In May 2023, the Shanghai Financial Court (SFC) concluded China’s first civil compensation case for fraudulent asset-backed securities (ABS) issuance.
The case refers to the plaintiff Postal Saving Bank of China Co., Ltd v. defendants Kunshan Meijite Dengdu Management Co., Ltd (“Meijite”), Huatai United Securities Co., Ltd (“Huatai Securities”), Shanghai Fucheng HFT Asset Management Co., Ltd (“the Manager”), China Chengxin Bong Rating Data Technology Co., Ltd (“CCXR”), and Beijing King & Wood Mallesons (“KWM”), (see Postal Saving Bank of China Co., Ltd v. Kunshan Meijite Dengdu Management Co., Ltd et al. (2020) Hu 74 Min Chu No. 1801).
On 26 July 2016, the plaintiff entered into a subscription agreement with the Manager to subscribe for a total nominal amount of CNY 967 million of the underlying securities of Meijite. KWM, CCXR, and Huatai Securities were the legal advisors, rating agencies, and financial advisors, respectively, for the securities in question.
In November 2016, the securities in question were listed on the Shanghai Stock Exchange. Upon maturity of the securities, the plaintiff received only a partial payment of principal and interest.
Believing that the above five defendants constituted a fraudulent issuance and caused substantial losses, the plaintiff filed a civil lawsuit with the SFC.
The SFC held that the underlying assets of the relevant securities and their cash flows were grossly misstated, and accordingly:
- Meijite should compensate the plaintiff for the loss of principal and interest due to the fraudulent issuance of securities;
- Huatai Securities should be jointly and severally liable for damages for intentionally concealing the fact of fraudulent issuance by the issuer; and
- The Manager, CCXR, and KWM were each grossly negligent in the preparation and issuance of the false statements in the disclosure documents and were jointly and severally liable within the scope of their responsibilities.
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