Rui Xing Financial Fraud Swirl: Does China'S Securities Law Have Jurisdiction?

Rui Xing's Hurricane is returning. 。

On the evening of April 2nd in Beijing, LK.US released an internal investigation report on a forged 2 billion 200 million dollar transaction. It admitted that from the second quarter of 2019, the company's chief operating officer (COO) and director Liu Jian and several employees who had reported to him had engaged in misconduct, including making up trading data.

Subsequently, Rui Xing shares fell rapidly, evaporating more than 30 billion market capitalization.

Although more than 10000 kilometers apart, Rui Xing's concern in the domestic capital market has no jet lag.

In twenty-first Century, the business reporter interviewed a number of stores to understand that Rui Xing coffee concession was subject to "run on", APP and small program crash.

Even this fraud has been gradually spreading to the domestic capital credit.

A number of investment banks and venture capitalists told the twenty-first Century economic news reporter that as a company with so much influence on the C side, the Rui Xing coffee incident will have negative reputation effects on fund-raising funds, preparatory companies listed in the US and listed stock companies.

"We are ready to temporarily shelve the IPO process for related projects." According to a venture capitalist.

According to a number of legal personages, it is difficult to apply "legislation" in the "lucky incident", but "judicial trial" is difficult. Under the framework of the new securities law, how to supervise the domestic regulation will become a landmark event.

Rui Xing's impact

"Resolutely combating securities fraud and effectively protecting investors' rights and interests." On the afternoon of April 3rd, the China Securities Regulatory Commission issued a notice against Rai Xing fraud.

Similar to most cases of financial fraud, the weavers of Rui Xing's story were exposed gradually with the incident. A group of capital holders, these people have been sitting on hundreds of millions of floating surplus, supporters.

It is interesting to note that as early as February 1, 2020, muddy water had received a report on the anonymous short sale of Rui Xing coffee, pointing to the fraud of Rui Xing coffee. At that time, under the strong denial of Rui Xing coffee and some domestic and overseas institutions and investment banking fans, the short selling storm did not last long.

And two months later, Rui Xing coffee suddenly "exposed the dirty linen", the risk exposure was completely torn apart.

"There are several possibilities. First, there is a split within the company team. The former team has already cash in or empty out the company and" run the road ". The people behind the plate are unwilling to take the opportunity to fake it. Two, there is a deep throat in the board of directors or senior executives. Three, the muddy water short report reminds the external auditor that in 2019 the annual report found the firm evidence of the company's performance fraud. Unable to publish audit opinion, the company had to admit fraud. Theoretical economics post doctoral Liu An analysis pointed out.

The truth is still wearing shoes. 。

PWC responsible person in an interview with the media said that PWC did not participate in any process of Rui Xing coffee IPO, and did not have any contact with Rui Xing company, "they are obviously our competitors' customers."

On the other side, executives like Rui Xing coffee and other executives are still shouting in their circle of friends, "today we should be more vigour."

What role will eventually be "washed white" is still unknown. It is certain that this massive "fraud" has irreversibly affected the reputation of domestic enterprises.

"As a result of listing requirements, a large number of light assets enterprises will go abroad to list, and foreign cornerstone investors will be cautious about domestic enterprises. Many Internet projects may exit now, but it may be good for domestic investment banks." In April 3rd, a domestic investment broker of a medium-sized brokerage company analyzed the twenty-first Century economic report reporter.

Professor Xi Chao, vice president of Law School of Chinese University Hong Kong, said: "the listed stocks and Chinese enterprises going to the US market may face headwinds in the short term. In the medium and long term, we believe that the capital market and investors will make rational judgments.

Controversial judicial problems

The second article and fourth paragraph of the new securities law, which just landed, clearly require that "securities issuance and trading activities outside People's Republic of China, disrupting the market order in People's Republic of China and damaging the legitimate rights and interests of domestic investors shall be dealt with and investigated for legal liability in accordance with the relevant provisions of this law."

In an interview with the economic news reporters in twenty-first Century, it was found that Rui Xing coffee registered in the Cayman Islands was issued by overseas regulatory agencies and listed on the Nasdaq stock market in the United States. The way in which the domestic regulatory authorities should take part in the definition of Rui Xing behavior still needs further improvement of the legal system.

