[Song Seungseop's Financial Light] Why Did the Financial Supervisory Service and Woori Financial Group Chairman Meet in Court?

2017 'Derivative Linked Fund (DLF)' Scandal Origin
Chairman Sohn Appeals Financial Authorities' Sanctions in Court
First Trial Court: "Cannot Be Seen as Discretionary Power Exercise"
Financial Supervisory Service Appeals... Legal Battle in Second Trial

In front of the Financial Supervisory Service (FSS) in Yeouido, Seoul, where the FSS Disciplinary Committee meeting was held last January. Members of the DLF Victims Countermeasure Committee and the Financial Justice Solidarity, protesting the overseas interest rate-linked derivative-linked fund (DLF) incident that caused massive principal losses, are holding a press conference demanding severe disciplinary actions against Woori Bank and Hana Bank. Photo by Kang Jin-hyung

[Asia Economy Reporter Song Seung-seop] The first trial between the Financial Supervisory Service (FSS) and Sohn Tae-seung, Chairman of Woori Financial Group, has concluded. A recent verdict was issued, but the FSS has announced it will appeal the decision. Why did the head of the financial regulator and the head of a financial company end up in court? And why did the FSS decide to appeal?

The case traces back to the 2017 'Overseas Interest Rate-Linked Derivative-Linked Fund (DLF)' incident. A DLF is a fund based on real assets such as interest rates, gold, and crude oil. If the price of the underlying real asset stays within a predetermined range, investors earn high returns; if it falls or rises significantly, they incur losses. The controversial product was structured so that investors would lose money if overseas interest rates fluctuated greatly.

This product caused enormous losses to investors. Nearly 800 billion KRW worth was sold, with an average loss rate exceeding 50%. You might ask, what's the problem if they invested themselves? The issue was the banks' 'incomplete sales' during the selling process. Although it was a risky product, sales staff were trained to say that "there is almost no principal loss," or they failed to properly explain the risk of total loss to investors.

The FSS judged that Sohn Tae-seung, Chairman of Woori Financial Group, should bear responsibility. Sohn was the CEO of Woori Bank at the time. As the person responsible for establishing and enforcing the bank's 'internal control standards,' he allegedly failed to properly fulfill this duty. In February last year, Sohn received a severe disciplinary action called a 'warning for disciplinary action,' which restricted his reappointment and employment in the financial sector.

The matter moved to the courtroom a month later. Sohn filed a lawsuit seeking to cancel the FSS's disciplinary action, claiming it was unfair. At that time, Woori Financial argued, "The management did not directly intervene in decision-making related to product sales," and "The FSS imposed sanctions excessively."

First Trial: "Cannot be seen as FSS exercising discretion"… Chairman Sohn wins

Son Tae-seung, Chairman of Woori Financial Group

The lawsuit's verdict came out at the end of last month. The court ruled in favor of Sohn. Kang Woo-chan, Chief Judge of the Seoul Administrative Court, stated, "Under current law, there is no legal basis to sanction financial companies or their executives for violating 'compliance' with internal control standards rather than 'establishment,'" and added, "It cannot be seen as an exercise of discretion." The ruling indicated a lack of legal grounds for disciplinary action.

Most of the disciplinary reasons claimed by the FSS were also dismissed. The FSS argued that the control standards lacked five key conditions, reducing their effectiveness. However, the court only recognized as valid the disciplinary reason related to the failure to establish meeting results or notification/reporting standards in the product selection committee.

The FSS decided to appeal this decision. Although the court said there was insufficient legal basis, it did not state that Chairman Sohn or Woori Bank were free of fault. The court found serious problems in the process and system of product selection and sales. It judged that there were organized wrongful acts in the decision-making process.

Furthermore, the court firmly stated that Sohn was the ultimate supervisor. Woori Financial argued in the first trial that Sohn was not the direct supervisor and therefore not the responsible party. However, the court said, "Although internal control standards are drafted by operational departments, they are deliberated and resolved by the board of directors, and the plaintiff (Sohn) is the CEO," adding, "The person responsible for internal control standards has the duty to establish and supervise the operations as a supervisor."

The court rejected the argument that actors and supervisors should be distinguished, stating, "If financial companies finely divide responsibility layers, the CEO would be exempt from responsibility."

The appeal and trial are expected to influence trials of other financial company CEOs. Due to the 'Optimus and Lime Private Equity Fund incidents,' former CEOs such as Kim Hyung-jin of Shinhan Investment Corp., Yoon Kyung-eun of KB Securities, Na Jae-cheol of Daishin Securities (current chairman of the Korea Financial Investment Association), Park Jung-rim of KB Securities, Jung Young-chae of NH Investment & Securities, and Ji Sung-kyu, Vice Chairman of Hana Financial Group, have either been disciplined or are undergoing disciplinary hearings.