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Listed companies hold vast amounts of non-public information, which is both a competitive edge and a significant legal risk. Misuse of such information, such as insider trading and market manipulation, may lead to severe legal consequences including hefty fines, corporate bankruptcy and even criminal penalties. This article examines the risks, repercussions and comprehensive strategies for mitigation.

Penalties, criminal prosecution

Non-compliant information disclosure. During the release of favourable information, companies may face risks if the disclosed information is false, exaggerated or intentionally manipulated in terms of timing or sequencing, such as through fragmentation, delay or selective disclosure. Such risks are also prevalent in scenarios involving shareholders increasing or reducing stock holdings, where individuals may engage in large-scale trading around the announcement of positive news without fulfilling disclosure obligations.

Insider trading. The scope of insiders privy to confidential information is not limited to senior executives and major shareholders of listed companies, although they are the most common. Insiders who exploit undisclosed and price-sensitive information to buy or sell stocks in advance may be implicated in insider trading, with severe cases potentially leading to criminal charges.

Securities and futures market manipulation. This refers to disrupting market pricing and misleading investors by creating false supply-demand dynamics, which potentially triggers systemic market collapse. Among the forms of manipulation is information misuse, where information advantages are exploited in trading.

Simple trading activities may constitute market manipulation in securities or futures. However, if such actions involve insider trading, such as leveraging information to inflate stock prices before trading, they may lead to charges of insider trading and market manipulation in securities or futures, with cumulative penalties.

Civil claims

Policymaking. The new Securities Law significantly broadens the scope of civil compensation for securities violations, introducing a specific chapter on investor protection and extending statutory compensation to multiple offences, including market manipulation and insider trading.

Additionally, the Several Opinions of the State Council on Strengthening Regulation, Preventing Risks and Promoting the High-Quality Development of the Capital Market (the new National Nine Articles) further expand avenues for investor compensation, fostering a system that integrates administrative, criminal and civil liability.

The Opinions on Strengthening Supervision of Listed Companies (Trial) and Opinions on Strict Enforcement of the Delisting System promulgated by the China Securities Regulatory Commission (CSRC) also emphasise the increased application of representative litigation with securities, as well as mechanisms such as advance compensation, litigation support, administrative enforcement and commitments by parties to enhance investor compensation and relief.

Judicial practice. Recent years have seen a significant rise in civil compensation cases related to the securities trading market. This is partly due to past legal and policy protections focusing on information disclosure, limiting the scope of investor claims. More importantly, the primary driver has been the gradual strengthening of securities market regulation and the continual improvement of investor protection mechanisms.

Since the introduction of the Several Provisions of the Supreme People¡¯s Court on the Trial of Civil Cases for Damages for the Tort of Misrepresentation in the Securities Market, there are more detailed and practical guidelines for determining causation and losses in investor claims against listed companies.

Crisis management

The policy framework of the above-mentioned new National Nine Articles adopts a more comprehensive and multi-dimensional approach to holding listed companies and key personnel accountable.

While the Supreme People¡¯s Court released typical cases of financial fraud this June, the Supreme People¡¯s Procuratorate¡¯s Economic Crime Prosecution Department issued the Guidelines on Handling Financial Fraud Cases in August. Both emphasise a balanced use of civil, administrative and criminal measures to establish an integrated accountability system. Correspondingly, listed companies should adopt a multi-faceted approach in crisis management covering the administrative, civil and criminal perspectives.

Administrative investigations. Listed companies should thoroughly review relevant facts, fully assess risks and actively co-operate with investigations. Meanwhile, companies must exercise their right to present statements and defences, providing clear explanations and evidence to demonstrate the legality and rationality of their securities transactions, thereby addressing any regulatory misunderstandings.

As most securities crime cases are transferred to public security authorities after penalties from the CSRC, with little practical difference in evidence conversion post-transfer, companies must prioritise the administrative investigation stage.

Civil proceedings. The paths for investors to protect their rights are expanding, with claim risks now potentially arising at any stage following the discovery of securities violations, whether before or after official determination by regulatory or judicial authorities. The guidelines suggest criminal cases may refer to civil judgments when calculating direct economic losses from false statements. Despite differences in proof standards between criminal and civil proceedings, judicial bodies are likely to adopt this approach.

Therefore, listed companies are recommended to proactively assess potential civil compensation risks, and integrate anticipated administrative and criminal legal implications to develop comprehensive dispute resolution strategies.

Criminal proceedings. Criminal investigations in securities cases typically originate from regulatory referrals to law enforcement, although direct police investigations without prior administrative penalties are increasingly common.

Despite the elimination of mandatory administrative pre-approval, the public security authorities usually return cases to securities regulators for initial investigation. In either scenario, listed companies are strongly advised to seek immediate professional legal counsel following the emergence of any potential crisis.

Wang Jun is a director and Wang Chenxing is an associate at Starrise Law Firm