As early as May 2006, the securities and Exchange Commission signed the terms of cooperation with the China Securities Regulatory Commission, and established the three objectives of the dialogue mechanism between China and the United States securities regulatory agencies, including the focus on the financial reporting of public offering companies listed on the other side of the market.

Wu Feng, director of Beijing Langcheng law firm and securities lawyer, pointed out: "(whether Rui Xing coffee can be internally pursued"), from the legal level, there is no problem in the application of the law in the context of the new securities law. However, there are still some obstacles and puzzles in the specific implementation of administrative supervision and judicial practice. "

At present, there is no precedent for the domestic regulatory authorities to intervene in the illegal behavior of the securities market abroad, and the first issue is jurisdiction.

Liu An said: "judging from the statement of the SFC, it does not mean that it has substantive jurisdiction over Rui Xing incident. The newly revised Securities Law enumerates two conditions of extraterritorial jurisdiction, disrupting the order of domestic securities market or causing losses to domestic investors. "Rui Xing is more likely to apply to the latter."

Some US financial institutions have launched cross-border investments in Chinese stocks for direct investment in US stocks, but investors in China may not be adequately protected by investors.

Xi Chao pointed out that if the above facts are true, Chinese regulators should consider appropriate investor education and investor protection measures.

In the eyes of Wang Jiyue, a well-known investment bank, the relevant provisions of the new securities law are mainly for the protection of legitimate investments in foreign stocks by QDII (such), which can also be included in the regulation of FTSE 50 affecting the domestic market.

There is another background. The domestic policy of class action against investors is still tight, and investment in US stocks is not smooth. In theory, there is no direct investor in China. In fact, the main body of safeguarding rights is unknown through depository receipts.

Opportunities behind

Can Rui Xing's coffee event open up a new stage of Sino US cooperation so as to improve the extraterritorial application of China's securities law?

According to the new securities law, Rui Xing coffee incident involves a more important core legal issue, that is, the extraterritorial application effect of China's securities law. Whether the Rui Xing coffee incident is likely to be held accountable under the new securities law system may also be a good opportunity to further strengthen and improve China's securities legal system, especially the extraterritorial application of the securities law.

Wu Feng believes that: (the foregoing legal provisions) has two levels: one is to disrupt the domestic market order; the second is to damage the legitimate rights and interests of domestic investors. That is to say, if the Securities Act disrupts the domestic market order or damages the legitimate rights and interests of domestic investors, China's securities law is extraterritorial, which is quite clear.

It believes that this is exactly a highlight of the new securities law, which is also in line with the legislative intent and regulatory purpose of the thirteenth chapter of the new securities law, which significantly improves the cost of illegal and illegal securities. At the same time, strengthening the application of the extraterritorial law of our country is also in line with the state's proposal: in the framework of existing principles, rules and systems of international law, China should perfect the legal system of extraterritorial application of the Chinese law, which is a macro strategic requirement.

However, if qualified domestic investors have filed false claims for civil compensation to Rui Xing coffee, there will be some challenges at the practical level.

Wu Feng pointed out: "if there is only the principle of legislation, but in judicial practice, there are no specific judicial interpretations or judicial guidance related to the specific application. In this case, there will be some challenges or obstacles."

In view of the misrepresentation of Rui Xing coffee, which court should be prosecuted by investors in China from the perspective of the civil rights protection of the injured investors? Is it possible to prosecute the controlling shareholders, actual controllers, directors, supervisors, senior managers and other directly responsible personnel of Rui Xing coffee as well as the sponsors, underwriting securities companies and their directly responsible personnel in accordance with the eighty-fifth provision of the new securities law? How to identify the implementation date, the date of disclosure and the base date of the implementation of misrepresentation by Rui Xing coffee outside the country? Is the investor protection agency able to recover damages to the investors or the other responsible persons in accordance with the ninety-third provision of the new securities law? All these need to have more specific and specific judicial guidance in the future.

Wu Feng said that from the perspective of securities market regulation, can China's securities regulatory agencies incorporate the illegal behavior of Rui Xing coffee into the integrity files of the securities market in accordance with the 215th provision of the new securities law? Can China's securities regulatory agencies implement cross-border supervision and administration in accordance with the 177th article of the new securities law? These follow-up may be further explored and improved.