'20 Years Since the Enforcement of the Securities Class Action Act' Only 12 Lawsuits Filed... Need to Improve 'Document Submission Orders' [War Against Stock Manipulation]

④-⑵Defense bears litigation costs... Difficult for specialized law firms to participate
Victims bear burden of proof... Impossible to secure evidence
Perpetrators face no penalty for refusing 'document submission orders'
'Appeal' system should be simplified and allow main trial proceedings
Penalty imposition needed as special rule for 'document submission orders'

In 2014, people who suffered losses after purchasing corporate bonds issued by Dongyang Group in 2012 filed a class-action lawsuit against the former Dongyang Securities (Yuanta Securities).

"12 cases in 20 years."

On January 1, 2005, after overcoming many obstacles, the Securities Class Action Act was enacted. It was significant as a law established to remedy victims of unfair trading such as market manipulation. However, contrary to expectations, the Securities Class Action Act has become a nominal and ineffective system. The first class action lawsuit was filed only in April 2009, five years after the law was enacted. Even in its 20th year of enforcement, only 12 class action lawsuits have been filed. This clearly shows how difficult it is for victims of unfair trading to bring class action lawsuits. Moreover, cases where compensation is received through class actions are even rarer. Next month marks one year since the La Deok-yeon incident occurred. After a large-scale stock price manipulation case, the unfair trading investigation system was reorganized, and the Capital Markets Act (regarding the calculation method of unjust profits and imposition of fines) was also amended. However, measures to remedy victims of unfair trading were not mentioned. The ineffective legal system has remained stagnant for 20 years.

Securities Class Actions: Lawyers Bear Cost Burden... Practically Only One Specialized Law Firm

The biggest problem with securities class actions is that filing a lawsuit is difficult. To initiate a class action, three main conditions must be met: ① at least 50 members must participate in the lawsuit, ② the plaintiff's law firm must have handled no more than three class actions in the past three years, and ③ the total number of defendant securities held by the victims must be at least 0.01% based on the time of the incident.

The biggest hurdle among these is hiring a lawyer (law firm). Unlike in the U.S., it is difficult to find law firms specializing in securities class actions in Korea. This is because securities class actions mainly target companies (or stock manipulators). It is not easy to sue potential clients (companies) who provide large consulting fees and retainers for major cases.

Above all, securities class actions are structured so that lawyers bear the costs themselves while conducting the lawsuit. Usually, when hiring a lawyer, an initial fee is paid and a success fee is separately agreed upon. However, in securities class actions, no initial fee is charged, and only a success fee is agreed upon. One person among many victims is designated as the representative plaintiff because an individual cannot bear the costs alone.

Naturally, after the securities class action begins, the lawyer bears all additional costs such as court fees, deposits, delivery fees, and verification costs. Court fees are about 100,000 KRW per person, but considering there are many participants (300-500 people), the total burden ranges from 30 million to 50 million KRW. Moreover, court fees over 10,000 KRW must be paid entirely in cash. The lawyer also bears deposits amounting to tens of millions of KRW.

A lawyer experienced in securities class actions said, "Even if a securities class action is initiated, the court often does not grant permission to proceed, or it takes a long time to start the main lawsuit, and many cases end in defeat. Because the financial damage is significant, only large law firms can bear the burden."

Due to these circumstances, there is practically only one law firm specializing in securities class actions in Korea: Hannuri Law Firm. Hannuri handled 7 out of the 12 securities class actions filed over 20 years. Other firms include Jungyul Law Firm (2 cases), Youngjin Law Firm (1 case), and INS Law Firm (1 case). The remaining case was handled by a lawyer who previously worked at Hannuri but later became independent.

This explains why only 12 securities class actions have been filed in Korea over 20 years since the enactment of the Securities Class Action Act. This contrasts sharply with the U.S., where an average of 420 class actions were filed annually over 10 years (2009-2018). Although the U.S. also feels the burden of suing companies, there are quite a few mid-sized law firms (with 100-200 lawyers) specializing in class actions.

Choi Seung-jae, a lawyer at Class Han-gyeol Law Firm and professor at Sejong University Law School, said, "The Securities Class Action Act in Korea is unfavorable to victims, functioning to suppress lawsuits, and naturally, it is difficult for specialized law firms to grow. The current litigation structure should be improved by providing incentives to victim lawyers who bear litigation costs alone."

To Start a Lawsuit, 'Permission Litigation' First; Perpetrators Can Appeal... 'Securing Evidence' Is the Biggest Hurdle

The procedure is also challenging. Securities class actions consist of three stages (permission procedure → main lawsuit procedure → distribution procedure). The first permission procedure is to determine whether the lawsuit is suitable to be filed as a class action. This is considered the biggest characteristic of securities class actions. During this process, if the defendant is a company, there is a high possibility of proposing a settlement. In the U.S., where class actions are well developed, the law is praised for fulfilling the role of "victim remedy" by promoting settlements between plaintiffs and defendants.

