Special Compensation
Case of the Special Fund for Investor Interest Compensation with respect to the Misrepresentation of Hirisun
After the financial fraud of Shenzhen Hirisun Technology Incorporated (“Hirisun”) was exposed, in order to protect the interest of eligible investors suffering from investment losses due to the misrepresentation of Hirisun and truly assume relevant responsibilities, on July 18, 2014, four controlling shareholders of Hirisun, Zhang Feng, Kong Biao, Xing Wenbiao and Yang Deguang contributed RMB 200 million to set up the “Special Fund for Investor Interest Compensation with respect to the Misrepresentation of Hirisun” for the purpose of compensating public investors for their losses incurred from the misrepresentation of Hirisun. This was the first case in China’s capital market where major shareholders voluntarily contributed fund to compensate investors through market mechanism.
The Investor Protection Fund Company accepted the commission of the contributors of the fund to serve as the manager of the special compensation fund and take charge of management and operation of the special compensation fund. This was another positive attempt of the Investor Protection Fund Company to explore the establishment and optimization of a long-term mechanism for investor compensation after it had served as the manager of the special compensation fund of Wanfu Biotechnology. For the establishment of this special compensation fund, it introduced specialized securities intermediation mechanism and expanded the channels for dispute settlement. During the term of the special compensation fund, various works were carried out orderly and smoothly, with over 95% of the eligible investors received compensation within a short period of only two months.
I. Profile of the Case
(I) Background
The predecessor of Hirisun was Shenzhen Hirisun Technology Co., Ltd. established in January 2000. On May 30, 2008, the whole company was re-established as Shenzhen Hirisun Technology Incorporated, a firm with the title of the national new high-tech enterprise dealing in electric power information technology and system integration. On November 23, 2011, Hirisun was listed on GEM (growth enterprise market) of Shenzhen Stock Exchange ( “SZSE”), with the stock code of 300277. Its sponsor institution was Ping An Securities Co., Ltd. ( “Ping An Securities”). Zhang Feng, Kong Biao, Xing Wenbiao, Su Hongyu and Yang Deguang were Hirisun’s top five major shareholders.
On March 22, 2013, Hirisun published the Announcement on Receipt of CSRC Investigation Notice, disclosing that it was being investigated by CSRC for its suspected violation of securities laws and regulations. During CSRC investigation, on April 27, 2013, Hirisun published in relevant media the Announcement on Correction and Retrospective Adjustment of Material Accounting Errors in Previous Years, disclosing that there existed misrepresentations in its IPO Prospectus and post-IPO periodic reports.
(II) Affirmation of illegality fact
CSRC’s administrative penalty decision affirmed that Hirisun conducted the following illegal acts:
There existed misrepresentations with respect to relevant financial data in its IPO application documents submitted to CSRC. This act was in violation of relevant provisions of Article 13 and Article 20 of the Securities Law, constituting the act whereby “the issuer fraudulently obtains issuance authorization without conforming to the issuance qualifications” as specified in Article 189 of the Securities Law.
There existed misrepresentations in relevant financial data in the periodic reports disclosed after IPO. There existed misrepresentations in relevant financial data and financial indicators in the annual report of 2011 and the 1st quarter report, the semi-annual report and the 3rd quarter report of 2012 disclosed by Hirisun, which were in violation of the provisions of Article 63 of the Securities Law, constituting the act whereby “the issuer, listed company or other information disclosure obligors fail to disclose information in accordance with the requirements, or disclose information that is misrepresented or misleading or omits material facts” as specified in Article 193 of the Securities Law.
(III) Administrative penalty decision
On November 14, 2014, CSRC issued the Administrative Penalty Decision ([2014] No. 94) to Hirisun. According to the Securities Law and other relevant laws and regulations, CSRC made the following penalty decisions against Hirisun: a warning and a fine of RMB 8.22 million to Hirisun; a warning and a fine of RMB 12.03 million to Zhang Feng; and a warning and a fine of RMB 30,000 to 600,000 to Xing Wenbiao, Yang Deguang and other individuals. In addition, Zhang Feng, Xing Wenbiao and Yang Deguang were restricted from access to securities market for eight years.
