[Invest&Law] 'Post-War Russia Fund Bargain Buy' Investor Loses Compensation Lawsuit Against Asset Manager

The Day After the War, Hundreds of Millions Invested in Russian Funds
Disputes with Asset Managers Over High Benchmark Price Valuation
Court Confirms Ruling Against Investors

Investors who purchased Russia-related funds immediately after the outbreak of the Russia-Ukraine war filed for damages, clashing with the fund management company over the timing of the net asset value (NAV) calculation, but ultimately lost the case in court.

According to the legal community on the 26th, the Seoul High Court Civil Division 12-2 (Presiding Judge Bae Gwang-guk) upheld the first-instance ruling that dismissed the damages claim filed by three investors, including Mr. Lee, against A Asset Management.

Previously, on February 25, 2022, Mr. Lee and others invested between 30 million to 280 million KRW each in a "Russia Fund" created by A Asset Management. This was one day after the outbreak of the Russia-Ukraine war. The fund was managed by investing in American and British exchange-traded depositary receipts (EDRs) of Russian companies included in the index published by the Deutsche B?rse Group, based on the performance of the Russia-related index.

About five months later, they filed civil lawsuits against the management company, demanding damages ranging from 19.85 million to 185.27 million KRW. They argued that they had expected the NAV to be calculated based on the closing price on March 1, 2022, but questioned why it was calculated based on February 26 instead. Because the fund’s performance was plummeting due to concerns such as 'redemption suspension,' the later the NAV calculation date, the cheaper the fund would have been purchased.

The first-instance court ruled that "the NAV was selected as stated in the prospectus," rejecting Mr. Lee’s claims. According to the business day flow, the NAV calculated on February 28, 2022, was announced on March 2, the third business day, skipping the holiday on March 1, and purchases were made based on the determined NAV.

The first-instance court noted, "The fund prospectus states that if an investor deposits funds on the first business day, the purchase is made based on the NAV announced around 7 a.m. on the third business day. The NAV announced on the third business day is evaluated on the second business day."

It further explained, "Considering the operating hours of the U.S. and U.K. exchanges for this fund, A Asset Management in Korea, where the time is earlier, reflects the final market price confirmed during business hours on Monday, February 28, the second business day (which corresponds to the closing price on Friday, February 25, in the U.S. and U.K.) in the NAV. The evaluation method for overseas listed stocks is also stated as 'the final market price traded on the securities market on the evaluation date.' A reasonable investor would have understood the NAV calculation method, and it cannot be said that important information was omitted from the prospectus," the court said.

The appellate court also agreed with this judgment. Regarding Mr. Lee’s claim that "A Asset Management violated its duty to protect investors," the second-instance court emphasized, "The prospectus states that 'emerging countries have relatively high political, economic, and social instability risks. Since the country where the original shares are traded and the country where the depositary receipts are traded differ, political instability in both countries must be considered,' and the fund risk is rated as level 1 (very high risk)."

Furthermore, "The war broke out, and trading of Russian company stocks was temporarily suspended on overseas exchanges. Domestic management companies also stopped new subscriptions to related funds and postponed redemptions," the court added. "Mr. Lee and others appeared to have invested in the fund, accepting the investment risk, believing they could profit by purchasing the fund at a low price despite knowing the risks."

With Mr. Lee and others abandoning their appeal, the recent second-instance ruling has been finalized as is.