China Launches 1st Class-Action Lawsuit as Regulators Vow to Fight Accounting Fraud

SHANGHAI – China filed the country’s first class action lawsuit against a publicly traded company against Kangmei Pharmaceutical Co on Friday as regulators praised “zero tolerance” for accounting fraud and other capital market tumors.

The China Securities Investor Service Center (CSISC), a government-affiliated entity, is suing Kangmei on behalf of more than 50 individual investors in a landmark case in China’s capital markets, the China Securities Regulatory Commission (CSRC) said.

Kangmei was involved in willful and systematic financial fraud worth 30 billion yuan ($ 4.60 billion) between 2016 and 2018, CSRC said. The addition of “toxic tumors” to the capital markets must be eliminated quickly and relentlessly.

Kangmei could not be immediately reached for comment outside of business hours.

China introduced the class action mechanism in capital markets last year to tackle corporate misconduct and build investor confidence.

Although corporate fraud is not uncommon in China, private investors have had little chance of being heard in the past. Small investors often compared legal action to ants fighting elephants.

Still, CSRC said on Friday that the new class action mechanism would significantly lower the cost of investors to litigate listed companies and help reduce malpractice in China’s capital market.

Unlike the US system, class actions must be initiated by government agencies such as CSISC and only typical and important cases are selected initially.

($ 1 = 6.5202 Chinese Yuan Renminbi) (Reporting by Samuel Shen and Andrew Galbraith; Editing by David Evans)

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