Ten years of private placements resulting in a 60% loss! A private equity firm sues the listed company, losing the first instance over a 430 million yuan claim.

Ask AI · Why Did Professional Investors Lose in a False Statements Case?

Caixin Media, April 7 (Reporter Feng Qijuan) A follow-on offering (private placement) is not a risk-free investment, and losses are the norm. A private equity fund that held a follow-on placement for a decade ended up deep underwater. After encountering a “black swan” of financial fraud, it angrily sued the listed company.

According to a recent announcement by Shangshi Development, as the defendant, the company has received the “Civil Judgment” issued by the Shanghai Financial Court. In the court’s first-instance ruling, it dismissed all claims brought by the plaintiff Junzheng Equity Investment Partnership (Ningbo Meishan Bonded Port Area) (Limited Partnership) (hereinafter: Junzheng Partnership). The court held that the transaction causal link between the plaintiff’s investment decision and the alleged false statements in this case was not established, and the plaintiff therefore had no right to demand compensation for investment losses. In addition, the case’s 2.2001 million yuan filing fee was also borne by the Junzheng Partnership.

This legal dispute between Shangshi Development and the Junzheng Partnership traces back to the follow-on offering project from 10 years ago.

In January 2016, the Junzheng Partnership subscribed to the follow-on offering shares of Shangshi Development—51.47M shares—at a price of 11.63 yuan per share, for a total capital commitment of 599 million yuan. The lock-up period was 36 months. By the unlock date, January 22, 2019, Shangshi Development’s closing price had fallen to 4.74 yuan, nearly a 60% drop from the issuance price of the follow-on offering.

However, the follow-on offering fundraising project of Shangshi Development in that round—Longchuang Energy Conservation (later renamed Shangshi Longchuang)—was exposed in 2022 as having engaged in systematic financial fraud for as long as six years, which directly led to Shangshi Development’s financial statements for six consecutive years containing false records. From April to June 2024, Shangshi Development and multiple executives, as well as the chairman of Shangshi Longchuang, were issued warnings by the Shanghai Securities Regulatory Bureau and fined hefty amounts, totaling 25.45 million yuan. In September of that year, a criminal judgment was issued sentencing the former chairman of Shangshi Longchuang, Cao Wenlong, and others.

Subsequently, the Junzheng Partnership first sued Shangshi Development and other defendants on the basis of a contractual dispute, alleging that Shangshi Development had committed fraudulent issuance, and claiming damages of approximately 801 million yuan. During the litigation process, it adjusted the basis of its claims to a dispute over liability for securities false statements, reducing the claimed damages to 431 million yuan. It also requested that the court award a total of 350k yuan in litigation fees and attorneys’ fees.

It is noteworthy that the judgment documents disclosed in March of this year show that two ordinary retail investors also sued Shangshi Development using the same cause of action—securities false statement liability disputes—and both won and were awarded compensation. Why did the same cause of action lead to different outcomes in court?

Six years of “fraud” exposed—regulators deliver heavy penalties

Six years after the follow-on offering was completed, Shangshi Development received a regulatory work letter from the Shanghai Stock Exchange, requiring it to conduct a self-examination regarding accounts receivable matters at Shangshi Longchuang. After an initial self-check, by the end of 2021, Shangshi Longchuang’s unaudited accounts receivable totaled approximately 350k yuan, of which some business activities might involve financing-type trade; and there may have been material business risks that were not recoverable with respect to certain accounts receivable. In April of the same year, the Shanghai Stock Exchange issued another regulatory inquiry letter, requiring the company to disclose issues including accounting corrections, fund misappropriation, non-standard internal control audit opinions, and so forth.

After the regulators’ investigation, from 2016 to 2021, Cao Moulong, then chairman of Shangshi Longchuang, used methods including fabricating contracts, inflating the implementation progress of business activities, conducting “round-trip” self-circulating trade, and participating in military-civil fusion trade. This resulted in inflated revenue of 2.62B yuan and inflated total profit of 614 million yuan, leading to false records in Shangshi Development’s financial statements for the same period.

