Plaintiff 1 and one other (Attorney Cho Jong-hwan et al., Counsel for the plaintiff-appellant)

Korean Investment Securities Co., Ltd. (Law Firm Shin, Attorneys Noh Jeong-hee et al., Counsel for the plaintiff-appellant)

April 19, 2013

1. The defendant shall pay to the plaintiff 1 32,124,345 won, 24,072,064 won to the plaintiff 2, and 5% per annum from August 9, 2011 to May 10, 201, and 20% per annum from the next day to the day of complete payment.

2. The plaintiffs' remaining claims against the defendant are dismissed.

3. Of the costs of lawsuit, 4/5 are assessed against the Plaintiffs, and the remainder are assessed against the Defendant.

4. Paragraph 1 can be provisionally executed.

The defendant shall pay 178,317,230 won to the plaintiff 1, 133,516,230 won to the plaintiff 2, and 5% per annum from August 9, 2011 to the service date of a copy of the complaint of this case, and 20% per annum from the next day to the day of complete payment.

1. Basic facts

A. Nonparty 1’s introduction of this case’s investment product

(1) On May 201, Nonparty 1 (the Nonparty in the judgment of the appellate court) who worked at the Defendant Company’s subsidiary branch introduced a discretionary investment contract product (hereinafter “instant investment product”) that is operated by the NAF Investment Advisory Co., Ltd. (hereinafter “SP”) while guiding the Plaintiff 1 who visited the subsidiary branch for the purpose of arranging passbooks for the first time, etc.

(2) The instant investment product is a product with the content that: (a) calculated an earning rate of 1 month by mainly investing in KOSPI200 stock options listed in the Korea Exchange as the contract amount received from investors as the discretionary investment amount; and (b) calculated an earning rate of 50% out of the excess portion in cases where profits exceeding 1% of the base earning rate accrue; and (c) obtained e.g., acquisition by e., e., e., e., e.

(3) While introducing the instant investment product to Plaintiff 1, Nonparty 1 presented a daily investment proposal prepared by Sck and provided information on the content. The said proposal states that: (a) the target rate of return is set up as “afford profit-making product that makes profits from the instant investment product,” regardless of the stock price fluctuation; (b) the target rate of return is set up as “afford profit-making profit-making product,” so as not to be significantly affected by market-orientedization in both directions of call options and put-in options; (c) the cumulative loss limit reaches a certain standard (4% prior to the due date of option, 3% prior to the due date, 3% prior to the due date of option), and (d) the accumulated loss limit is set up, and (e) the accumulated loss limit is prevented, and (e) the monthly profit was earned, except twice during the operation period of 47 months, and then the average of 3.12% per month was made.

(4) After receiving the information on the instant investment product from Nonparty 1, the Plaintiff 1 called Nonparty 2, who was the head of the derivative management team.

B. Conclusion of a discretionary investment contract by the plaintiffs

(1) After that, the Plaintiff 1 expressed his intention to subscribe to the instant investment product to Nonparty 1, and Nonparty 1 visited Plaintiff 1’s office on May 11, 201, and drafted an application for opening an account with the intent to subscribe to the instant investment product by designating the Defendant as a trading securities company.

(2) On the 12th of the same month, at the Defendant Company’s Busan Branch, Plaintiff 1 drafted each discretionary investment contract on behalf of Plaintiff 2 on behalf of each ordinary investor of Plaintiff 2, who is one’s own name and each of the parties to the contract with Plaintiff 2, who is one of the parties to the contract. Each of the above investment information certificates states that the Plaintiffs’ investment tendency constitutes “official investment”.

(3) Around May 12, 2011, Plaintiff 1’s account opened to invest in the instant investment product deposited KRW 243,932,00. Around that time, Plaintiff 2’s account deposited KRW 151,584,000.

C. The plaintiffs obtained profits and losses

(1) With respect to the instant investment product, Plaintiff 1 acquired KRW 27,389,503 from May 201 to July 201, 201, and paid KRW 9,694,000 among them as performance fees to Scasset. During the same period, Plaintiff 2 acquired KRW 20,307,90, and paid KRW 7,152,000 among them as performance fees to Scasset.

