How Can Investors Seek Legal Recourse After Suffering Nearly 40% Losses from Buying Funds at Market Peaks? Lawyer Explains Compensation Paths and Key Evidence Points

Recently, Dacheng Fund drew widespread market attention after taking over "Kingboard Group" stocks at high prices, with a maximum drawdown of nearly 40% in a single month. After significant shrinkage in net asset value, investors have increasingly questioned whether the fund manager failed in their duties or engaged in improper benefit transfers. This incident is not only a lesson at the investment level, but also touches on the core issue of fiduciary duties in fund legal relationships. This article will analyze the legal controversies behind fund losses and the viable legal recourse paths available to investors from a lawyer's perspective.

Fiduciary Duties of Fund Managers: How the Law Defines the Boundaries of Diligent Performance

The legal relationship established between a fund manager and investors is a trust relationship. According to Article 9 of the Securities Investment Fund Law, a fund manager shall, when managing and utilizing fund assets, perform his duties with diligence and fulfill the obligations of honesty, good faith, prudence, and diligence. This means that when making investment decisions, a fund manager must place the interests of investors first, avoid conflicts of interest, and exercise professional rationality.

In the Dacheng Fund case, if the "buying at high positions" behavior is proven to be an irrational purchase when stock prices are clearly overvalued, and lacks sufficient research support, it may constitute a violation of the duty of care. In judicial practice, courts typically determine whether a manager has fulfilled their fiduciary duties by examining whether the investment decision-making process was compliant, whether reasonable analysis was conducted based on public information, and whether there was any obvious deviation from investment strategy. For example, in a fund "rat trading" case, the court explicitly held that a manager's use of undisclosed information for trading directly violated the duty of loyalty and must bear compensatory liability for investor losses.

However, fiduciary duty does not require the manager to guarantee profits. Investment itself carries market risks, and the law permits reasonable investment mistakes. Therefore, distinguishing between normal investment risk and dereliction of duty is the key to whether rights protection succeeds or fails.

Does Taking Over Positions at High Prices Constitute Illegality: The Legal Red Lines of Insider Trading and Market Manipulation

The term "buying at high prices" often implies suspicion of improper trading. If the fund's buying behavior involves a pre-arranged agreement with specific related parties (such as the Kingboard Group), or uses undisclosed information for benefit transfer, it may violate the prohibitive provisions of Article 53 of the Securities Law concerning insider trading and Article 55 concerning market manipulation.

Specifically, if a fund makes concentrated purchases when stock prices are high, while major shareholders or related parties reduce their holdings and cash out during the same period, and the fund's decision-makers are aware of the relevant reduction plans, the fund may be suspected of using inside information to facilitate the unloading of shares. Furthermore, if the fund artificially influences stock prices through block trades or consecutive buying and selling to create exit conditions for others, it may also constitute market manipulation.

But legal determination requires conclusive evidence, including transaction records, communications, and decision-making documents. In a 2023 case where a fund company was penalized, the CSRC determined that the fund manager had engaged in trading on undisclosed information due to frequent contact with listed company executives and the highly consistent timing of trades. Therefore, if investors suspect illegal activities, they may report them to the CSRC, which will initiate an investigation by regulatory authorities.

Investor Rights Protection Paths: The Choice Between Breach of Contract Claims and Tort Claims

Investors who suffer losses from funds and initiate litigation mainly have two paths. First, they may file a breach of contract action based on the fund contract, claiming that the manager failed to fulfill the duty of care and diligence and violated the contractual terms. Second, they may file a tort action based on Article 1165 of the Civil Code, claiming that the manager, through fault, infringed upon the investors' property rights.

In a breach of contract action, the burden of proof is relatively light, requiring only demonstration that a contract existed, a loss occurred, and that the manager's conduct failed to meet the contractual standards. However, contract terms often grant managers considerable discretion—for example, merely requiring them to "use fund assets in accordance with laws, regulations, and contractual provisions"—which increases the risk of losing the case. In a tort action, by contrast, the plaintiff must prove that the manager was at fault, establish causation between the loss and the conduct, and specify the exact amount of damages, making the burden of proof significantly heavier. Yet the scope of compensation may be broader, including losses of anticipated benefits.

In practice, courts tend to favor cases involving clear procedural violations or defects in information disclosure. For example, if a fund fails to disclose changes in its major holdings as required, or if risk warnings are inadequate, investors may claim breach of contract by the fund manager on that basis. Therefore, investors should first collect documents such as the fund contract, periodic reports, and temporary announcements to identify any gaps in the manager's information disclosure.

How Investors Can Collect Evidence and Seek Professional Help

The foundation for rights protection lies in evidence. Investors should preserve all transaction records, fund NAV announcements, fund manager change information, and any written statements issued by the fund manager. Special attention should be paid to changes in holdings since the fund's inception; if the timing of position-building coincides with stock price peaks and is followed by a sharp decline, this can serve as key evidence. Meanwhile, investors may request the fund company to allow inspection of investment decision records; if such a request is refused, they may apply to the court to obtain these records during litigation.

In addition, investors may join forces with other holders of damaged shares to jointly retain counsel, thereby reducing litigation costs and creating economies of scale. Given that the class action mechanism is not yet well-established, the deterrent effect of individual lawsuits is limited, whereas coordinated action can make fund managers more inclined to settle.

Guangdong Zhiming Law Firm has long focused on the protection of financial consumers' rights and interests, having represented numerous cases involving fund and trust investment disputes, and is well-versed in regulatory rules and judicial adjudication standards. If you have suffered losses in Dacheng Fund or other fund product investments, you may contact us for an initial consultation. We will assess the viability of your case and develop targeted rights-protection strategies. Investment carries risks, but when losses are caused by managerial negligence, the law will not remain silent.