This fraud caused Shangshi Development’s 2017 annual report to understate goodwill impairment losses by 220 million yuan, accounting for 18.31% of the total profit disclosed for that period. It also caused Shangshi Development’s 2021 annual report to understate bad debt provision by 809 million yuan, accounting for 52.36% of the total profit disclosed for that period.

In April 2024, in relation to its failure to timely disclose expected losses from operating performance, failure to timely disclose the signing of material contracts, and the presence of false records in annual reports from 2016 to 2021, the Shanghai Securities Regulatory Bureau issued warnings to Shangshi Development and imposed total fines of 8.5 million yuan. Former chairman Zeng Mou, former chief financial officer Yuan Mou, former president Xu Moubing, former president Tang Mou, former vice president Wang Moujun, and former vice president Guo Moumin all received warnings and fines of 4 million yuan, 3 million yuan, 2.1 million yuan, 2.1 million yuan, 1 million yuan, and 750k yuan, respectively.

In June of the same year, Cao Moulong, then chairman of Shangshi Longchuang, was warned and fined 4 million yuan by the Shanghai Securities Regulatory Bureau, and was also subject to a 10-year ban from the securities market. Three months later, the Second Intermediate People’s Court of Shanghai issued a criminal judgment, in the first instance, against Cao Wenlong, the former chairman and general manager of Shangshi Development, and others. In December 2025, the Shanghai Higher People’s Court issued its second-instance ruling against Cao Wenlong.

Why did the same case have different verdicts?

Regarding the Junzheng Partnership’s litigation requests, Shangshi Development explicitly stated its disagreement and, in its defense, presented six key arguments: one, it clearly characterized the plaintiff as a professional investor and argued that the investment decision should not be found to have relied on the information at issue; two, it emphasized that this case concerns disputes arising from a “off-market” “non-public issuance” participated in by professional investors, and that the relevant elements of general tort liability should be examined under the law; three, it argued that the income approach adopted by the appraisal institution and the target company’s profit forecast report were both predictive information and therefore did not constitute a false statement under the law; four, it pointed out that the two items of disclosure claimed by the plaintiff lacked materiality; five, it further argued that the plaintiff’s contracting conduct occurred before the disclosure of the information at issue, and therefore there was no causal relationship between the two; six, it reiterated that the subscription price paid by the plaintiff was not affected by the content of the relevant information disclosures.

In practice, there is a real reference point for why the Junzheng Partnership adjusted the cause of action to a dispute over securities false statement liability.

On March 16 of this year, the Shanghai Financial Court publicly released first-instance decisions in two cases involving securities false statement liability disputes. Investors Dong Mou and Sheng Mou both sued Shangshi Development and executives including Zeng Mou and Tang Mou, and both won. The court found that these two investors bought shares between the period when the false statements were implemented and the disclosure date, and that after the disclosure date they incurred losses due to selling or continuing to hold; therefore, there was a causal relationship between the losses and the conduct of the false statements.

The final judgment outcomes showed that the defendant Shangshi Development was ordered to pay the plaintiff Sheng Mou total compensation of 1.581 million yuan, including 750k yuan for investment spread losses, 47.37 yuan for commission losses, and 157.89 yuan for stamp tax losses. It was also ordered to pay the plaintiff Dong Mou total compensation of 369,000 yuan, including 368,000 yuan for investment spread losses, 11.05 yuan for commission losses, and 36.83 yuan for stamp tax losses. At the same time, the court ruled that several defendant executives should bear joint and several liability for compensation in proportion to the shareholding indicated by their respective roles.

This stands in stark contrast to the Junzheng Partnership’s loss. Actions by retail investors buying shares in the secondary market are protected by legal presumptions; while Junzheng, as a professional institution, subscribed through the follow-on offering and held the shares long-term under lock-up before the false statements occurred. The fundamental differences in investment model and transaction timing led the court to make completely opposite findings regarding “transaction causality.”

