Lawsuit against China Everbright Securities may tarnish through train stock scheme

PUBLISHED : Monday, 11 August, 2014, 3:56am
UPDATED : Monday, 11 August, 2014, 4:32am

A class-action lawsuit stemming from a chaotic trading error by China Everbright Securities in August last year has put the China Securities Regulatory Commission on the dock just two months before the Shanghai-Hong Kong stock trading scheme launches in October.

A class-action lawsuit was filed by more than 60 retail investors against Everbright after a technical glitch in its trading department placed a buy order of 7.27 billion yuan (HK$9.1 billion).

It propelled Shanghai's share market by 5 per cent before the brokerage pared its orders, causing the rally to go bust in the span of a single trading session.

Scores of investors were left holding the proverbial bag when the index tumbled.

The CSRC fined Everbright a record 523 million yuan and banned four company executives for life from the securities industry, after deeming the trading transaction by Everbright on that day as insider trading.

The regulator encouraged small investors to use the legal system to sue and get compensation for their losses.

But Yang Jianbo, the former chief of Everbright's trading department, fought back against the regulator in a Beijing intermediate court in April, requesting the court to overturn the punishment.

If Yang were to win the case, it would be an embarrassment to the CSRC as it would be difficult for retail investors to win compensation claims.

"The trading operations were not insider trading at all, and Everbright is not supposed to pay the investors," said Yang, who is now a professor at the Shanghai University of Finance and Economics.

Under mainland securities laws and regulations, insider trading refers to practices involving the use of information about a listed company.

The Beijing court has yet to render a verdict on the lawsuit, pitting Yang against the CSRC.

The regulator's ability to enforce the law and protect small investors is one of the top concerns of retail punters.

The market has gained notoriety from listed firms that overstated their earnings and unscrupulous fund managers.

The managers would use inside information to profit by artificially bloating the price of a company's shares and sucking in retail investors before selling the stock off in a "pump and dump" scheme at the expense of small players who poured their life savings into the market.

Mainland investors had felt the deck had been stacked against retail players, who often regarded the CSRC's assurances that their interests were safeguarded as empty promises.

However, the substantial fine levied on Everbright has boosted hopes that a change is in the works.

"My clients are apparently the victims of the trading error," said Yan Yiming, a Shanghai-based lawyer who represents more than 30 of the plaintiffs. "In light of the regulator's promise to protect small investors, their wishes should be granted."

The upcoming launch of the through train scheme - which will enable investors in Shanghai and Hong Kong to cross-trade each market's shares - may have prompted the mainland to fine-tune its regulatory and legal systems as Beijing wants to prove its markets are on par with international standards.

"With many regulatory loopholes and an opaque legal system, it is certain that some issues will arise when the programme starts," said Haitong Securities analyst Zhang Qi.

"One thing the regulator can do is keep its fingers crossed that a trading chaos similar to the Everbright case won't happen again."