[Invest&Law] Crude Oil Futures ETF Lawsuit Ends in Defeat for Investors

Oil Prices Plunge During COVID-19 Pandemic
Samsung Asset Management Diversifies Investments Early to Prepare for Further Decline
Unexpected Returns Lead to Investor Lawsuits, All of Which End in Defeat

Investors in Samsung Asset Management's crude oil futures exchange-traded fund (ETF) filed a lawsuit for damages, claiming that the asset manager arbitrarily changed the investment target and deprived them of market returns. However, the Supreme Court has finalized a ruling against the investors. As a result, the series of lawsuits between the investors and Samsung Asset Management has concluded with a complete loss for the investors.

According to the legal community on September 17, the Supreme Court's Civil Division 3 on September 11 dismissed the appeal filed by 265 investors, including Kang, against Samsung Asset Management, seeking approximately 880 million won in damages. The court upheld the lower court's ruling against the plaintiffs (the investors) without further review. This procedure, known as "simlibulsokhaeng," confirms the lower court's decision without a substantive hearing unless there are significant legal violations or other special circumstances.

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

Previously, the investors had invested in Samsung Asset Management's "Kodex WTI Crude Oil Futures Special Asset Exchange-Traded Investment Trust," a fund tracking the price of West Texas Intermediate (WTI) crude oil traded in New York. In 2020, the COVID-19 pandemic caused international oil prices to plummet. Samsung Asset Management held an emergency meeting and shifted some of the June contracts held by the fund to July and September contracts. This action was taken earlier than planned, reducing the proportion of June contracts from 73% to 34%.

The issue arose when the price of the June contract surged above those of the July and September contracts. Investors subsequently filed a series of lawsuits against Samsung Asset Management. In this case, over 560 investors claimed about 2.2 billion won in damages. During the first trial, the plaintiffs argued, "The fund is supposed to track the nearest contract month, but the asset manager changed it arbitrarily," and "They also failed to provide timely notice of the change, violating the duty of periodic disclosure."

The first court ruled in favor of Samsung Asset Management. The court stated, "This was a defensive measure in anticipation of further declines in oil prices. According to the contract, Samsung Asset Management has the discretion to select and change investment targets." The court emphasized, "At the time, due to the COVID-19 pandemic, oil demand had plummeted, and the May contract price dropped to minus $37.63 for the first time in history. There was a strong consensus that the June contract could also collapse."

The court further explained, "There is no regulation in the investment prospectus requiring advance notice of periodic disclosure items. Moreover, Samsung Asset Management fulfilled its obligation by notifying the Korea Exchange and posting the information on its website after the diversification measure. If oil prices had fallen further, investors would have been significantly protected by this action. If oil prices had actually fallen and no action had been taken, investors might have filed lawsuits claiming that the asset manager did nothing."

In the appeals trial, only about 340 investors participated. They added the argument that "Samsung Asset Management's actions violated the principle of protection of trust and constituted an illegal act exceeding the limits of discretion." However, the appellate court dismissed this, stating, "There is no evidence that the fund gave investors a legitimate expectation of investing only in the nearest contract month," and maintained the first court's position on the original issues. The Supreme Court also agreed with these judgments.

Accordingly, the series of lawsuits filed by investors in the same product over the past five years has ended with a complete defeat for the investors. Previously, group lawsuits involving about 1,000 investors and another suit with 22 participants also concluded with victories for Samsung Asset Management.