[Direct answer]In the Beijing area, private equity funds that encounter defaults may not necessarily be able to directly sue the custodian banks. The core responsibilities of custodian banks lie in supervising fund transfers and account custody. If they have fulfilled their obligations according to contracts and regulatory requirements and are free from any faults, they generally do not bear investment losses. Only when the custodian violates the contract or fails to fulfill its duties, such as failing to fulfill its supervisory obligations and causing funds to be misappropriated, may they bear corresponding compensation responsibilities. When seeking legal redress, it is necessary to first verify the custodian's performance of duties before deciding on the next course of action.

I. Problem background and typical scenarios

Private equity funds often face scandals such as fund managers embezzling funds, false advertising, fraudulent underlying assets, or unauthorized changes in investment direction. After investors lose all their money, they often blame the custodian banks, believing that they failed to fulfill their duty of care. However, the legal roles of custody and management are different, and whether the custodian can be held accountable depends on whether the provisions of the custody agreement and the custodian's actual performance meet the prudent obligation. In practice, many investors overlook the preliminary step of verifying the custody report and payment instructions, resulting in misguided litigation and prolonged protection periods.

II. Key points of dispute

Firstly, the scope of the custodian's responsibilities and the extent of their supervisory obligations; Secondly, whether the custodian has breached contractual obligations or committed major negligence, such as failing to review orders or allowing funds to be misappropriated; Thirdly, the causal relationship between the losses and the custodian's negligence of duty; Fourthly, when the manager has been criminally prosecuted, how to coordinate civil compensation and criminal restitution, and the order of investors' claims. In addition, the custodian contract often stipulates dispute resolution and disclosure mechanisms. If investors fail to assert their rights in a timely manner, they may be deemed to have tacitly approved of the violations. Exercising rights in a timely manner also affects the final determination of liability.

III. Professional analysis by Henglue Law Firm

Based on our practical experience in handling financial disputes, it is necessary to conduct a review of the performance of duties before suing the custodian bank. The custodian agreement usually stipulates that the custodian shall conduct a review of the payment instructions for their surface consistency and compliance. If the manager forges materials to fraudulently obtain the payment and the custodian has conducted a reasonable review, the court will generally hold the custodian not liable; conversely, if the custodian fails to intercept obviously abnormal large-scale transfers or fails to disclose violations in a timely manner, they may be held liable for negligence of duty. Investors should obtain the custodian's reports, payment instructions, and account statements, and compare them with the contract provisions item by item. Such disputes often involve complex financial product structures, and it may be necessary to combine them with other evidence to clarify the responsibilities of all parties involved.Financial capitalAndContract disputesThe method of argumentation, with the help of supporting evidence when necessary.Specialised legal servicesClarify the legal relationships among custody, management, and sales, and refer to relevant documents for reference.\nEnforce the recovery of compensationPath locking is available for executing property. In summary, the determination of fiduciary responsibility highly relies on evidence of performance of duties. It is better to entrust professionals to prepare a thorough performance comparison report first before suing blindly, clarify whether the trustee is negligent in his duties, and then decide whether to negotiate, file a complaint, or initiate litigation. A professional comparison can also help investors determine whether there is a possibility of collusion between the manager and the trustee, thus deciding whether to pursue civil compensation or simultaneously promote criminal prosecution. The emphasis of evidence preparation for the two paths is different.

IV. Practical suggestions and legal basis

According to the relevant provisions of the "Securities Investment Fund Law of the People's Republic of China" on the duties of fund custodians (amended in 2015) and the differentiated requirements for custody and management set forth in the "Regulations on the Supervision and Administration of Private Equity Investment Funds" (effective September 1, 2023), the following recommendations are made: First, collect fund contracts, custody agreements, and net value disclosure records. Second, verify whether the manager has been subject to regulatory penalties or criminal prosecution. Third, file complaints with regulatory authorities and report the case to the police as needed. Fourth, evaluate the evidence of the custodian's negligence and decide whether to initiate civil compensation proceedings to avoid indiscriminate litigation that increases costs. When necessary, apply for evidence preservation to fix the custodian's performance records and prevent the loss of key materials. For products involving numerous investors, attention should also be paid to representative litigation and unified registration mechanisms. Centralizing evidence and claims can better facilitate negotiation and accountability than dispersed litigation, and it is also conducive to regulatory coordination and improving the overall probability of compensation.