Korea's Securities Class Action Act favors perpetrators. Based on Article 15, Paragraph 5 of the Securities Class Action Act, defendants (perpetrators) can immediately appeal the decision granting permission to sue. In this case, under the Civil Procedure Act, the execution is suspended. The Jinmatric market manipulation class action, filed in December 2013, received the court's final permission ruling only in August 2018, five years later.

Once the lawsuit starts, even greater hurdles arise. The burden of proof lies with the victims (plaintiffs). Victims must request evidence from the perpetrators. Article 32 of the Securities Class Action Act allows the court to order the submission of documents related to the lawsuit from those who possess them. However, if the perpetrator refuses, the court has no grounds to sanction or enforce compliance.

Kim Ju-young, lead lawyer at Hannuri, said, "'Document submission orders (Article 32 of the Securities Class Action Act)' should be considered a nominal provision. If the perpetrator refuses to submit documents, they pay a fine of 5 to 10 million KRW, but it is common to refuse submission of unfavorable evidence and just pay the fine."

Out of only 12 securities class actions, only 7 cases ended in victory or settlement. The law intended to protect victims is failing to fulfill its role. Kim emphasized, "Because victims find it difficult to secure evidence held by financial institutions and companies, uncertainty about winning or losing discourages filing class actions. A discovery system is necessary."

Simplify Appeal Procedures and Allow Main Lawsuit Progress... Special Provisions Needed for 'Document Submission Orders' (Article 32)

During that time, the National Assembly proposed amendments to the Securities Class Action Act, which failed to serve the role of victim relief, but all were eventually discarded or withdrawn.

There is a reason why the class action system was designed to be unfavorable to victims: fear of frivolous lawsuits. The Ministry of Justice first prepared the Securities Class Action bill in 1996 but failed to submit it to the National Assembly. Legislative discussions began in 1998 during the foreign exchange crisis. At that time, as companies went bankrupt due to accounting fraud, individuals who traded those stocks suffered significant losses, prompting the National Assembly to prepare the bill.

At that time, the business community strongly opposed the Securities Class Action Act, arguing it could burden corporate activities. It was considered a law where corporate and financial consumer interests conflicted, causing considerable difficulties from legislation to proposal. During this process, the three-stage procedure (appeal system) and qualifications for class action law firms were added, and the bill was passed only in December 2004.

The legal and academic communities agree that the amendment discussion should resume. Professor Jung Soon-seop of Seoul National University Law School said, "Looking at actual lawsuits since 2005, it is necessary to consider whether there is a real risk of frivolous lawsuits. The purpose of the Capital Markets Act and Securities Class Action Act is to maintain 'sound market order' and 'investor protection,' so it is necessary to review whether the current Securities Class Action Act imposes excessive obstacles to investors exercising their rights."

Procedural improvements needed include allowing both plaintiffs and defendants to immediately appeal permission or denial decisions (Articles 15(4) and 17(1) of the Securities Class Action Act). Kim said, "Even if defendants immediately appeal the permission decision, there is room to consider allowing the main lawsuit to proceed separately."

If continuing the main lawsuit procedure is not agreed upon, the legal community's consensus is to at least simplify the appeal process to prevent prolonged litigation.

Especially urgent is improving the nominal 'document submission order' (Article 32 of the Securities Class Action Act). If victims cannot prove the perpetrator's legal violations, the law's purpose of activating victim remedies cannot be realized. The Korea Legislation Research Institute and others have proposed introducing a 'document submission order system' as a special provision under the Civil Procedure Act, similar to the 2016 amended Patent Act. If the perpetrator refuses to comply, the victim's claims based on the documents are presumed true, thereby reducing the burden of proof.

Editor's NoteThe 'La Deok-yeon Gate,' the largest stock price manipulation crime in history (total unjust profits of 730.5 billion KRW), is approaching its first anniversary (April 24, 2023), yet victims' nightmares continue. There are no effective victim remedies in the Korean capital market. Litigation is the only option, but cost burdens and difficulties in proving damages deter victims from even attempting it. The amendment of the Capital Markets Act, which supplemented the limitations of criminal punishment and introduced effective monetary sanctions following the 'La Deok-yeon Gate,' is significant. However, to eradicate the increasing securities crimes in various forms, it is necessary to establish a system that can efficiently detect and investigate these crimes and to implement additional institutional improvements for swift and strict sanctions. The Asia Economy Securities Capital Market Department Special Coverage Team examines advanced systems in overseas capital markets and reviews the challenges and directions for our market to suppress securities crimes. Given the occurrence of intelligent and organized criminal acts, we also seek effective remedies for investor damages.

We plan to intensively report from various perspectives on all kinds of unfair trading such as insider trading, fraudulent trading, market manipulation, and reporting obligation violations. We will strive to establish comprehensive countermeasures to eradicate capital market crimes. Please send tips to (lsa@asiae.co.kr). We will investigate and report thoroughly.

▲Team Leader Lee Seon-ae, Manager △Reporters Kim Min-young, Hwang Yoon-joo, Cha Min-young, Kim Dae-hyun