paper that whether wenfeng shares have manipulated the securities trading market should be viewed in the context of market value management. "in the past ten years, under the background of market value management, many listed companies have established market value management systems. if wenfeng shares authorized chairman xu changjiang to cooperate with xu xiang in the process of market value management, there is cooperation in market value management, even if the relevant news released is true, it is also a conscious influence on the market price. this behavior may violate article 55 of the securities law, and the listed company may also become a manipulator." however, zheng yu further emphasized that in the information of the judgment, the plaintiff claimed that the listed company cooperated, but did not go into more arguments and information disclosure, and only the chairman agreed to conduct market value management. if the listed company can prove that it was unaware of the market value management, then the listed company does not constitute information-based manipulation conspiracy.

"the biggest concern in this case is that wenfeng shares was not identified as manipulating the securities market in the criminal judgment or administrative penalty for xu xiang and xu changjiang's crime of manipulating the securities market, but in this case it needs to bear civil liability to shareholders because of xu xiang and xu changjiang's fault in manipulating the securities market." lawyer zhao bing told the reporter from the paper that based on the information disclosed in the verdict, in the criminal judgment, xu xiang and xu changjiang were both found guilty of manipulating the securities market, but wenfeng shares only had violations related to information disclosure.

"the cause of action in this case is a dispute over liability for manipulation of the securities market. manipulation of the securities market is criminally punishable by the crime of securities market manipulation, and in administrative law there are acts of securities market manipulation as stipulated in the securities law. however, in civil matters, one cannot conclude that wenfeng shares have engaged in securities market manipulation simply because of a lack of internal control. in other words, one must first determine whether wenfeng shares have engaged in market manipulation before one can further require wenfeng shares to bear joint and several liability for compensation," added attorney zhao bing.

in addition, zhao bing also stated that xu changjiang is the actual controller and chairman of wenfeng shares, and the listed company is passive to xu changjiang. in the process of xu changjiang using information advantages to manipulate the securities market, wenfeng shares must be the means or tools used to manipulate the market. in xu changjiang's crime of manipulating the securities market, wenfeng shares is actually a victim.

"listed companies bear joint and several liability for compensation, but it is actually the shareholders of listed companies who bear the responsibility." wang xiaodong, senior partner of beijing hairun tianrui law firm and director of the shanghai branch, told the paper that investors should consider carefully if a small number of actual controllers or shareholders manipulate the stock price of listed companies and cause investors losses. "now, whether it is administrative penalties, civil compensation, or criminal liability, from the perspective of compensation, the legal responsibility is generally pursued by directors, supervisors, and senior managers and actual controllers. even if listed companies as legal entities have insufficient internal control, it is caused by the directors, supervisors, and senior managers."

the current solvency of xu xiang and xu changjiang is still unclear.

according to the official weibo account of the qingdao intermediate people's court, in january 2017, xu xiang was sentenced to five years and six months in prison for manipulating the securities market; according to the personal weibo account of xu xiang's wife ying ying, xu xiang was fined 11 billion yuan, and about 21 billion yuan of family property was seized, confiscated and frozen by judicial authorities.

in addition, according to a 2018 report by china times, on april 27, 2017, the qingdao intermediate people's court sentenced xu changjiang to two years and six months for market manipulation, suspended his sentence for three years, and imposed a fine of 1.2 billion yuan. xu changjiang's illegal gains of 2.5 billion yuan were turned over to the state treasury in accordance with the law. the qingdao intermediate people's court also made it clear in its verdict that it would continue to recover his illegal gains of 907 million yuan. it is understood that a considerable proportion of the two illegal gains involving xu changjiang were transferred from the account of jiangsu wenfeng group co., ltd., the controlling shareholder of wenfeng co., ltd.

regarding whether the criminal fines and confiscations of xu xiang and xu changjiang can be used for civil compensation for investors, lawyer zhao bing said that first, it is necessary to determine whether all means have been exhausted to prove that xu xiang and xu changjiang have no compensation ability; secondly, the "regulations on matters concerning the priority of using the property of securities violators to bear civil liability for compensation" was issued on july 29, 2022. the premise is that the offender violates the securities law and shall bear both civil compensation liability and administrative liability for paying fines and confiscations. after the offender pays the fines and confiscations, the remaining property is insufficient to bear civil liability. investors whose legitimate rights and interests in civil compensation liability are infringed can submit a written application to the china securities regulatory commission to request that the fines and confiscations already paid for the same administrative violation be used to bear their civil compensation liability. the people's court filed a lawsuit. "its premise is that the person responsible for the violation has violated the administrative behavior in the securities law, which is different from the fines and confiscations in criminal cases. there are currently no relevant regulations in criminal cases."

some interviewees mentioned the verdict of the "xian yan case". according to the disclosure of the insured typical cases officially released by the "china securities quotation investment education base" in october 2023, in 2022, the shanghai financial court, in the trial of the civil tort case of 13 plaintiff investors suing the defendant xian yan for manipulating the securities market, based on the principle of priority of civil compensation established in the "securities law", made corresponding preservation of the fines and confiscations of the criminal case of xian yan manipulating the securities market, and gave priority to the execution of the compensation liability determined by the civil judgment. the "china securities quotation investment education base" stated in the article that the first instance of the case ruled that xian yan compensate investors for losses of more than 4.7 million yuan. at present, the preservation funds have been executed, realizing the rights relief of small and medium-sized investors to the greatest extent, and stated that "this case successfully implemented the provisions of the "securities law" on the priority of civil compensation, and it is the first securities infringement case in the country to implement the priority of civil compensation liability."

on the topic of whether the criminal fines and confiscations of xu xiang and xu changjiang can be used to compensate investors, wang xiaodong mentioned the principle of priority of civil compensation liability. he said that article 36, paragraph 2 of the criminal law stipulates that if a criminal who bears civil compensation liability is also sentenced to a fine and his property is insufficient to pay all the money, or if he is sentenced to confiscation of property, he shall first bear civil compensation liability to the victim. article 220 of the securities law also stipulates that if a person violates the securities law, he shall bear civil compensation liability and pay fines, penalties, and illegal gains. if the property of the offender is insufficient to pay, it shall be used to bear civil compensation liability first. the use of criminal fines and confiscations to compensate investors is supported by the rules of the criminal law and the securities law.

wang xiaodong said that the principle of priority of civil compensation liability is stipulated in many laws and regulations in my country, such as the civil code, the criminal law, the company law, the securities law, the securities investment fund law, the partnership enterprise law, the sole proprietorship enterprise law, the anti-unfair competition law, the product quality law, the food safety law, and the consumer rights protection law. according to the above laws and regulations, when criminal liability and civil liability compete, the principle of priority of civil compensation liability shall be adopted. when administrative liability and civil liability compete, the principle of priority of civil compensation liability shall also be adopted. on july 29, 2022, the china securities regulatory commission and the ministry of finance jointly issued the "regulations on matters concerning the priority use of property of securities violators to bear civil compensation liability". after the violator pays the fines and confiscations, if the remaining property is insufficient to bear civil liability, investors whose legitimate rights and interests have been infringed can file a lawsuit with the people's court and request that the fines and confiscations paid by the violator for the same violation be used to bear civil compensation liability. in the field of securities violations, when administrative liability and civil liability compete, the principle of priority of civil compensation liability has been more detailed.