[2] I. Case Overview

[3] On October 13, 2000, the plaintiff, Wuhan Zhongrong Trade Development Co., Ltd. (hereinafter referred to as Zhongrong Company), while in possession of the original ID card of the third party, Zheng XX, opened Shenzhen and Shanghai shareholder code cards (Shanghai number: A381350148, account name: Zheng XX) at the Wuhan Securities Registration Center for stock trading. On July 30, 2002, Zhongrong Company opened a stock account under Zheng XX's shareholder code at the defendant's Shenzhen Dongyuan Road Business Department of Great Wall Securities Co., Ltd. (hereinafter referred to as Dongyuan Road Business Department). As of August 7, 2002, the account held 165,028 shares of Changjiu Co., Ltd. (with a market value of 3,412,779.04 yuan).

[4] On August 8, 2002, another third party, Qian, without authorization from Zhongrong Company, submitted forged documents bearing Zhongrong Company's seal—including an "Application for Revocation of Designated Trading," "Application for Designation," and "Shareholder Transfer Authorization"—to the Dongyuan Road Business Department. The seal affixed to these documents, reading "Wuhan Zhongrong Trade Development Co., Ltd.," was clearly inconsistent with the company's seal on file with the defendant. Qian applied to revoke the designation, register a new designation, and transfer the shareholder code card of Zheng XX from Zhongrong Company's fund account to his own fund account. The next day, Zheng XX's Shanghai shareholder code card A381350148 and the 165,028 shares of Changjiu Biochemical were transferred and sub-accounted under Qian's fund account at the Dongyuan Road Business Department. After discovering this, Zhongrong Company pursued recovery but failed. On January 8, 2003, it filed a lawsuit with the Shenzhen Futian Court, seeking compensation of 3,412,779 yuan for economic losses. Attorney Wang Tengfeng, as the legal representative of the third party Zheng XX, participated in the litigation and argued, based on the real-name registration system for securities, that the disputed shares should belong to the third party Zheng XX.

[5] On October 23, 2003, the Shenzhen Futian Court issued its first-instance judgment [(2003) Shen Fu Fa Min Er Chu Zi No. 357], which addressed the claims of the third party Zheng XX as follows:

[6] "Although China implements a real-name registration system for stock ownership, the ownership status of the registered rights holder can be overturned by sufficient counter-evidence. In other words, when there is clear evidence that the registered rights holder differs from the actual rights holder, ownership should still be determined based on the actual rights holder. — Given the above, there is ample evidence to establish that the plaintiff borrowed the ID card of the third party Zheng XX to open a shareholder card and purchase stocks. The actual owner of the disputed stocks is the plaintiff, whose legitimate rights and interests are protected by law. — The related statements of the third party Zheng XX lack sufficient evidence and are not well-founded; thus, this court does not accept them."

The Futian District Court ruled on the plaintiff's claims as follows:

First, the third party, Qian, shall compensate the plaintiff for economic losses of 3,412,779 yuan within ten days from the effective date of this judgment.

Second, the defendant, Dongyuan Road Business Department, shall bear joint and several liability for the above debt of the third party, Qian.

Third, if the assets of the defendant, Dongyuan Road Business Department, are insufficient to satisfy the above debt, the defendant, Great Wall Securities, shall bear supplementary liability for payment.

The Dongyuan Road Business Department, dissatisfied with the first-instance judgment, filed an appeal. On February 12, 2004, the Shenzhen Intermediate People's Court issued a second-instance judgment [(2004) Shen Zhong Fa Min Er Zhong Zi No. 233], dismissing the appeal and affirming the original judgment.

II. Focus of the Case

The core focus of the dispute in this case is how to confirm the ownership of property rights in sub-accounts under a stock and securities fund account.

(I) Plaintiff Zhongrong Company:

1. Claims that the subject matter of this case (165,018 shares of Changjiu Biochemical stock) belongs to it.

2. Claims that the defendant Dongyuan Road Business Department infringed on the plaintiff's ownership rights by privately transferring the shareholder card linked to the plaintiff's fund account to a third party, Qian (whom the plaintiff asserts it did not authorize), and demands that the defendant bear the resulting losses.

(II) Defendant Dongyuan Road Business Department:

1. Claims that it did not infringe on the plaintiff's rights and that all procedures it handled were lawful, as Qian had the plaintiff's authorization.

2. The plaintiff does not own the stock in dispute. According to the information, this stock is under the name of Shanghai shareholder card A381350148 (account holder: Zheng XX), and the ownership should belong to Zheng XX.

