[Invest&Law] NH Investment & Securities vs. KB Securities: 120 Billion Won DLS Trust Lawsuit Enters Full Appeal Stage

First Trial Rules "NH Investment & Securities 40% Liable"
Focus on Duty of Explanation vs. Duty of Review

The appeals trial over the 120 billion won derivative-linked securities (DLS) lawsuit between KB Securities and NH Investment & Securities is set to begin in earnest.

According to the legal community on July 30, the Seoul High Court Civil Division 16 (Presiding Judge Kim Inkyum) has scheduled the first hearing of the second trial for KB Securities’ unjust enrichment lawsuit against NH Investment & Securities for August 21.

COVID-19 as a Variable... Complete Suspension of Principal and Profit Payments

Previously, in 2019, KB Securities structured DLS products issued by NH Investment & Securities in the form of trusts and sold them to 200 investors, totaling 105.5 billion won. The underlying asset of the product was a trade finance fund managed by TransAsia (TA), an asset management company based in Hong Kong. The fund was structured to generate an annual return of around 4% by investing in accounts receivable arising from import-export transactions. However, the COVID-19 pandemic, which began in 2020, became a significant variable.

As a result of the impact of COVID-19, the operation of the fund faced disruptions, leading to the complete suspension of payments of both principal and profits. As most investors found it difficult to recover their principal, KB Securities filed this lawsuit, demanding that NH Investment & Securities pay unjust enrichment of approximately 119.2 billion won as well as delayed interest.

During the first trial, KB Securities argued, “NH Investment & Securities explained that, in the event of investment losses, the Hong Kong asset manager would repurchase the investment assets under a ‘buyback agreement’ and that related insurance coverage was certain. Therefore, NH Investment & Securities should be liable for the entire amount of losses.” In contrast, NH Investment & Securities countered, “The product description clearly stated that there were certain limitations to the insurance coverage, and the buyback agreement was at the discretion of the Hong Kong asset manager, not a legal obligation.” They also emphasized that the COVID-19 pandemic was an unforeseeable force majeure event.

The court of first instance determined that both securities firms had different types of responsibilities. In February, the court ruled that NH Investment & Securities must compensate KB Securities 33.9 billion won plus interest.

Issuer’s Duty of Explanation and Seller’s Duty of Review Remain Key Issues on Appeal

At that time, the court pointed out that NH Investment & Securities provided KB Securities with inaccurate information regarding the structure and risks of the product and failed to sufficiently explain key matters necessary for investment decisions. In particular, the court noted that the emails and product descriptions provided by NH Investment & Securities included statements such as “a global insurer guarantees 100% of the principal for the underlying asset.” It was also confirmed that explanations regarding the existence of a buyback agreement were included. However, these details did not match the actual contract structure and were not legally binding on the Hong Kong asset manager.

The court also criticized KB Securities for “neglecting its own duty to review the product during the sales process.” The company relied solely on the explanatory materials provided by NH Investment & Securities and omitted its own independent analysis. Consequently, the court limited NH Investment & Securities’ liability for KB Securities’ losses to 40%.

Both securities firms have appealed the ruling. It is expected that the main issues from the first trial will be contested again in the second trial. Whether NH Investment & Securities properly conveyed the effectiveness of the insurance coverage and the buyback agreement, and whether KB Securities sufficiently conducted its own product analysis and risk assessment will be key points of contention. The impact of external factors such as the COVID-19 pandemic at the time of the incident is also expected to be reassessed. Meanwhile, it is reported that investors who have not recovered their funds are pursuing individual lawsuits against the securities firms.