In addition to the penalties against Hirisun, Ping An Securities, the sponsor institution for Hirisun’s IPO process, was also penalized by CSRC for being suspected of failure of fulfillment of due diligence and duties and of misrepresentation in relevant materials it thus issued.
(IV) Establishment of the special compensation fund
In order to protect the interest of eligible investors suffering from investment losses due to the misrepresentation of Hirisun and truly assume relevant responsibilities, on July 18, 2014, four controlling shareholders of Hirisun, i.e. Zhang Feng, Kong Biao, Xing Wenbiao and Yang Deguang contributed RMB 200 million to set up the special compensation fund for the purpose of compensating public investors for their losses incurred from the misrepresentation of Hirisun. The Investor Protection Fund Company accepted the commission of the contributors of the fund to serve as the manager of the special compensation fund and take charge of management and operation of the special compensation fund. The term of the special compensation fund was two months starting from the date of establishment of the special compensation fund.
During the term of the special compensation fund, various works were carried out orderly and smoothly, and the compensation was satisfactorily completed. Within a short period of two months and by September 10, 2014, after compensation amount confirmation, compensation amount payment and other processes, 9,823 eligible investors, accounting for 95.7% of all eligible investors, had completed effective declaration and reached effective reconciliation with the four shareholders of Hirisun, and the compensation amount paid to the eligible investors amounted to RMB 88,827,698, accounting for 98.81% of total compensation amount payable.
II. Features of Hirisun Special Compensation Fund
Operation of Hirisun special compensation fund followed two basic requirements of “full compensation” and “easy operation”. In addition, the fund, according to the actual situation, went through process optimization and mechanism innovation, making it more replicable and systematic and also easy for investors’ participation. Hirisun special compensation fund had the following basic features:
(I) Controlling shareholders assumed their own responsibilities. Differing from the case of Wanfu Biotechnology where the sponsor institution, Ping An Securities, contributed the fund, the contributors of Hirisun special compensation fund were major controlling shareholders of the issuer, and this was the first case in China’s capital market where major shareholders voluntarily contributed fund to compensate investors through market mechanism, which was more in line with the rule of “assuming own responsibilities” encouraged in the Opinions of Further Promoting Healthy Capital Market Development issued by the General Office of the State Council.
(II) Introduction of intermediation mechanism. Introduction and participation of specialized intermediation and arbitration agencies, including four settlement and remedy channels of reconciliation, intermediation, arbitration and litigation, have expanded dispute settlement channels. Eligible investors could resort to the compensation and reach reconciliation with the fund contributors; investors who did not accept the reconciliation could apply for intermediation to specialized intermediation agency of securities dispute; those who fail or are unwilling to accept the intermediation could apply for arbitration to specialized arbitration agency after reaching an arbitration agreement with the fund contributors; investors could also file lawsuits to competent people’s court in accordance with the laws. In the case of Hirisun, under the active intermediation of Shenzhen Securities and Futures Dispute Intermediation Center, Hirisun’s controlling shareholders reached intermediation agreements regarding the compensation issues with four investors.
(III) More optimized process. Optimization of fund operation process and simplification of procedures made it easier for investors to get compensation and improved the efficiency thereof. Investors could reach reconciliation with the fund contributors by declaring through the online voting system of the general meeting of shareholders of Shenzhen Stock Exchange.
(IV) Adhering to the rule of full compensation. This special compensation fund adjusted the calculation method to make it more reasonable and favorable for the compensation of investors, which was more in line with the rule of “full compensation”. This fund took full consideration of the trend in the secondary market following Hirisun’s IPO, and calculated the compensation amount according to the disclosure date or correction date and their corresponding base dates that were closest to the stock purchase time. According to such calculation method and given the trend of “down first and up later” for Hirisun stock, some investors holding stock of different periods might get a compensation amount more than their actual loss amount.
- © China Securities Investor Protection Fund Corporation Limited All Rights Reserved
- 京ICP备12035868号-1
