Observation on the Resolution of Securities False Statement Disputes (Part One) - Judicial Dilemmas and Breakthroughs in Determining Lack of "Materiality": A Dual Perspective of Cases and Theory

On March 10, 2025, Zhou Lunjun, the deputy director of the Civil Division II of the Supreme People's Court, stated in an interview that stock false statement cases still account for the vast majority of securities disputes, indicating that cracking down on financial fraud has become an important aspect of the court's trial work. The Supreme People's Court pointed out that it will continue to refine the civil compensation system for false statements, for instance, by further clarifying the causal relationship to prevent civil compensation lawsuits from being distorted into an investor loss insurance system, and emphasized the need to handle the dialectical relationship between the intensity of cracking down on violations, the strength of protecting rights and interests, and the healthy development of the market by strengthening the "gatekeeper" responsibilities of intermediary institutions. Similarly, the clarification and strengthening of the "materiality" element can also provide a strong guarantee for the healthy development of the capital market.
This article is the first in the series "Observations on the Resolution of Securities False Statement Disputes". It will combine similar case judgments and legal theories to discuss with you the predicament and breakthrough of the lack of "materiality" in securities false statements from the perspectives of the coexistence of dual standards and the independence of judicial review.
1.The dual interactive pattern of judicial practice and theoretical research
(1) Coexistence of Dual Standards at the Normative Level
Existing research shows that there is a mixed use of the "investor decision standard" and the "price sensitivity standard" in the determination of "materiality" of false statements in securities in China. The "rational investor standard" originated from the case law in the United States. This standard holds that if a rational investor may consider a certain fact important when purchasing or selling securities, then such fact is material. The "price sensitivity standard" holds that as long as certain public information can affect the market price of securities, such information is material.
Zhang Wenpeng (2024) through the normative analysis of the "Several Provisions of the Supreme People's Court on Civil Compensation Cases for False Statements in the Securities Market" (Judicial Interpretation [2022] No. 2, Supreme People's Court, effective from January 22, 2022, "Several Provisions") pointed out that the element of "causing significant changes in the trading price or trading volume of securities" established in Article 10 [2] essentially constructs a recognition system dominated by "price sensitivity". [3] Although Article 80 [4] of the "Securities Law of the People's Republic of China (Revised in 2019)" (Order No. 37 of the President, Standing Committee of the National People's Congress, revised on December 28, 2019, effective from March 1, 2020, "Securities Law") adopts a list plus the description of "having a significant impact on the trading price" for the determination of major events, the investor decision-making standard retained in Article 84 [5] still causes institutional gaps.
Coincidentally, the "White Paper on the Trial of Securities Disputes by Beijing Financial Court" released by the Beijing Financial Court in 2023 disclosed that in the securities false statement cases concluded in this jurisdiction over the past three years, 89.7% of the cases took the price-sensitive standard as the main basis for determination. [6]
This "dual parallel" legislative model was vividly manifested in a case involving a certain holding company in Anhui Province [7] ((2021)No. X of the early Republic of China, Shanghai 74). All three false statements made by the company met the mandatory disclosure standards, but the court, through a penetrating review, found that the stock price changes on the three information correction dates were -0.34%， +2.13%， and +39.57% respectively， and the turnover rate did not exceed the 3% benchmark line. Ultimately， it was determined that they did not have "materiality".
It is worth noting that Article 12 of the "Administrative Measures for Information Disclosure of Listed Companies (Revised in 2021)" (Order No. 182 of the China Securities Regulatory Commission, revised on March 18, 2021, and effective from May 1, 2021; to be revised again on March 26, 2025, and effective from July 1, 2025) explicitly incorporates investor decision-making into the "materiality" judgment dimension. This was innovatively applied in the case of a certain mining company in Tibet ((2023) Tibet Civil Appeal No. X): when the court was reviewing the 1 billion yuan related-party transaction involved, it found that the funds were ultimately recovered in a closed loop through the form of debt transfer, and none of the key transaction nodes triggered stock pledge risks. Based on this, the court determined that the information disclosure defect "did not significantly alter the risk-return calculation model of a rational investor".
This mixed legislative model of "dual standards" not only increases the uncertainty in judicial practice but also poses challenges to investor protection and the maintenance of market order. On the one hand, the price sensitivity standard, although highly operational, overly relies on short-term market price fluctuations, which may lead to excessive leniency towards information disclosure deficiencies. On the other hand, the investor decision-making standard, although closer to the core purpose of information disclosure, is highly subjective and prone to causing inconsistencies in judicial discretion. Therefore, finding a balance between the two standards has become the key to further improving China's Securities Law.
(2) Practical Breakthroughs in the Independence of Judicial Review
In recent years, beyond legal norms, some breakthroughs have been made in the judicial practice regarding the determination criteria for "materiality".
