[Invest&Law] Crude Oil Futures ETF Investors Lose Another Damages Lawsuit Against Samsung Asset Management

Court Rules "No Violation in Samsung Asset Management's Contract Month Diversification"
Crude Oil Futures ETF Lawsuit Effectively Concludes

More than 340 investors in Samsung Asset Management's crude oil futures exchange-traded fund (ETF) filed a lawsuit for damages, claiming that the asset manager arbitrarily diversified and replaced specific contract months, causing them to miss out on profits from the rise in certain contract months. However, they lost both in the first and second trials.

Seoul High Court, Seocho-gu, Seoul. Asia Economy DB

According to the investment banking (IB) industry and legal circles on June 10, the Civil Division 18-2 of the Seoul High Court (Presiding Judge Park Sunjun) recently ruled against the plaintiffs (the investors) in the appeal trial of a damages lawsuit worth approximately 1.1 billion won, filed by 341 investors including a person surnamed Kang against Samsung Asset Management.

Previously, the investors had put their money into Samsung Asset Management's "Kodex WTI Crude Oil Futures Special Asset ETF," a product designed to track the price of West Texas Intermediate (WTI) crude oil futures traded on the New York Mercantile Exchange. The turning point came in April 2020 with the outbreak of the COVID-19 pandemic. As international oil prices plummeted, Samsung Asset Management held an emergency meeting and implemented an "early diversification" by reallocating a portion of the existing June contracts into July and September contracts. The proportion of June contracts in the fund's portfolio shifted from 73% to 34%.

However, in the end, the price of the June contracts far exceeded those of the July and September contracts. The investors filed the lawsuit, arguing that "although this is a passive fund designed to track WTI futures prices, Samsung Asset Management unilaterally diversified the contract months and also violated the obligation of timely disclosure."

The first trial court sided with Samsung Asset Management, stating that "the contract month diversification measure cannot be considered a violation of the contract or the investment prospectus." The court further explained, "It was a defensive measure in anticipation of further declines in oil prices. According to the trust agreement, Samsung Asset Management holds the discretion to select and change investment targets." The court also noted, "At the time, due to the sharp drop in oil supply and demand caused by COVID-19, the price of the May contract fell to a record low of minus $37.63, and there was a prevailing expectation that the June contract could also collapse."

The court continued, "There is no regulation in the investment prospectus requiring advance notice of timely disclosure items," and added, "Samsung Asset Management fulfilled its obligations by disclosing the information to the Korea Exchange and on its website after taking action." The court particularly emphasized, "If oil prices had fallen further, investors would have been significantly protected by the contract month diversification measure. Conversely, if oil prices had actually dropped and no action had been taken, investors might have filed lawsuits claiming that the asset manager did nothing."

In the appeal trial, the investors added the argument that "Samsung Asset Management's actions violated the principle of protection of trust and constituted an illegal act that exceeded the limits of its discretion." However, the appellate court dismissed this, stating, "There is no evidence to recognize that the fund provided trust that it would invest only in the nearest contract month." The court maintained its original stance on the other issues as well.

Meanwhile, the series of lawsuits over the past five years between Kodex WTI crude oil futures ETF investors and Samsung Asset Management is effectively coming to a close. Another class action involving more than 1,000 investors was also finalized last month with a loss in the second trial, as no further appeal was filed. In a lawsuit filed by 22 investors in 2022, the court also ruled against the plaintiffs.