Supreme Court "Partially Dismisses Daewoo Shipbuilding & Marine Engineering Compensation, Overturns and Remands Lower Court Ruling"

"After False Disclosure, Correction Disclosure Takes Time
Investors Find It Difficult to Recognize the Truth"

The Supreme Court overturned and remanded the lower court ruling regarding the damages lawsuit filed by small investors of Daewoo Shipbuilding & Marine Engineering (DSME) against the corporation, its management, and the accounting firm, claiming losses due to the company's accounting fraud. DSME was acquired by Hanwha Group last year and changed its name to Hanwha Ocean.

On the 25th, the Supreme Court's First Division (Presiding Justice Oh Kyung-mi) overturned and remanded the lower court ruling that dismissed the damages claim in the appeal trial filed by 291 investors against Hanwha Ocean, former DSME President Ko Jae-ho, and Anjin Accounting Corporation.

The court stated that the lower court's judgment, which held that the damages suffered by shareholders from April 1, 2014, when the financial statements including the accounting fraud were disclosed, until before the report of DSME's deficit forecast were not due to false disclosure, was erroneous. Since there were reports revealing the company's financial instability during this period, it cannot be concluded that the false disclosure and the stock price decline were unrelated.

In the past, DSME committed accounting fraud over approximately eight years from 2008 to 2016. It was found that various methods were used, such as overstating sales revenue and understating cost of sales. Anjin Accounting Corporation gave an 'appropriate' opinion on DSME's audit reports, which included such accounting fraud.

Accordingly, the Securities and Futures Commission under the Financial Services Commission imposed a fine of 4.5 billion KRW on DSME in 2017, recommended the dismissal of Kim Yeol-jung, then DSME Chief Financial Officer (CFO), implemented a three-year auditor designation system, and ordered the correction of financial statements from 2008 to 2016. Anjin Accounting Corporation was suspended from audit business for one year.

Both the first and second trials partially ruled in favor of the plaintiff investors. However, the amount awarded was slightly adjusted from 10.2 billion KRW in the first trial to 9.2 billion KRW in the second trial. The Supreme Court stated, "Regarding the damages claims for stocks sold by the plaintiffs or the decline in stock value from April 1, 2014, the day after the false disclosure, to May 3, 2015, it is difficult to say that the presumption of damages under the Capital Markets Act has been broken, and thus the lower court's dismissal of that part of the damages claim is overturned and remanded."

However, the limitation of liability part was upheld. The Supreme Court agreed with the lower court's judgment limiting the defendants' liability to 70% of the total damages for the defendant company and its representative director, and 30% for the accounting firm.