(Yicai Global) Nov. 15 -- Kangmei Pharmaceutical has been ordered by a Chinese court to pay compensation to investors who suffered heavy losses due to the drugmaker’s financial fraud in the country’s first verdict on a securities class action lawsuit.

Kangmei Pharma infringed around 50,000 investors’ rights and interests by making false statements and must pay CNY2.5 billion (USD392 million) in damages, the Guangzhou Intermediate Court said on Nov. 12.

Kangmei Pharma was found guilty last year of inflating its business revenue by CNY29.1 billion (USD4.5 billion) and its cash holdings by CNY88.6 billion between 2016 and 2018. It also issued its main shareholder with CNY11.6 billion in unauthorized funds. Last May, the Jieyang, southern Guangdong province-based firm was given the maximum penalty of CNY600,000 (USD94,000).

Former Chair Ma Xingtian and five employees directly involved in fiddling the books as well as the firm’s auditor Zhengzhong Zhujiang Accounting Firm were found severely liable, the court said.

China only began allowing securities class action, or special representative action lawsuits, last year 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 hefty, they could bankrupt the accused, making it less certain that the investors will actually receive compensation.

The China Securities Regulatory Commission will continue to optimize its class action system based on the outcome from this first case to support investors, an official said.

Kangmei Pharma logged losses of CNY1 billion (USD157 million) in the first nine months, a narrowing from last year. Revenue was down 22 percent to CNY3.1 billion. It has received claims of CNY43.5 billion (USD6.8 billion) from creditors and it is not known if it can find the cash to repay them.

Kangmei Pharma’s stock price [SHA:600518] was trading down 2.45 percent at CNY4.38 (USD.69) at 11:30 a.m. China time today, giving it a market valuation of CNY21.8 billion (USD3.4 billion). Earlier in the day it had slumped 4.6 percent to CNY4.28.

Editor: Kim Taylor