Yerui Zhen's (2023) systematic research indicates that against the backdrop of the cancellation of the pre-procedure, the courts' breakthrough review of administrative determinations exhibits a "gradual" characteristic. [10] In typical cases that do not have "significance", two major review paths are demonstrated: The first is the "market digestion defense" mechanism established in the case of a certain education company in Beijing [11] ((2023) Jing 74 Min Chu X), where the court, by comparing the difference in turnover rate changes between the first false statement disclosure date and the current disclosure date (Δ = 2.3%), and combining the standard residual calculated by the event study method (SR = 0.82), determined that "the market risk of the previous false statement has been fully released"; the second is the case of a certain natural gas company in Xinjiang [12] ((2024) Xin Min Zhong X), where the amount involved in the case, which accounted for 63.58% of the net assets, was originally a major event, but by combining the abnormal volatility index (IVX = 12.7, industry average 15.3) and the deviation of the β coefficient (Δ = 0.11), the court innovatively introduced the "market reaction dulling" theory to exclude it.
Furthermore, by integrating the two review paths, in the case of a certain department store company in Xinjiang [13] ((2022) Xin Min Zhong X No.), the defendant successfully negated the necessity of determining "materiality" through a dual evidence chain of "no substantial fluctuation in stock price after the false statement was exposed + stable turnover rate" (the average turnover rate from the exposure date to the benchmark date was only 5.32%) (Zhang Wenpeng, 2024).
With the increasing complexity of the securities market and the rising demand for investor protection, the judicial practice in the future may need to further optimize the review mechanism for determining "materiality". On the one hand, more refined market reaction assessment tools can be introduced, such as combining big data analysis and artificial intelligence technology to dynamically track and quantitatively analyze the market impact of false statements. This not only enhances the scientific nature of judicial review but also reduces the risk of misjudgment caused by a single indicator. On the other hand, judicial interpretations should further clarify the scope and conditions for the application of the "market digestion defense" and the "market reaction dulling" theories. For instance, the "market digestion defense" should be limited to repetitive disclosures of false statements, while the "market reaction dulling" theory should be judged differently based on industry characteristics.
Correspondingly, Lin Wenxue, the director of the Civil Division II of the Supreme People's Court, emphasized at the 2023 Financial Trial Work Conference that "judicial review should not only respect the professionalism of regulation but also adhere to the independence of legal judgment. For cases where market reaction anomalies are absent as verified by big data, a substantive review mechanism should be established." This significant judicial policy orientation has been implemented in a case involving a certain technology company in Guangdong [14] ((2022) Yue Min Zhong X No.): In this case, the court used minute-level high-frequency transaction data analysis and found that the abnormal fluctuations began only in the 31st transaction after the correction announcement was released, and this time window had exceeded the effective period of the securities false statement behavior. Thus, the principle of "strict time sequence correspondence" was established. In the future, a standardized "time window" assessment mechanism can be established to clarify the temporal correlation between false statement behavior and market reaction, avoiding recognition deviations caused by time lag. For instance, the high-frequency transaction data within 30 minutes to 2 hours after the release of the correction announcement can be set as the key observation window. If no significant fluctuations occur during this period, it can be preliminarily excluded as not significant.
Although current judicial practice has initially formed innovative approaches such as the "market digestion defense" and "market reaction dulling" in the determination of "materiality", the fragmented review standards still struggle to address the dual challenges of the complexity of the securities market and the demands for investor protection. For instance, in the case of a certain education company in Beijing, the combination of the difference in turnover rate and residual analysis can explain the risk release mechanism, but it is difficult to quantify the threshold of market dulling. The β coefficient deviation model in the case of a certain natural gas company in Xinjiang also lacks universal applicability across industries. The "strict correspondence of time series" principle proposed by the Supreme People's Court, although it strengthens the review of causal relationships, fails to solve the problem of quantifying the relationship between false statements and market fluctuations. The lack of uniformity in judicial efficiency and judgment standards has led to an average trial period of over 180 days for cases, with a rate of acceptance and cessation of litigation of less than 75% (Zhang Wenpeng, 2024). Therefore, we will continue to explore solutions from a systematic perspective, through progressive research from empirical testing to institutional design, to build a securities false statement judgment system that balances efficiency and fairness, providing scientific support for the legalization of China's capital market.
2.Empirical Testing of Systematic Solutions
(1) Case Mapping of the "Quantity First" Standard
