Court Rules "Domestic Underwriters Must Pay Fines" in 'Goseom Trading Suspension Incident'

[Asia Economy Reporter Ryu Tae-min] A ruling has been made recognizing the responsibility of the domestic listing underwriter in the case of the trading suspension of the Chinese company Goseom on the domestic stock market, which caused investors losses amounting to 200 billion KRW.

According to the court on the 3rd, the Seoul High Court Administrative Division 3 (Presiding Judges Ham Sang-hoon, Kwon Soon-yeol, and Pyo Hyun-duk) recently ruled against the plaintiff in the retrial of the lawsuit filed by Daewoo Securities (now Mirae Asset Securities) against the Financial Services Commission (FSC), requesting the cancellation of a fine. If this ruling is finalized as is, Mirae Asset Securities will have to pay the 2 billion KRW fine previously imposed on Daewoo Securities by the FSC.

Goseom, a Chinese textile company, was listed on the domestic KOSPI market in January 2011 but had its trading suspended after two months and was delisted in October 2013. Goseom raised 210 billion KRW in public offering funds by issuing 30 million shares at a subscription price of 7,000 KRW per share on the domestic stock market. According to the authorities’ investigation, Goseom stated in its securities registration statement that 31.6% of its underlying assets were cash or cash equivalents, but it was revealed that the company was actually in a severe cash shortage.

The FSC held Daewoo Securities, the listing underwriter, responsible for the incident, citing that it did not even verify Goseom’s bank balances, and imposed a fine of 2 billion KRW in October 2013. However, in the lawsuits filed by Daewoo Securities, both the first and second trial courts ruled that the listing underwriter could not be held responsible and ordered the cancellation of the fine. The courts reasoned that there was no circumstance to believe that Daewoo Securities knew or should have known about the falsehood in Goseom’s securities registration statement due to gross negligence.

However, in May 2020, the Supreme Court overturned the previous rulings due to insufficient examination and remanded the case to the Seoul High Court. The Supreme Court pointed out at the time, “It appears difficult to acknowledge that the plaintiff, as the lead underwriter and acquirer, exercised due diligence reasonably expected, and it is also hard to find circumstances that would suggest the plaintiff could not have known about the false statements even if due diligence had been exercised.”

The retrial court, following the Supreme Court’s ruling, sided with the FSC, stating, “The plaintiff’s failure to verify cash and cash equivalents constitutes a significant breach of duty of care as an acquirer.”

Meanwhile, Mirae Asset Securities won a subrogation lawsuit last December against Chinese banks that issued false bank inquiry certificates related to the delisting of China Goseom.

Hanwha Investment & Securities, which jointly acted as the listing underwriter with Daewoo Securities, has also filed a separate lawsuit against the FSC, and the retrial is currently underway at the Seoul High Court. Hanwha Investment & Securities won in the first and second trials, but the Supreme Court remanded the case in February 2020 with a ruling against the plaintiff.