In fact, this is not the first time Shangshi Development and the Junzheng Partnership have clashed in court. As early as May 2024, the Junzheng Partnership submitted a temporary proposal to Shangshi Development, directly pointing out that the company’s dividend level was significantly lower than the market average and recommending a substantial increase in the company’s cash dividend per share for 2023 to 0.15 yuan, far above the original plan of 0.021 yuan. However, at subsequent shareholders’ meetings, the proposal failed to pass due to more than 91% of the votes being against it.

According to the China Asset Management Association (AMAC), the Junzheng Partnership is a private equity investment fund, and its manager is Junzheng Capital. This is an equity-type private fund established in May 2014; it completed registration in February of the following year, with a registered capital of 50 million yuan and a paid-in ratio of only 10%. The private fund manages assets in the range of 0 to 500 million yuan, and the last update to institutional information was in July 2025.

Tianyancha shows that Junzheng Capital is currently held by Shanghai Junzheng Investment, Guotai Junan Investment, and Shanghai Junzheng Investment Management Enterprise (Limited Partnership) at 55%, 25%, and 20% respectively.

He Bin, who is registered as the legal representative, chairman, and general manager of Junzheng Capital, previously served for many years within the original Guotai Junan system. In December 1999, He Bin joined Guotai Junan and held positions such as executives in the mergers and acquisitions department, the capital operations headquarters, the listing office, and the human resources headquarters. In December 2006, he became assistant to the president of Guotai Junan Securities. Since October 2008, He Bin served successively as general manager of Guotai Junan Venture Capital and chairman. In May 2014, He Bin took charge of Junzheng Capital; in October 2016, he also became the legal representative and executive director of the securities-related private fund Junzheng Asset Management.

Everyone in the follow-on “dream team” is all in the red—those who held on are down by about 60%

In January 2016, Shangshi Development raised 158.1k yuan through its follow-on offering. In addition to the Junzheng Partnership, Shangshi Investment Assets, Shanyin Fund, CICC Securities, Great Wall Assets, Rongdingxin, as well as Cao Wenlong, all subscribed for follow-on offering shares,投入ting 1 billion yuan, 673 million yuan, 525 million yuan, 449 million yuan, 422 million yuan, and 234 million yuan, respectively. They were allocated 85.98 million shares, 57.90 million shares, 157.9k shares, 45.1632 million shares, 36.9k shares, 36.8k shares, and 20.12.04 million shares in sequence.

Compared with the top 10 shareholders as of the end of 2015, the above seven investors—after the follow-on offering—were all newly added to the list of the company’s top 10 shareholders.

Based on publicly available data, from the first quarter of 2026 through the first quarter of 2019, the above seven shareholders were all listed among the top 10 shareholders of Shangshi Development. By the second quarter of 2019, Shanyin Fund and Cao Wenlong had exited as top 10 shareholders. In the first and third quarters of 2020, CICC Securities and Beijing Rongdingxin exited in sequence from the top 10. In the fourth quarter of 2025, Shanyin Fund also exited as a top 10 shareholder.

Looking back, in the second quarter of 2019, the average trading price of Shangshi Development shares was 10.06 yuan, with a highest price of 12.57 yuan. The average trading prices in the first quarter of 2020, the third quarter of 2020, and the fourth quarter of 2025 were 5.56 yuan, 5.94 yuan, and 6.47 yuan, respectively. As a result, the exited investors also suffered losses to varying degrees.

As of the end of 2025, Shangshi Investment Assets, the Junzheng Partnership, and Great Wall Assets still remained among the company’s top 10 shareholders, holding 111.7799 million shares, 66.9084 million shares, and 31.7705 million shares, respectively.

Meanwhile, using the latest closing price of 4.69 yuan, the corresponding total market value of the holdings of Shangshi Investment Assets, the Junzheng Partnership, and Great Wall Assets is 524 million yuan, 314 million yuan, and 149 million yuan, respectively. Without considering the factor of dividends, each has lost nearly 60% versus the initial investment: they have lost 476 million yuan, 285 million yuan, and 300 million yuan, respectively.

(Caixin Media reporter Feng Qijuan)