A court ruling has reaffirmed the position that, the more complex the structure of a derivative product, the more financial companies must explain risk factors specifically and clearly, taking into account the investor's ability to understand.
A court ruling reaffirmed the position that financial companies must explain risk factors specifically and clearly, considering the investor's understanding, especially for complex structured derivatives. Yonhap News
On July 23, the 12th Civil Division of the Seoul Southern District Court (Presiding Judge Park Jeonggil) ruled partially in favor of small manufacturing companies K and F in their lawsuit against KB Securities for the return of unjust enrichment (Case No. 2022Gahap110651).
[Facts]
The product purchased by K and F was a specific money trust product sold by KB Securities called 'KB able DLS.' Derivative Linked Securities (DLS) are financial investment products whose profits or losses are determined in advance according to fluctuations in underlying assets such as stock prices, interest rates, exchange rates, or physical assets.
In this case, the product was structured in multiple layers, with KB Securities' DLS connecting to NH Investment & Securities, the OPAL Fund, and ATFF, resulting in an indirect investment in trade finance loan receivables. If the performance of overseas trade finance loan receivables was good, returns could be generated, but if there were problems with the loans, it could become difficult or impossible to recover the invested principal. However, after the outbreak of COVID-19, international trade contracted sharply, causing delays and defaults in trade finance loans. As the value of the underlying assets declined, the maturity redemption amount of the DLS was significantly reduced, resulting in principal losses.
As a result, K and F argued that "the trust contract was based on a mistaken declaration of intent and should be canceled, so the defendant must return the investment received," and that "KB Securities did not sufficiently explain the structure and risks of the product, leading to losses." In contrast, KB Securities countered that "the plaintiffs, as corporate investors, had sufficient understanding of financial products and could recognize the risks through the proposal and materials provided."
[Issues]
Whether the trust contracts entered into by the plaintiffs with KB Securities could be canceled due to a mistaken declaration of intent, thereby requiring the defendant to return the investment as unjust enrichment; whether KB Securities sufficiently disclosed key risks, including the possibility of total principal loss, for the complex DLS product; and whether K and F had the ability to recognize and assess these risks themselves.
[Court's Judgment]
The court found that KB Securities had breached its duty to explain. The court ordered KB Securities to compensate K approximately 529.86 million won and F approximately 304.34 million won. However, the court acknowledged partial negligence on the part of K and F, reducing the compensation by 30% and 20%, respectively.
The court recognized that the defendant had used the plaintiffs' investment principal for the acquisition of the DLS in accordance with their agreement, and thus did not accept the claim for the return of unjust enrichment.
However, the court stated that if damages occur due to a breach of duty of care, liability for damages under tort law is recognized. The court pointed out that KB Securities failed to adequately inform investors about the requirements for insurance payment, grounds for exemption, and payment procedures, and that the product brochure included language that could mislead investors into believing that the principal would be guaranteed through insurance or repurchase even in the event of a default on trade finance receivables. The court also noted, "The defendant itself was under the mistaken impression that the principal of the loan receivables was mostly guaranteed at the time, and the likelihood that investors properly recognized the risks is extremely low."
However, the court also noted that the Capital Markets Act provides especially strong protection for general investors at the solicitation stage and therefore not all investors can be held equally responsible. K is a KOSDAQ-listed company and thus qualifies as a professional investor under the Capital Markets Act. The court took into account that the plaintiffs, as corporate investors, had a certain level of financial knowledge and access to information, that financial investment products inherently involve uncertain risks, and the principle of self-responsibility, and thus limited the defendant's liability to 70% and 80% of the losses, respectively.
[Representative's Opinion]
Lee Sungwoo (Judicial Research and Training Institute, 35th class), an attorney at Hanbyul Law Firm representing K and F, stated, "It is noteworthy that the court found the defendant's mistake regarding principal guarantees on the loan receivables, which originated from NH Investment & Securities, to be essentially the same as the plaintiffs' mistake as investors." He added, "This is a significant ruling that imposes stricter liability not only on NH Investment & Securities, the DLS issuer, but also on KB Securities, which has a direct transactional relationship with financial consumers."
Reporter Jo Hanju, The Law Times
※This article is based on content supplied by Law Times.
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