(Yicai Global) Jan. 20 -- Leshi Internet Information and Technology Corp., a struggling company once known as China’s Netflix, is being sued to the tune of CNY4.6 billion (USD725 million) by irate investors for making false financial statements in a 2016 private placement in what could amount to the country’s biggest penalty in a securities class action lawsuit.

Some 2,000 plaintiffs are claiming compensation from Leshi and another 20 defendants who are jointly liable, Shanxi Securities, owner of one of the defendant firms, said on Jan. 18. The class action lawsuit is likely to be heard in February or March.

Six intermediary agencies who were sponsors of Leshi’s private offering and failed to discover the fraud are in the firing line. These are Shanxi Securities’ unit Zhong De Securities, Ping An Securities Group and Zhongtai Securities as well as accounting firms RSM China, ShineWing International and Reanda Certified Public Accountants.

Also liable is Leshi’s founder, controversial businessman Jia Yueting who fled to the US in 2017 to escape the mounting debt crisis and to focus on developing his new energy vehicle startup Faraday Future. He has since resigned from all his positions at Beijing-based Leshi but remains a majority shareholder with a 22.5 percent stake. Another 13 individuals are also being held responsible.

Although the CNY4.8 billion (USD756.6 million) private placement was approved by the China Securities Regulatory Commission back in June 2016, the regulator’s Beijing arm subsequently opened an investigation. In April last year both Leshi and Jia were each slapped with a CNY240 million (USD37.8 million) fine, the country’s biggest-ever penalty for stock fraud.

Should it lose this latest lawsuit, another hefty fine could push Leshi to the brink. At the end of 2020, the company had net assets of minus CNY16.9 billion (USD8.6 billion). That year it racked up losses of CNY2.5 billion (USD385.9 million) with revenue of just CNY468 million. Three straight years of losses also led to the company delisting in July 2020.

China only began allowing securities class action, or special representative action, lawsuits in 2020 as part of its ‘zero tolerance’ policy on capital market crimes. They provide a convenient and low-cost channel for investors to participate directly in litigation rather than through representative organizations. But as the fines are likely to be quite large, they could bankrupt the accused, making it less certain that investors will receive compensation.

A court ruled in favor of investors in the first verdict of a securities class action lawsuit last November, ordering Kangmei Pharmaceutical to pay compensation of CNY2.5 billion (USD394 million) for cooking its books.

Editor: Kim Taylor