[Exclusive] Hyundai Motor and BNK Securities Lose First Trial in ‘CERCG ABCP’ Lawsuit

Court: "Hanwha and Ebest Securities Not Responsible for Loss Compensation"

[Asia Economy Reporter Lim Jeong-su] Hyundai Motor Securities and BNK Investment & Securities lost the first trial lawsuit against Hanwha Investment & Securities and Ebest Investment & Securities regarding the China National Chemical Engineering Group Corporation (CERCG) asset-backed commercial paper (ABCP).

According to the investment banking (IB) industry on the 15th, the Seoul Southern District Court ruled in favor of Hanwha Investment & Securities and Ebest Investment & Securities in the unjust enrichment restitution claim lawsuit filed by Hyundai Motor Securities and BNK Investment & Securities related to CERCG. The lawsuit amount totaled 113.5 billion KRW invested by Hyundai Motor Securities, BNK Investment & Securities, KB Securities, Busan Bank, and KEB Hana Bank, concluding that Hanwha and Ebest are not required to compensate investors for their losses.

The CERCG default incident shook the financial investment industry three years ago. CERCG’s subsidiary, CERCG Capital, privately issued dollar-denominated bonds worth 150 million USD (approximately 180 billion KRW) in May 2018. Hanwha Investment & Securities and Ebest Investment & Securities issued ABCP based on foreign currency bonds issued by CERCG through a special purpose company (SPC) called Geumjeong Je12cha.

Hyundai Motor Securities (50 billion KRW), BNK Investment & Securities (20 billion KRW), KB Securities (20 billion KRW), Busan Bank (20 billion KRW), KTB Asset Management (20 billion KRW), Yuanta Securities (15 billion KRW), Shin Young Securities (10 billion KRW), Golden Bridge Asset Management (6 billion KRW), and KEB Hana Bank (3.5 billion KRW) purchased ABCP worth 164.5 billion KRW. Financial companies sold these to other institutions and individual investors through trust products and others.

However, shortly after, an offshore subsidiary of CERCG failed to repay bonds worth 350 million USD, which were guaranteed by CERCG, triggering a cross default on the ABCP invested by domestic institutions. Financial companies that sold ABCP to individual investors had to refund part of the sales amount due to incomplete sales and recognize most of the investment as a loss.

Subsequently, Hyundai Motor Securities, BNK Investment & Securities, and others filed a lawsuit at the Southern District Court demanding the return of their investment from Hanwha Securities and Ebest Securities, who mediated the issuance of CERCG ABCP. The complaint alleged that Hanwha and Ebest Investment & Securities violated their due diligence obligations as lead managers. It also raised issues of deceptive acts by hiding matters related to bond registration with the Chinese foreign exchange authority (SAFE) and CERCG’s status as a public enterprise.

Hanwha Investment & Securities and others, who were sued, argued that they only acted as asset managers during the ABCP issuance process and were not lead managers as defined by relevant laws, thus having no due diligence obligations. They also denied any deception regarding the SAFE registration issue. An IB industry insider said, "The first trial court did not recognize any responsibility of Hanwha Investment & Securities and Ebest Investment & Securities," adding, "With Hyundai Motor Securities and BNK Investment & Securities losing the case, the possibility of recovering losses has significantly decreased."