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Introduction

On March 25, the Hangzhou Intermediate Court, which heard the false statement of Wuyang Bonds, announced that the execution of the judgment in this case had been completed, of which the underwriter paid 575 million yuan, the audit institution paid 100 million yuan, and the law firm paid 35.94 million yuan. Compared with the first two, the liability of the law firm may not seem large, but it is still staggeringly high compared with the usual charges for this type of business.

In recent years, the punishment methods and relevant judicial judgments of the regulators on the "Wuyang Debt" and "Xintai Electric" cases have made many law firm managers particularly concerned about the responsibilities of lawyers and law firms in capital market misrepresentation cases. It is urgent to clarify what is the responsibility boundary of due diligence for lawyers in capital market business.

The above cases arise from the background of our country's current capital market reforms. General Secretary Xi Jinping has repeatedly emphasized the need to strengthen capital market supervision, prevent and control financial risks, and promote capital market reform. The relevant important discussions include the following lines:

1. We must grasp the focus of improving financial services and preventing financial risks, and promote the high-quality development of the financial industry, including the capital market; 2. We must deepen reforms to create a standardized, transparent, open, dynamic and resilient capital market, investors' rights and interests can be fully protected; 3. It is necessary to improve the basic system of the capital market, ensure that the market entry and market exit are well established, and strengthen the supervision of the whole process of transactions; 4. It is necessary to strictly investigate and punish all kinds of capital market violations behavior, and solve the problem of low cost of violation of laws and regulations in the capital market.

As for how to view the current law firm's responsibility boundary in the capital market due diligence business, the author attempts to use the above thesis as a starting point, combining typical cases, refering to foreign practices, and discussing related issues, with a view to providing legal advice to law firm managers,regulators,managers and lawmakers are inspired.

（一1）典型案件概述

1五洋债案

"Wuyang Bond" is the first case of fraudulent issuance of corporate bonds in the country, and also the first case of securities disputes in the country under the representative litigation system. According to the first-instance judgment of the Hangzhou Intermediate People's Court, Wuyang's actual controller, underwriters and auditors will be jointly and severally liable for the investor's 740 million yuan of debt principal and interest, while a Shanghai Law Firm that provided legal services for the bond issuance and Credit Rating Agencies are liable for 5% and 10% of the joint and several compensation respectively. The Zhejiang High Court upheld the original judgment in the second instance.

During the trial of this case, the Law Firm argued that it had performed its duty of diligence and due diligence in the issuance of the bonds involved, and was not at fault for Wuyang’s false statement; Accounts receivable and accounts payable are "counterfeiting", which is a matter of professional judgment in financial aspects, which exceeds the duty of care of lawyers, and does not belong to the scope of work and professional fields of law firms.

However, the Hangzhou Intermediate People's Court believed that the law firm, as the legal service institution for this bond issuance, did not pay attention to and check the major contracts and the changes in the major assets involved when issuing legal opinions, and the due diligence on the ownership of real estate was not in place. No legal risks that may affect the solvency of Wuyang Construction were found. Therefore, the law firm failed to perform its duties diligently and was at fault. Considering the principle of combining liability and fault degree, the law firm should bear joint and several liability within 5%.

The second instance opinion of the Zhejiang Higher Court further pointed out that if the service agency has false records, misleading statements or major omissions, causing losses to investors and cannot prove that it is not at fault, it should be jointly and severally liable with the issuer for compensation. The penalty amounted to a maximum of 1,200 times the broker's income. As the highest compensation judgment against an intermediary in the history of securities litigation in China and the first judgment in which the intermediary bears joint and several liability, the Wuyang Debt case undoubtedly puts forward higher requirements for the law firm's "diligence and due diligence" obligation.

2欣泰电气案

The Xintai Electric case is the first case in the country that involves a law firm's determination of the standard of diligence in the process of applying for an IPO. In 2017, a Beijing-based law firm that served as Xintai Electric’s IPO intermediary sued the Beijing No. 1 Intermediate Court for refusing to accept a fine of 2.7 million yuan from the China Securities Regulatory Commission, requesting that the administrative penalty be revoked. The focus of the dispute in this case was "the criteria for the determination of diligence and conscientiousness of a law firm". The court of first instance rejected the law firm's claim, and the second instance was dismissed again by the Beijing High Court.