(2) On August 201, 201, in the course of operating the instant investment product, SOSPI200 stocks indexed rapidly, and did not take measures to prevent losses by arranging the accumulated loss limit set out in the daily investment proposal, etc. As a result, as the Plaintiffs’ financial losses incurred on August 9, 201, 201, KRW 12,257,840 was additionally deposited in the Plaintiff’s account in the Plaintiff’s account in addition to the Plaintiff’s account.

(3) The Plaintiffs, upon the occurrence of a large loss as above, closed an investment in the instant investment product, and on August 9, 201, the Plaintiffs left 65,614,770 won in cash in the Plaintiff 1’s account and 30,325,610 won in cash in the Plaintiff 2’s account.

[Ground of Recognition] Facts without dispute, Gap evidence 1 to 12 (including each number), Eul evidence 2 to 9 (including each number), non-party 1's testimony and the purport of the whole pleadings

2. Occurrence of liability for damages;

A. Whether the non-party 1 can be deemed to have made an investment recommendation as a financial investment business entity

(1) The parties' assertion

The Plaintiffs, along with the explanation that the instant investment product may generate a stable profit from Nonparty 1, actively solicited the Plaintiffs to subscribe to the said investment product, which constitutes an investment recommendation to ordinary investors as stipulated in the Financial Investment Services and Capital Markets Act (hereinafter “Capital Markets Act”). Accordingly, the Defendant asserted that, as a trading securities company of a discretionary investment contract concluded between the Plaintiffs and set-off deposit, the Defendant did not obtain any profit such as investment commission or operational performance fee due to the conclusion of a discretionary investment contract in addition to sales commission, and merely supported the conclusion of a discretionary investment contract for the sake of the convenience of the Plaintiffs, as it merely supported the conclusion of a discretionary investment contract for the sake of the convenience of the Plaintiffs, the Plaintiffs cannot be deemed to have made an investment recommendation to the instant investment product or arranged the conclusion of a discretionary investment contract.

(2) Determination

However, according to the above evidence, the investment product of this case is deemed to have been managed by the plaintiffs by entering into a discretionary investment contract with the fee and gained profits therefrom. The parties to the contract are the plaintiffs and the fee, and the defendant seems to have acquired operating profits or sales fees only in the operation of assets.

However, in light of the above facts and the overall purport of oral argument, the following circumstances revealed: (i) Plaintiff 1 did not request Nonparty 1 to recommend investment; (ii) did not request the said Plaintiff to recommend investment; (iii) presented the daily investment proposal, etc. prepared by Nonparty 1 while introducing the instant investment product; and (iv) it appears that Plaintiff 1 was aware of the instant investment product with Nonparty 1’s explanation and expressed his intent to make investment; and (iii) Plaintiff 1 did not obtain the Plaintiff’s respective investment risk confirmation and sales commission for each of the instant investment contracts, as it did not obtain the Plaintiff 1’s respective investment risk confirmation and sales commission; (iv) Plaintiff 1 did not obtain the Plaintiff 1’s respective investment risk and sales commission from Nonparty 1, who did not obtain the Plaintiff 1’s investment risk and sales commission. Accordingly, Plaintiff 1 did not obtain the Plaintiff 1’s investment risk and sales commission.

B. Whether the principles of conformity are violated

(1) The parties' assertion

The Plaintiffs asserted that Nonparty 1 suffered losses from the Plaintiffs in violation of the suitability principle set forth in Article 46(3) of the Capital Markets Act by recommending the instant investment product that is inappropriate for Nonparty 1 seeking stable profits to enter into a discretionary investment contract. Accordingly, the Defendant asserts that the instant investment product constitutes a product with low risk since the Plaintiffs not only have extensive investment experience but also have a usual and aggressive investment tendency. As such, the Defendant asserts that the instant investment product is not suitable for investing in the instant investment product. Since the instant investment product has a cumulative loss limit set up to forecast the scope of losses, it constitutes a product with low risk.

