Standard for determining whether an act constitutes a fraudulent act prohibited under Article 178 of the Financial Investment Services and Capital Markets Act / In the case of financial investment instruments with a structure in which the exercise of rights or fulfillment of conditions is decided based on the prices of underlying assets at a certain point or money is settled, whether an act affecting the exercise of rights or fulfillment of conditions by using means, etc. recognized as unfair under social norms constitutes a fraudulent act in violation of Article 178(1)1 of the Financial Investment Services and Capital Markets Act (affirmative), and whether an investor who suffered from a violation may claim damages against an unfair trading person in accordance with Article 179(1) of the Financial Investment Services and Capital Markets Act (affirmative)

Whether a certain act constitutes an unlawful act prohibited under Article 178 of the Financial Investment Services and Capital Markets Act in relation to trading of financial investment instruments ought to be determined by comprehensively taking into account the structure and method of trading, details of trading, characteristics of the market where financial investment instruments are traded, investors’ rights and obligations arising from the financial investment instruments, timing of termination, relationship between investors and the offender, and circumstances before and after the act. Therefore, if a certain act affects the exercise of rights or fulfillment of conditions arising from a financial investment instrument with a structure where the exercise of rights or fulfillment of conditions is determined based on the price of underlying assets at a certain time or in the pertinent numerical value, or where money is settled, such an act constitutes an unlawful act in relation to trading of financial investment instruments, and constitutes a violation of Article 178(1)1 of the Financial Investment Services and Capital Markets Act. If an investor suffered loss due to a change or settlement of the contents of rights and obligations of investors in the financial investment instruments due to a violation, the investor may claim compensation for damages against an unfair trading act.

Articles 178(1)1 and 179(1) of the Financial Investment Services and Capital Markets Act

Representative Party 1 and one other (Law Firm Hannuri, Attorneys Kim Sang-won et al., Counsel for the plaintiff-appellant)

Loyal Bank Co., Ltd. (Attorneys Son Ji-yol et al., Counsel for the plaintiff-appellant)

Seoul High Court Order 2012Ra764, 765 dated May 31, 2013

The order of the court below is reversed, and the case is remanded to Seoul High Court.

The grounds of reappeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. The Securities-Related Class Action Act was enacted in order to effectively relieve investors’ damages, taking into account the fact that it is difficult to expect that individual victims would be relieved of damages through lawsuits, while the amount of damages suffered by each victim would be relatively small, and thereby to ensure transparency in corporate management, in relation to claims for damages under Article 3(1)3 of the Financial Investment Services and Capital Markets Act (hereinafter “Capital Markets Act”), allowing securities-related class action against claims for damages under Article 179 of the Financial Investment Services and Capital Markets Act (hereinafter “Capital Markets Act”).

Meanwhile, Article 179(1) of the Financial Investment Services and Capital Markets Act provides that “any person who violates Article 178(1) of the said Act shall be liable to compensate for damages sustained by a person who has traded or made any other transaction in financial investment instruments due to such violation in connection with such trading or transaction.” Article 178(1) provides that “no person shall commit any of the following acts in connection with such trading or other transaction” (Article 178(1) provides that prohibited unfair trading means, plans, or tricks (Article 1) (Article 179(1) of the said Act provides that “any person shall not commit any of the following acts in connection with such trading or other transaction of financial investment instruments.” Article 179(1) provides that “The person shall not use false means, plans, or tricks (Article 179(2) of the said Act) (Article 179(1) of the said Act) (Article 179(1) of the said Act provides that “any person shall not use any false means, deceptive, deceptive, or other transaction with the aim of an individual trading of financial investment instruments (Article 2014.).