Regarding the core issue of whether the law firm is diligent and conscientious in this case, the court's view is as follows:  

1. The law firm's diligence and conscientiousness determination standards and the issue of the burden of proof. The court held that the key to the relevant cases is not the validity of the statutory certification of the reports issued by other intermediaries, but whether the content of the disputed false records falls within the scope of matters that legal professionals need to pay special attention to. And whether the law firm has evidence to prove that it has fulfilled the corresponding duty of care.

2. Issues verified by lawyers are often of a complex nature, such as the recovery of accounts receivable, which is a financial accounting issue. Accountants must use their professional prudence and diligence to check the authenticity, integrity and consistency of financial and accounting data. At the same time, the collection of accounts receivable also belongs to the company's major creditor's rights and debts, and falls within the scope of the company's business compliance and legal risk issues. Therefore, when a law firm provides securities legal services and issues legal opinions, it is necessary to perform the duty of care of a general rational legal person for professional issues such as corporate financial accounting. Regarding the compliance and legal risks of the company's business behavior reflected in these financial and accounting data, lawyers should still perform the special duty of care as a professional legal person.

3. In terms of work procedures, it is necessary to judge whether the lawyers have failed to perform their duties diligently in the provision of legal services. The plaintiff's law firm's working papers do not show that it has performed the necessary inspection procedures for the materials obtained from other intermediaries in accordance with laws and regulations, and failed to formulate an inspection plan and conduct inspections in accordance with the "Practice Rules"; When it is shown that some major customers have not confirmed the balance of accounts receivable, the law firm has no evidence to prove that they have fulfilled their inspection obligations; the compliance of Xintai Electric in handling major claims and debts behind the recovery of a huge amount of fictitious accounts receivable and legal risk issues, there is no evidence to prove that the law firm conducted an evaluation and issued a legal opinion on the basis of performing due diligence verification and discussion review in accordance with regulations.

The above viewpoints further standardize and interpret the boundaries of the diligence and due diligence that lawyers should perform in the field of securities business, and draw a "red line".

3乐视案

Recently, the financial fraud case of LeTV has attracted public attention again, because a number of intermediaries involved in the case have been investigated by the regulatory authorities, including a well-known law firm in Beijing responsible for the listing of LeTV. At present, dozens of IPO projects participated by the law firm have been affected and have been suspended for review, and some companies have a high probability of needing to re-select IPO lawyers.

The Shenzhen Stock Exchange issued an announcement stating that because the issuer's lawyer, a law firm in Beijing, was investigated by the regulator, according to the relevant provisions of Article 64 of the "Shenzhen Stock Exchange's GEM Share Issuance and Listing Review Rules", the firm suspended its participation in the issuance and listing review of enterprises involved 31 enterprises.

LeTV is suspected of fraudulent issuance of 4.799 billion yuan, and the amount of claims sued by investors is 4.571 billion yuan, which is far greater than the amount involved in the "Wuyang Debt" case. The case is still under investigation.

（二）对案件司法判决的再思考

1. Comments on the judgment of "Wuyang Debt" - clearly strengthen the attitude of supervision, but there are still points for discussion

The Zhejiang Higher People's Court's second-instance judgment on the "Wuyang Debt" clarified the importance attached by the judicial authorities and regulatory agencies to the prevention of capital market risks. Under the background of our country's current strengthening of financial supervision, it is undoubtedly of positive significance. But at the same time, there are still some debatable points in the reasoning part of the judgment.

Article 31 of the Minutes of the Bond Symposium of the Supreme Court stipulates that when determining the responsibilities of accounting firms, law firms, asset appraisal agencies, and credit rating agencies, they should "consider whether they have fulfilled their obligations of diligence, and distinguish the different situations between intentional and negligent". However, the "Minutes of the Bond Symposium" is not a judicial interpretation, and its effectiveness is low. If it is used as a legal source for judicial organs to decide a case, it is still weak; further reasoning is needed, or more authoritative reasons need to be cited.