The operational guidelines established in a case involving a certain energy company in Zhejiang Province are of exemplary significance: The court adopted the modified Ohlson model to parameterize the market effect of financial data and set four quantitative standards: (1) the excess turnover rate during the information disclosure window period Δ ≥ 3%; (2) the individual stock volatility exceeding the industry benchmark by 1.5 times; (3) reverse screening of transaction flow data (the proportion of instant sell orders exceeding the 75% threshold); (4) verification of volatility clustering effect by the GJR-GARCH model. These models have achieved remarkable results in practical application - the average trial period for securities cases in Jinhua region has been shortened by 38 days, and the rate of acceptance of judgments and cessation of litigation has increased by 22 percentage points (Zheng Xintong, 2023). [15]
(2) Institutional Construction of Professional Judicial Capacity
The Beijing Financial Court's "White Paper on the Trial of Securities Disputes of the Beijing Financial Court" proposed three paths for building capabilities: at the level of evidence rules innovation, the high-frequency data collection norms established in the case of a certain supply chain company in Xinjiang (extracting 10 levels of market data per second) can be adopted; at the level of the expert assistant system, the "double-blind review" mechanism created in the case of a certain technology company in Jiangxi can be upgraded; in terms of differentiated handling solutions for similar cases, intelligent diversion can be achieved through a "signal strength - market absorption" matrix. Jiang Qibo, director of the Research Office of the Supreme People's Court, pointed out at the Securities Law Forum: "It is necessary to strengthen the construction of data sharing channels between financial trials and financial supervision, and explore a dynamic calibration mechanism for judicial review standards and administrative penalty standards."
(3) Exploration of the Localization of the Rational Investor Model
In current judicial practice in China, the determination standard of the "materiality" of false statements is deeply integrated with the "Layered Protection Theory for Informed Traders" proposed by Zhang Ao (2022) [16], forming a dynamic adjudication logic oriented towards the substantive impact on the market. This theory advocates for the establishment of protection mechanisms based on the differences in investors' information processing capabilities, which is reflected in judicial practice as a refined review of market reactions. Traditional adjudications often rely on administrative penalties or financial ratio thresholds to infer "materiality". For instance, in the case of a certain department store in Xinjiang, although the amount of fictitious transactions reached 296 million yuan, all the funds were returned and the stock price did not show significant fluctuations. The court ruled that it did not have "materiality". This reflects that judicial practice believes that informed traders have priced the value of information through market behavior, and the absence of abnormal fluctuations indicates that professional investors have not formed information dependence, and thus ordinary investors do not require special protection. Another example is the case of a certain holding company in Anhui, where the court used event study methods to strip out macro factors such as the stock market crash and industry cycles, and determined that if the contribution of false statements to the stock price was less than 20%, it did not have "materiality". This quantitative analysis essentially adopts the market judgment logic of informed traders. In other words, when professional investors attribute stock price fluctuations to systemic risks rather than specific information, the judiciary excludes civil liability to avoid excessive relief for non-informed traders.
3. Conclusion
Liu Guixiang, a member of the Judicial Committee of the Supreme People's Court, pointed out: "The governance of securities false statements needs to build a dual-core driving system of 'legal logic + financial technology', which not only requires adhering to the underlying logic of tort law but also innovatively applying big data analysis technology." With the advancement of the "Three-Year Action Plan for Intelligent Trial" of the Beijing Financial Court, the construction of a "materiality" determination system based on market impact, dominated by quantitative analysis, and supported by intelligent supervision will become the development direction. This is not only a judicial response to the requirements of the registration system reform but also a system innovation to achieve a dynamic balance between investor protection and the efficiency of the capital market. The second part of "Observation from the Perspective of Resolving Securities False Statement Disputes" will continue to discuss with you the practical difficulties and improvement paths of "materiality" determination. Please stay tuned.
Footnote:
[1] "Exclusive Interview with Zhou Lunjun, Deputy Director of the Civil Division II of the Supreme People's Court by China Business News: Multiple judicial rules and interpretations in the financial and securities fields will be introduced and improved."
[2] Article 10 Where any of the following circumstances exists, the people's court shall determine that the content of the false statement is material:
(1) The content of the false statement falls within the category of major events as stipulated in Article 80, Paragraph 2 and Article 81, Paragraph 2 of the Securities Law;
(2) The content of the false statement falls within the category of major events or important matters that are required to be disclosed as stipulated in the rules and regulations and normative documents formulated by the regulatory authorities;
(3) The implementation, disclosure or correction of the false statement leads to a significant change in the trading price or trading volume of the relevant securities.
Where the defendant submits evidence sufficient to prove that the false statement has not led to a significant change in the trading price or trading volume of the relevant securities in the circumstances listed in Paragraph 1, Items (1) and (2), the people's court shall determine that the content of the false statement is not material.
Where the defendant can prove that the false statement is not material and uses this as a defense to claim that it should not bear civil liability, the people's court shall support such defense.

