"Loopholes in civil liabilities in the Securities Law have prevented it from effectively protecting individual investors, from checking irregularities and from streamlining the market," said Wang Liming, a leading civil law professor at the Law School at Renmin University of China in Beijing.

False disclosure of information, market manipulation and insider securities trading are the most common misdeeds in China's US$554 billion stock market.

Market manipulation, one of the most serious abuses in the securities market, is the practice of raising the price of securities through a series of well-timed transactions for the purpose of manipulating the price of the stock to unload holdings on the public just before the price drops.

Insider trading refers to purchases or sales by people who have access to information not available to other traders.

Provisions in the current Securities Law impose administrative liabilities such as the revoking of licenses, business shutdowns and confiscation and fines on the misdeeds. It also stipulates criminal liabilities if applicable.

The law has a general provision for civil liabilities concerning fraud in information disclosures, giving investors a chance to sue for compensation.

However, it does not impose any civil liabilities on price riggers or insider trading.

The only way someone can seek redress for damages caused by price rigging or insider trading is by using the nation's 15-year-old General Principles of Civil Law, which states that encroachment on property rights should compensate the sufferer.

The absence of clear legal provisions has held the judges back from accepting cases involving shareholders seeking redress in China, experts said.

"Given the volatility of the securities market, it is difficult for small investors to prove liability," said a senior legislative official with the civil legislation office of the Legal Affairs Commission of the National People's Congress (NPC) Standing Committee, the nation's top legislative body.

Criminal and administrative penalties should be applied in this case. After all, it is the government's responsibility to foster an orderly market and punish wrongdoers, while investors should face necessary risks in a well-regulated market, added the official who would not be identified.

Guo Feng, a Beijing lawyer who represents shareholders at Yorkpoint Science & Technology, said administrative or criminal penalties should not be used for civil liabilities which can offer compensation to innocent shareholders.

Last September, in Beijing and Guangzhou, a total of 363 small shareholders in Yorkpoint Science & Technology, a Shenzhen-listed company, filed a class-action suit against the company and company price riggers who secured huge gains for themselves but caused losses to ordinary investors.

The shareholders demanded 24.6 million yuan (US$2.98 million) in compensation.

But the case has not been heard so far by any court because related regulations for hearing such cases need to be improved.

"It is unfair to allow companies who lied and cheated their shareholders to get away with it," said a 51-year-old retired worker, who spoke on the condition of anonymity and said he lost 130,000 yuan (US$15,700) in more than 4,000 shares of Yorkpoint securities. "That's the equivalent of the life-long savings of both me and my father," he said.

( October 8, 2002)