[Reporter’s Notebook] The 'Ineffective' Securities Class Action System Is Also a Barrier to Stock Market Value Enhancement

"Who would take on such a case? First, we will finish the arguments and then make our judgment."

The court presiding over the first trial of the securities class action lawsuit related to the 'STX Shipbuilding and Marine Engineering accounting fraud' case made this statement when concluding the argument phase in October last year. This was said in the context of the plaintiff investors and the defendant, former STX Group Chairman Kang Deok-su, disputing the overlap among about 100 participating investors, emphasizing that the lawsuit could not be delayed any further. It also reflected the complexity and difficulty of the lawsuit itself.

The first trial verdict was delivered last month. The case was dismissed on the grounds that the lawsuit was filed after the deadline. According to the Capital Markets Act, investors must file a lawsuit within one year from the date they become aware of the false disclosure. The court stated, "Investors recognized the issues in the business report before March 21, 2014, and this lawsuit was filed on March 27, 2015." The plaintiffs' claim that they learned of the accounting fraud through media reports after the disclosure was rejected.

Securities class action lawsuits are a system that allows investors who suffered damages due to corporate accounting fraud or false disclosures to file lawsuits collectively. However, there are many criticisms that the initiation procedures are cumbersome and the process takes a long time, reducing its effectiveness. In this case, although the number of victims was about 20,000 and the total damage amounted to around 100 billion KRW, the approval for the lawsuit took eight years. This explains why only 12 securities class action lawsuits have been filed in the 20 years since the system was introduced.

If the legal system introduced to protect investors becomes ineffective, the Korea Discount (the undervaluation of the Korean stock market) phenomenon will inevitably worsen. If the Korean market is perceived as a market where shareholder rights are not protected, it will be difficult to prevent the withdrawal of not only foreign investors but also domestic investors. Especially since accounting fraud cases are often concealed within companies and individual investors find it difficult to immediately identify false disclosures, there is a need to improve the securities class action lawsuit system.

First, the filing deadline for lawsuits needs to be extended. In advanced capital markets such as the United States, a period of two to three years or more is guaranteed. The provisions regarding document submission orders also need improvement. Article 32 of the Securities Class Action Act stipulates that the court can order the submission of documents related to the lawsuit from those who possess them, but there is no basis for sanctions if the defendant company refuses. It is also common for companies to pay only fines of 5 to 10 million KRW instead of submitting unfavorable materials.

Cho Sung-ik, head of the Industry and Market Policy Research Department at the Korea Development Institute (KDI), pointed out at a related conference that "General shareholders can regulate self-serving acts by filing injunctions or damage compensation lawsuits, but (currently) the benefits gained from lawsuits are not significant compared to the expected profits." The court is the last bastion for socially vulnerable groups. Normalizing the securities class action lawsuit system conducted in courts will allow the Korean stock market to regain market trust and receive fair evaluations in the global market.