In full view of the legislative purpose, statutory structure, and content of these regulations, whether certain act constitutes an act prohibited under Article 178 of the Financial Investment Services and Capital Markets Act in relation to trading of financial investment instruments ought to be determined by comprehensively taking into account the structure, method, and circumstances of trading, the characteristics of the market where the financial investment instruments are traded, the rights and obligations of investors arising from the financial investment instruments and the time of termination thereof, the relationship between investors and the offender, and the situation before and after the act. Therefore, if a financial investment instrument, the price of underlying assets at a certain point or the numerical value of which is a structure where the exercise of rights or fulfillment of conditions is decided, or the payment of money is settled, affects the exercise of rights or fulfillment of conditions prescribed in the financial investment instrument, such act constitutes an act of unlawful act in relation to trading of the financial investment instrument, and thus, constitutes a violation of Article 178(1)1 of the Financial Investment Services and Capital Markets Act, and if an investor suffers loss due to the change or settlement of the investor’s rights and obligations.

2. The record reveals the following facts.

A. On April 22, 2008, the Korea Exchange Securities Co., Ltd. (hereinafter “Korea Exchange Securities”) issued “Korea Exchange-Linked Smart Stock Co., Ltd. No. 10” (hereinafter “Korea Exchange-Linked Securities”) based on the underlying asset of Scco Co., Ltd. (hereinafter “Scco”) and Sc Co., Ltd. (hereinafter “SK”). The stock exchange-linked Securities of this case is at least 94,000 won for all the two underlying assets at the early stage of three months and on the maturity date of redemption and at the maturity date of redemption, when it is determined at least 9,500% of the base price on three-month basis as the base price, by adding 22% profits per annum to the face value, and at least one of the two-month redemption date, if the maturity date is determined at less than one of the two-month redemption date.

B. On April 25, 2008, when the redemption condition of the stock-linked securities of the instant case is fulfilled, the Korea Exchange Co., Ltd. entered into a swap contract with the other party to trade derivatives of the same structure as the stock-linked securities of the instant case in order to avoid the risk of redemption to investors in the event of the fulfillment of the redemption condition of the stock-linked securities.

C. Members, including the Re-Appellants, purchased the stock-linked Securities from Korea following the issuance date of the instant stock-linked Securities.

D. On April 22, 2009, when the maturity date of the instant stock-linked securities was 120,000 won or more than the maturity price (119,625 won, which is 75% of the base price) and at least 124,000 won, the instant stock-linked securities were traded. However, the other party sold the instant common stocks in bulk at the maturity date, and as a result, the KS common stocks were determined at KRW 119,000, and the redemption condition of the instant stock-linked securities was not fulfilled. The investors of the instant stock-linked securities received an amount equivalent to approximately KRW 74.6% of the investment amount with the maturity repayment from the Korea Exchange Securities after April 27, 2009.

E. The Re-Appellant filed a lawsuit seeking damages under Article 179(1)1 of the Capital Markets Act against the other party on the ground that the other party’s sale of the underlying asset in large volume falls artificially into the share price of the underlying asset and thus interferes with the fulfillment of the redemption condition of the instant stock-linked securities. Thus, the Re-Appellant filed a lawsuit seeking damages against the other party under Article 178(1)1 of the same Act.

3. Examining these facts in light of the aforementioned legal principles, since the stock-linked securities of this case are the structure in which the amount to be repaid to investors is determined according to the closing price as of the base date for redemption of underlying assets, the other party’s claim for damages under Article 179(1)1 of the Financial Investment Services and Capital Markets Act is asserting that the fulfillment of the redemption condition of the stock-linked securities of this case was impossible due to artificial decline in the stock-linked common share price, which is a underlying asset, in violation of Article 178(1)1 of the Financial Investment Services and Capital Markets Act, and thereby, the investors holding the stock-linked securities of this case suffered damages due to only a part of the investment amount at maturity.

Nevertheless, the court below held that the re-appellants could not exercise their right to claim damages under Article 179 of the Capital Markets Act, and as a result, the application for the permission of this case did not meet the requirements under Article 3 of the Act, on the grounds that the re-appellant was held passive and passive after the re-appellant acquired the stock-linked securities of this case on April 25, 2008 and that the other party did not actively sell, exchange, offer as security, etc. the stock-linked securities of this case on April 22, 2009 due to the massive sale of Esp common stocks, which are underlying assets of this case. Accordingly, the court below erred by misapprehending the legal principles as to the scope of the right to claim damages under Article 179(1) of the Capital Markets Act, which

4. Therefore, the order of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Shin (Presiding Justice)