5. Henglu Law Firm's Reminder

When protecting their rights in private equity funds, it is crucial to avoid indiscriminately listing custodian banks as co-defendants. Claims lacking evidence of negligence are likely to be dismissed and result in a waste of litigation fees. A more prudent approach is to first clarify the whereabouts of the funds through regulatory complaints and criminal reports, and then seek compensation from the parties who are genuinely at fault. Investors should also pay attention to the dispute resolution clauses and jurisdiction agreements in the fund contracts, plan the coordination of group rights protection in advance, and avoid being defeated one by one when acting individually. If investors understand the roles of managers and custodians, they can screen out a large number of high-risk products at the subscription stage; when encountering abnormal net asset values or redemption difficulties, they should immediately collect evidence and join forces to protect their rights, which often gives them more bargaining power than acting alone.

VI. Frequently Asked Questions

Q1: Can I directly sue the custodian bank if a private equity fund goes bankrupt?

Not necessarily. The main responsibilities of a custodian bank are to supervise the transfer of funds and the custody of accounts. If it has fulfilled its obligations according to the contract and regulatory requirements and is free from any fault, it generally does not bear the responsibility for investment losses. Only when the custodian violates the contract or fails to fulfill its duties, such as failing to fulfill its supervisory obligations and causing the misappropriation of funds, may it bear corresponding responsibilities. Before suing, it is necessary to review the performance of duties first to avoid indiscriminately listing defendants.

Q2: What evidence is required to notify the custodian bank?

It is necessary to prepare the fund contract and the custody agreement, the fund transfer and account transactions, the records of the custodian's performance or dereliction of duty, the evidence of the manager's violation of regulations, and the proof of their own losses; the key point is to prove the causal relationship between the custodian's violation of the agreement or statutory obligations and the losses. The custody report and the transfer instructions are the key materials for verifying the performance of duties.

Q3: How much do lawyers charge for such lawsuits, including attorney's fees and litigation costs?

The litigation fees are prepaid in stages according to the amount of the litigation subject matter, and the attorney's fees are negotiated based on the amount of the subject matter and the complexity of the case. The demonstration of the trustee's liability is highly professional, and the fees are usually higher than those of general financial disputes. The specific fees shall be subject to the contract of entrustment. For group rights protection, it is possible to explore risk-sharing agreements to reduce costs.

Q4: How long does the accountability process for private equity funds take?

For those who file complaints with regulators or report criminal cases first, the investigation period can vary from several months to years. For civil litigation, the simplified procedure takes three months and the ordinary procedure six months. Cases involving criminal and civil litigation or group rights protection may take even longer, so it is recommended to secure evidence as soon as possible. The findings of the regulatory review often influence the direction of evidence collection for subsequent civil claims.

Q5: What should I do first after a fund crisis occurs?

First, collect the fund contract, the custody agreement, and the net value and payment records, and verify whether the manager has been investigated or punished. Promptly file a complaint with the regulatory authorities and report the case as needed, while consulting a lawyer to assess the custodian's liability and civil recovery path to avoid missing the deadline. For those seeking to protect their rights individually, they should also pay attention to whether there is a unified registration and representative litigation mechanism.

The above Q&A is mainly based on judicial practices in the Beijing area. There may be differences in the adjudicative opinions in different regions. It is recommended to consult a professional lawyer based on the specific circumstances of the case.

If you are currently facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the relevant evidence materials, so as to avoid missing the statutory time limit. →Financial capital legal services·Beijing Henglu Law Firm

Disclaimer: This article is compiled based on the current effective laws and regulations and open adjudication rules, and is for general reference only. It does not constitute a formal legal opinion on specific cases. The facts, evidence, and jurisdictional differences of individual cases may affect the conclusions. In case of disputes, please consult a practicing lawyer in time.