Kangmei Pharmaceutical Securities False Statement Case Sentence in First Instance

On November 12, 2021, the Intermediate People's Court of Guangzhou City, Guangdong Province issued a first-instance judgment on the country's first securities class action case, ordering Kangmei Pharmaceutical Co., Ltd. to compensate securities investors for losses of 2.459 billion yuan due to false statements in annual reports and other infringements. The former director The chairman and general manager Ma Xingtian and the five directly responsible personnel, as well as Genzon Zhujiang Accounting Firm and the directly responsible personnel bear all joint and several liability for compensation. In addition, 13 relevant responsible personnel bear part of the joint and several liability for compensation according to the degree of fault.

On May 13, 2020, due to false records and major omissions in Kangmei Pharmaceutical’s annual and semi-annual reports, the China Securities Regulatory Commission issued an administrative penalty decision to impose fines and market bans on the company and 21 responsible persons. On February 18, 2021, the China Securities Regulatory Commission imposed administrative penalties on Genzhong Zhujiang Accounting Firm and relevant responsible personnel responsible for the financial audit of Kangmei Pharmaceutical. On April 8, 2021, China Securities Small and Medium Investor Service Center Co., Ltd. was specially authorized by some securities investors to apply to the Guangzhou Intermediate People’s Court to participate in the lawsuit. Later, China Securities Small and Medium Investor Service Center Co., Ltd. Special representatives of investors participated in the class action lawsuit. After the Supreme People's Court designated jurisdiction, the Guangzhou Intermediate People's Court applied special representative litigation procedures and conducted a public hearing on the country's first securities class action case.

The court found that the annual reports and semi-annual reports disclosed by Kangmei Pharmaceutical contained inflated operating income, interest income and operating profits, inflated monetary funds, and failed to disclose related-party transactions involving non-operating funds occupied by shareholders and their related parties as required. , the financial statement audit report issued by Genzhong Zhujiang Accounting Firm contained false records, which constituted securities misrepresentation. The China Securities Investor Protection Fund Co., Ltd. calculated the plaintiff’s investment losses and other risk factors. The actual losses of investors were 2.459 billion yuan. There is a causal relationship between this loss and Kangmei Pharmaceutical’s misrepresentation.

The court held that Kangmei Pharmaceutical made false statements in the listed company's annual report and semi-annual report, causing investment losses to securities investors, and should be held liable for compensation. Ma Xingtian, Xu Dongjin and other organizations planned financial fraud and should bear full joint and several liability for the actual losses of investors. The relevant auditors of Genzhong Zhujiang violated the professional standards, resulting in financial fraud that was not discovered by the audit, and should bear full joint and several liability for compensation. Although some senior managers of the company were not directly involved in the fraud, they signed to confirm the authenticity of the financial report and should bear some joint and several liability based on the magnitude of their fault.

On November 12, 2021, the head of the relevant department of the China Securities Regulatory Commission made a judgment on the Kangmei Pharmaceutical special representative litigation case and answered a reporter’s question: The Kangmei Pharmaceutical securities dispute case is the first special representative litigation case in my country. Kangmei Pharmaceutical Company has committed financial fraud for three consecutive years. The amount involved was huge, lasted for a long time, was extremely serious in nature, had a bad social impact, and seriously damaged the legitimate rights and interests of investors. As an investor protection organization, the China Securities Small and Medium Investor Service Center responds to market calls, accepts investor entrustments in accordance with the law, and participates in Kangmei Pharmaceutical representative litigation as a representative to strive for the maximum rights and interests of investors. This time the court made a first-instance judgment in accordance with the law, which is of great demonstration significance. It is a powerful measure to implement the new Securities Law and the Opinions of the General Office of the Central Committee and the General Office of the State on Strictly Combating Illegal Securities Activities in accordance with the Law. It is also a pioneering sign in the history of the capital market. Sexual cases are of milestone significance in promoting the deepening reform and healthy development of my country's capital market and effectively safeguarding the legitimate rights and interests of investors. The China Securities Regulatory Commission expresses support for this and will supervise investor protection agencies in accordance with the law and cooperate with the People's Court in follow-up related work. On the basis of comprehensively summarizing the experience of the first case, the China Securities Regulatory Commission will promote the improvement of the representative litigation system and mechanism, support investor protection agencies to further optimize case evaluation, decision-making, and implementation processes, and promote the normalization of special representative litigation in accordance with the law.

The first-instance judgment of the Kangmei Pharmaceutical class action case is a milestone in protecting the legitimate rights and interests of investors, and also guides the direction for resolving group disputes in the securities market. The application of the special representative system in civil litigation for securities infringement can effectively protect the legitimate rights and interests of small and medium-sized investors, help better maintain the order of the securities market, create a good capital market atmosphere, and provide a favorable guarantee for the healthy development of the capital market!