China cracks down on securities violations as several firms fined

Some of China’s largest firms, including Dacheng, JunZeJun and Jingtian & Gongcheng, are among the first to feel the pinch as the country’s stock markets regulator gets tough on accounting fraud in the domestic market.

The China Securities Regulatory Commission (CSRC) has fined one of China’s largest law firm Dacheng a total of RMB1.5m (£154,000) for inadequate due diligence and misrepresentation on the proposed 2012 IPO of Xindadi. The IPO was terminated and the company and its advisers investigated by the CSRC after allegedly falsified data was found in the prospectus. 

The four Dacheng lawyers who worked on the IPO were also fined RMB100,000 each, with one banned for life from providing securities legal advice.

Beijing firm JunZeJun was fined a total of RMB1.8m (£184,000) for similar violations in the IPO of Tianneng Technology, which was also terminated. The firm’s two lead lawyers on the transaction were fined RMB50,000 each.

The penalties imposed on the firms, alongside accountants and underwriters in the two transactions, were announced earlier this month following a year-long investigation by the CSRC.

In a separate case, capital markets specialist Jingtian & Gongcheng is currently being investigated by the CSRC for its role in the IPO of Henan Tianfeng Energy-Saving Panel, which was also allegedly subject to accounting frauds.

According to China’s regulations governing capital markets legal practices, firms and lawyers that are under investigation will be suspended from providing legal advice and opinions to the CSRC.

It is understood that Jingtian has advised on 35 IPO applications that are currently waiting for the CSRC’s approval. As the investigations into Jingtian started on 14 June, it is expected that many of the applicants will have to change their legal adviser if their applications are to progress.

Since the beginning of this year, the CSRC has taken tough measures to curb accounting frauds and disclosure violations in domestic IPO applications. From January to October, it ordered an unprecedented tough review of last year’s financial results for all current IPO applicants in an effort to weed out unqualified candidates and enforce tighter requirements on information disclosure from the companies and their financial and legal advisers.

As a result, the CSRC announced on 11 October that 268 of the 622 reviewed IPO applications were terminated, or 30.5 per cent of the 800 applications.

Jingtian is also under fire abroad, as the firm is currently involved in a potentially billion-dollar lawsuit in Canada. In May, 11 international financial institutions, including Credit Suisse Securities and Banc of America Securities, filed a claim against Jingtian and Commerce & Finance in Ontario Superior Court of Justice, alleging the two firms of negligence and breach of duty (14 October 2013).

It is one of the very first cases in which well-established Chinese law firms are being pursued by global clients on such a high-profile and big-ticket matter. Read our recent feature, Forest Fire, for an in-depth analysis on this case and its impact on capital markets practices in China.