China launches first class-action lawsuit in war against corporate fraud

China launched the country's first class-action lawsuit against a listed company on Friday, targeting Kangmei Pharmaceutical Co, as regulators vowed "zero tolerance" against accounting fraud and other capital markets "tumors". Unlike the U.S. system, class actions must be launched by government bodies such as CSISC, and only typical and major cases are selected initially. ($1 = 6.5202 Chinese yuan renminbi)

China launched the country's first class-action lawsuit against a listed company on Friday, targeting Kangmei Pharmaceutical Co, as regulators vowed "zero tolerance" against accounting fraud and other capital markets "tumors". The China Securities Investor Service Centre (CSISC), a government-affiliated body, 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 engaged in intentional and systematic financial cheating worth 30 billion yuan ($4.60 billion) between 2016 and 2018, CSRC said, adding "toxic tumors" in capital markets must be eradicated swiftly, and relentlessly. Kangmei could not be immediately reached for comment outside business hours.

China introduced the class-action mechanism to capital markets last year as part of efforts to crack down on corporate malfeasance and bolster investor confidence. Although corporate fraud is not uncommon in China, retail investors have historically had little chance to make their voices heard. Small investors often likened legal action to ants fighting elephants.

Still, CSRC said on Friday that the new class action mechanism would greatly reduce investors' cost of suing listed companies and help reduce malpractices in China's capital market. Unlike the U.S. system, class actions must be launched by government bodies such as CSISC, and only typical and major cases are selected initially.

($1 = 6.5202 Chinese yuan renminbi)