[3] Zhang Wenpeng. Deconstruction of the Dual Model for Determining Materiality under the Registration System [J]. Legal Research, 2024.

[4] Article 80 Where a major event occurs that may have a significant impact on the trading price of the stocks of a listed company or a company whose stocks are traded on other national securities trading venues approved by the State Council, and investors have not yet been informed of such event, the company shall immediately submit a temporary report on the relevant major event to the securities regulatory authority under the State Council and the securities trading venue, and make an announcement, explaining the cause of the event, its current status and the possible legal consequences.

The major events referred to in the preceding paragraph include:

(1) Major changes in the company's business policy and scope of operations;

(2) Major investment activities of the company, including the purchase or sale of major assets within one year exceeding 30% of the company's total assets, or the mortgage, pledge, sale or scrapping of the company's main operating assets at one time exceeding 30% of such assets;

(3) The company entering into important contracts, providing significant guarantees or engaging in related-party transactions that may have a significant impact on the company's assets, liabilities, equity and operating results;

(4) The company incurring major debts or defaulting on major debts that have become due;

(5) The company suffering major losses or significant damages;

(6) Major changes in the external conditions affecting the company's production and operation;

(7) Changes in the company's directors, more than one-third of the supervisors or the manager, or the inability of the chairman or the manager to perform their duties;

(8) Significant changes in the shareholding or control of the company by shareholders holding more than 5% of the company's shares or the actual controller, or significant changes in the actual controller's control of other enterprises engaged in the same or similar business as the company;

(9) The company's plans for dividend distribution or capital increase, significant changes in the company's equity structure, decisions on the company's capital reduction, merger, division, dissolution or application for bankruptcy, or the company's entry into bankruptcy proceedings or being ordered to close down;

(10) Major lawsuits or arbitrations involving the company, or the revocation or declaration of invalidity of resolutions of the shareholders' meeting or the board of directors;

(11) The company being investigated for suspected criminal activities, or the company's controlling shareholders, actual controllers, directors, supervisors or senior management personnel being subject to compulsory measures for suspected criminal activities;

(12) Other matters as prescribed by the securities regulatory authority under the State Council.

If the controlling shareholder or actual controller of the company has a significant impact on the occurrence or progress of a major event, they shall promptly inform the company in writing of the relevant circumstances they are aware of and cooperate with the company in fulfilling its information disclosure obligations.

[5] Article 84 Except for the information that is required to be disclosed by law, the information disclosure obligor may voluntarily disclose information related to the value judgment and investment decision made by investors, but such information shall not conflict with the information disclosed by law and shall not mislead investors.

Where the issuer and its controlling shareholders, actual controllers, directors, supervisors, senior management personnel, etc. make public commitments, such commitments shall be disclosed. Where failure to fulfill such commitments causes losses to investors, they shall bear the liability for compensation in accordance with the law.

[6] "Four Years of Trial Practice: The 'White Paper on Securities Dispute Trials' Reveals: Financial Fraud, False Information Disclosure, Concealment of Related Party Transactions..." 。

[7] (2021) Shanghai No. X Civil Case of the 74th People's Court. The case of Anhui Certain Holding Company was judged in May 2022.

[8] Article 12 The regular reports that listed companies shall disclose include annual reports and interim reports. All information that has a significant impact on investors' value judgments and investment decisions shall be disclosed.

The financial accounting report in the annual report shall be audited by an accounting firm that complies with the provisions of the Securities Law.

[9] (2023) Tibet Civil Final X No. Case of a certain mining company in Tibet. Judged in November 2022.

[10] Ye Ruizhen. Research on the Synergistic Mechanism of Administrative and Judicial Procedures [J]. Modern Law Science, 2023.

[11] (2023) Jing 74 Min Chu X No. Beijing Education Company Case. Judgement made in January 2024.

[12] (2024) Xinmin Intermediate Court Case No. X - Xinjiang Natural Gas Company Case - Judged in August 2024.

[13] (Civil Appeal No. X of Xinmin, 2022) Xinjiang Department Store Company Case, Judged in February 2022.

[14] (2021) Yue Min Zhong X No. Guangdong Certain Technology Company Case. Judgement made in June 2023.

[15] Zheng Xintong. Construction of a Localized Rational Investor Model [J]. Securities Law Review, 2023.

[16] Zhang Ao. The Shift of the Price Sensitivity Standard to Judicial Discretion [J]. Financial Law Review, 2022 (4).