After reciting the relevant content of the CSRC's administrative punishment, the Zhejiang Higher Court sentenced the underwriters to bear the full joint and several liability, and sentenced the rating agencies and law firms to bear 10% and 5% of the responsibility. There is no clear explanation on how the distribution of the above responsibilities is roughly calculated, and why the gap is so large. I am afraid it needs to be discussed more fully.

2. Lessons learned from foreign securities laws: Distinguishing expert and non-expert statements

The U.S. Securities Act of 1933 distinguishes between expert and non-expert statements, and therefore divides due diligence into two categories: "positive action" and "negative reliance". Professionals should self-certify that they have formed their inner convictions through active and reasonable investigations on their own expert statements and underwriters' statements on non-experts, and thus have reasons to believe in the veracity of the relevant statements. Non-professionals generally allow "reasonable reliance" on professional opinions issued by professionals. In addition, non-professionals also need to conduct reasonable investigations on non-professional content, and the reasonable standard here depends on the difficulty of obtaining information about the issuer.

In the United States, the mainstream view is that lawyers' primary task in securities offerings is to facilitate transactions, not the "gatekeepers" of the securities business, and unless their legal opinions become part of the registration statement, they should not be the subject of responsibility; Legal advice only expresses a professional opinion or point of view, rather than an absolute conclusion on the issuer's factual situation, and therefore cannot be equated with "misrepresentation". Because of this, U.S. courts generally do not hold lawyers liable for issuing false statements.

Of course, the roles of Chinese and American lawyers in securities business are different after all. In the United States, statutory issuance documents do not include legal opinions, and lawyers’ participation in securities business is a voluntary act of the issuer’s internal directors and underwriters to reduce their own responsibilities; while in China, the China Securities Regulatory Commission incorporates lawyers’ legal opinions and work reports into the application documents of the securities issued, lawyers engaged in securities business once had to be chartered by the China Securities Regulatory Commission, which pushed lawyers to the front-line supervision position, resulting in higher accountability of lawyers in our country than securities lawyers in the United States.

On the one hand, Chinese lawyers are theoretically popular, and considering the current background of strengthening capital market supervision, it is understandable that lawyers are given more responsibilities; on the other hand, in practice, lawyers are responsible for verifying the issuance of information. Responsibilities should still be adapted to their objective capabilities and the functions carried by legal services, otherwise it is easy to lead to the dilemma of inconsistent rights and responsibilities. In the long run, it will dampen the enthusiasm of lawyers to provide services to the capital market.

3. The boundary of responsibility of law firms still needs to be further clarified by legislation

The CSRC's "Compilation and Reporting Rules for Information Disclosure of Publicly Offering Securities Companies No. 12" sets out basic requirements for legal opinions and lawyers' work reports on public offering of securities, including a large number of non-legal professional matters, and requires legal opinions to provide information on the prospectus. The prospectus is assessed for misstatements or omissions, that is, lawyers should double-check and verify the work of sponsors and accountants, resulting in a significantly increased risk for lawyers.

The above provisions cause lawyers and law firms to be liable for damages for misrepresentations in legal opinions or work reports issued by them that are not related to their profession. The original intention of the regulators is to increase the insurance coefficient of public offering of securities, but repeated verification and verification between different themes often may not achieve the expected results. On the contrary, due to unclear responsibilities, it leads to difficulties in cooperation, and intermediaries appear to shirk the blame or facilitate each other. In this situation, the actual effect is not conducive to investors.

To sum up, the author believes that the revision of relevant laws and regulations needs to further distinguish legal matters and accounting matters, narrow the scope of securities lawyers' investigation matters, clarify the standards of securities lawyers' duty of care, and appropriately reduce the requirements for the depth of securities lawyers' investigations. As non-professionals in the field of accounting, lawyers should have the right to reasonably rely on the conclusions of the work of professionals in the field of accounting, and should not bear civil liability unless there are obvious problems that can be noticed under normal circumstances and should be further investigated and inquired.