3. Zhongrong Company's custody of the stock under Zheng XX's name violates the provisions of China's Securities Law.

(III) Third party Qian:

No defense was submitted, nor did he appear in court.

(IV) Third party Zheng XX:

Believes that he himself should be the rightful owner of the subject matter in dispute in this case.

III. Analysis of This Case

This case involves a securities dispute arising under special historical circumstances. At that time, procedures such as stock account opening and designated trading in China were not as rigorous as they are today, and the trading system was not fully developed. Currently, one stock account corresponds to one capital account, with funds held in custody by banks. This differs from the previous system, where multiple sub-accounts could be linked under a single capital account, and funds were held in custody by securities firms.

The focus of the dispute in this case is:

(1) The issue of confirming stock ownership and whether it infringes upon the rights of the third party, Zheng XX.

(2) Whether Zhongrong Company's custody of the stocks under Zheng XX's name violates the provisions of China's Securities Law (which prohibits legal persons from opening accounts and trading securities in the name of individuals).

(3) The determination of liability of Dongyuan Road Business Department.

(4) The issue of determining the liability of the third party, Qian Mou.

Regarding the third and fourth focal points, based on the facts confirmed by the court, Attorney Wang believes that the court's trial was not improper. In this case, during Qian Mou's process of applying for the revocation of designation and registration of designation at Dongyuan Road Business Department, the seal on the authorization letter was not the seal of Zhongrong Company, and it did not match the seal reserved by Zhongrong Company at Dongyuan Road Business Department. Qian Mou's actions constituted infringement. The defendant also failed to exercise sufficient duty of care when handling client mandates, so the judgment that the defendant Dongyuan Road Business Department bears joint liability is not inappropriate.

Regarding the second focal point, Attorney Wang agrees with the view of the court of second instance, believing that it does not fall within the scope of this case. If this regulation is violated, it should result in consequences of violating administrative laws and regulations. The ownership dispute arising from the act of borrowing and purchasing stocks is a civil dispute.

Regarding the first focal point, Attorney Wang has reservations about the facts of the case as determined by the court. In fact, looking at the entire case, the most noteworthy and discussable point lies here. The plaintiff claims:

1. Zheng XX's ID card and shareholder card have always been with the plaintiff.

2. All procedures regarding the transactions of the affiliated account, etc., were handled and managed by the plaintiff.

3. It is recognized that the plaintiff provided the funds for buying and selling stocks.

From this, it is considered that the plaintiff is the true rights holder of the stocks in question. The court held that although China's law adopts a real-name stock system, the ownership status of the registered rights holder can be overturned by sufficient counter-evidence. However, what we see is that the plaintiff has never provided evidence that the stocks involved were purchased with their funds, sufficient to overturn Zheng XX's status as the rights holder. As is well known, trading stocks requires setting up two accounts: one is the stock account, commonly referred to as the shareholder card number, used to record the transaction changes of stocks; the other is the fund account, set up with a securities firm, used to mark changes in funds. First, the subject matter of this case is clearly recorded under the shareholder card number A381350148, indicating that Zheng XX is at least the nominal rights holder of the subject matter. If the plaintiff objects, they should provide sufficient reasons and evidence, and the most sufficient evidence would be that the plaintiff can prove the stocks were purchased with their funds; any other evidence is insufficient to support their claim of ownership. To further illustrate, we take property registration as an example. Under Chinese law, ownership of a house is based on registration, unless there is sufficient proof that the house was purchased with funds from another person; otherwise, the law only recognizes the registered rights holder. In this case, all the evidence presented by the plaintiff cannot prove that the stocks were purchased with their funds, so we believe the court's trial is open to question.

During the second instance, Attorney Wang raised an objection because the plaintiff's lawsuit was based on a tort claim, which was changed to a breach of contract claim during the trial. According to the law, parties can change their claims and the basis for them, so the first-instance court should have tried the case based on the breach of contract claim. However, the first-instance court rendered a judgment based on the tort claim, clearly violating the principle of "no trial without complaint." The second-instance court adopted Attorney Wang's opinion, finding the basis of the first-instance judgment improper. Unfortunately, it did not support other requests, and the second-instance court upheld the original judgment. However, what is worth studying and researching is the issue of confirming the property rights relationship between the master account and its sub-accounts in this case, especially under the conditions where China's securities and finance systems had not yet implemented a real-name system over a decade ago. Resolving disputes and determining right and wrong required a high level of cognitive ability. This case serves as a reference for similar cases in the future.

(Compiled and commented by Sun Zhitao)

Zhiming Office

February 21, 2004