[Invest&Law] High-Risk PF Investment with Client Funds... Frozen Sangjo Companies

Filed Lawsuit Against Securities Firm Over Product Loss, Lost in First Trial
"Securities Firm Provided Sufficient Information"

A funeral service company that lost its principal after investing customers' money in a high-risk real estate project financing (PF) has filed a lawsuit against a securities firm but lost in the first trial.

According to the legal community on the 8th, the Civil Division 22 of the Seoul Central District Court (Presiding Judge Choi Wook-jin) recently ruled against plaintiff A, a major domestic funeral service company, in the first trial of a 3 billion KRW unjust enrichment refund claim lawsuit filed against a securities firm.

In April 2019, Company A invested 3 billion KRW in a real estate PF fund through its investment subsidiary, which was involved in a residential-commercial complex development project in Goyang-si, Gyeonggi Province. When the maturity of an existing investment product (with an interest rate of 2.5%) approached, they chose a more aggressive investment product aiming for higher returns. At that time, the securities center manager who recommended the fund presented a corporate product proposal specifying conditions such as "7% annual yield" and "1-year maturity."

Company A’s investment funds were raised based on advance payments received from funeral service customers who were promised future services such as funerals. It is known that Company A’s annual net increase in advance payments was about 20 billion KRW at the time. Typically, funeral service companies deposit half of the advance payments in banks or mutual aid associations and invest the rest in financial products.

Seoul Central District Court, Seocho-gu, Seoul. Photo by Asia Economy DB

However, even after the maturity date in April 2020, Company A was unable to recover the principal. This was because the developer could not secure additional loans due to the impact of COVID-19, and the sales rate of unsold commercial units did not improve. Ultimately, the product maturity date was extended seven times until August last year.

Company A claimed investment funds and delayed interest from the securities firm, stating, "We thought there was no possibility of principal loss, but the risks were not properly disclosed." During the trial, they argued, "We intended to invest customers’ deposits in safe financial products, but the securities firm provided incorrect product descriptions, causing a misjudgment."

The first trial court rejected Company A’s claims, stating, "The securities firm provided sufficient information, and as an investor, one cannot expect high returns while avoiding all risks."

First, the court noted, "Even if Company A did not receive any explanation about the fund’s risks, investment risks are fundamentally for the investor to judge," adding, "Company A did not inquire about the investment structure or risks. It failed to recognize the possibility of investment loss, which constitutes gross negligence." The court further stated, "Company A was aware that the fund was a product investing in real estate PF project profits and that profits would be generated from the developer’s gains," and ruled, "It is difficult to see that the securities firm did not inform about the fund structure, the existence of senior priority beneficiaries, investment risks, and the possibility of principal loss."

The court also focused on the unforeseeable events that occurred after the securities firm recommended the fund subscription. The court said, "The failure to secure loans or repay the fund was due to the COVID-19 pandemic and the resulting stagnation in the financial market and commercial unit sales market," and "The risks inherent in real estate PF projects, such as changes in the real estate market, sales abandonment, and increased project costs leading to deteriorated profitability, were disclosed to Company A."

Company A has appealed the first trial ruling.