(2) Determination

In light of the aforementioned evidence and the purport of the entire pleadings, the Plaintiffs were assessed as “risk neutrality type” as a result of the Defendant’s investment inclination diagnosis conducted at the Defendant’s fathercheon Branch on November 2009, prior to the purchase of the instant investment product. Plaintiff 1 had shown the investment tendency pursuing stable profits by holding the ordinary shares for a long time or subscribing to the principal-guaranteed financial product. However, the fact that Nonparty 1 received the instant investment product from Nonparty 1 and decided to subscribe to the instant investment product after receiving the instant investment product, can be acknowledged as having been assessed as “competitive investment type” as a result of the investment inclination diagnosis conducted by Nonparty 1.

In full view of the following circumstances, i.e., (i) Plaintiff 1 has experienced prior to the conclusion of the instant discretionary investment contract as an elderly person in trading stocks or joining the investment product, but has shown investment tendency to minimize investment risk while pursuing stable profits rather than pursuing high risk; (ii) options are very dangerous products that may cause losses exceeding the investment principal, unlike stock transactions that cause losses to the investment principal; and (iii) Nonparty 1 introduced the instant investment product that mainly invests in options to Plaintiff 1 with a stable investment risk. Although the instant investment risk is pursuing absolute profits through management of risks, it cannot be readily concluded that stable profits may necessarily be generated in light of the basic risks of the instant investment product with a financial product with an option (i.e., options). Considering that the confirmation letter of investment risk assessment conducted by Nonparty 1 as “public investment risk” was prepared after Nonparty 1’s investment risk assessment, it appears that the instant investment risk was changed to Nonparty 1’s investment risk investment risk investment recommendation.

C. Whether the duty of explanation is violated

(1) The parties' assertion

The Plaintiffs asserted that Nonparty 1 violated the duty to explain under Article 47(1) of the Financial Investment Services and Capital Markets Act by explaining that the purchase of the instant investment product by Nonparty 1 can stably earn more than a certain percentage of profits, but not explaining the characteristics of options investment and the risks ensuing therefrom. Accordingly, the Defendant asserted that Nonparty 1 did not violate the duty to explain under the Financial Investment Services and Capital Markets Act, on the ground that Nonparty 1 introduced the content of the instant investment product in detail on the basis of a set-off discretionary investment agreement, and did not explain that Nonparty 1 objectively explained the past management performance, and did not explain that there was no risk of the instant investment product and that stable profits are guaranteed in the future.

(2) Determination

However, in light of the aforementioned evidence and the overall purport of oral argument, it appears that Nonparty 1 appears to have explained to Plaintiff 1 on the previous operation performance based on the proposal for a discretionary investment contract prepared by SPC. However, Nonparty 1, an employee of the securities company, is likely to have explained only the risk inherent in the investment product of this case without explaining the risks involved in the investment product of this case, although Nonparty 1, an employee of the securities company, has a strong knowledge about the investment product of Plaintiff 1, it appears that only the profit accrued from the investment product of this case without explaining the risks inherent in the investment product of this case. ② It can be sufficiently anticipated that losses exceeding the principal amount may occur due to the nature of the investment product of this case, which mainly invests in options, and ③ even if SPC uses the investment strategy to avoid risks caused by options trading, it may cause unexpected damages if the employee of this case, which is an employee of the Korea Capital Markets, can sufficiently explain the risk of losses by setting up the standards for the investment product of this case to minimize the risk of losses by setting up the investment product of this case.

D. Whether causation between Nonparty 1’s tort and the occurrence of damages is recognized

(1) The parties' assertion

In regard to the plaintiffs' assertion that the damage occurred due to the non-party 1's violation of the suitability principle and the duty to explain, the defendant asserts that there was no causation between the non-party 1's tort and the damage of the plaintiffs since the defendant failed to comply with the risk management standards originally promised.

(2) Determination

However, as seen earlier, the main content of the investment product of this case is not to pursue high profit at risk of risk, but to set up strategies, such as arranging the way of possession and distribution, and preventing a large loss if a certain percentage of loss occurs even if low profit occurs, by giving priority to avoiding the risk arising from the investment. However, in operating the investment product of this case, it is deemed that a large amount of loss is caused by hyp’s investment without complying with the risk management standards as seen above.

However, considering the characteristics of options trading and the meaning of "to pursue a stable profit" in the investment product of this case, it is not possible to avoid all risks that may be caused by the investment as a member of the investment product of this case. Even if the fund complies with the risk management standards set by itself and operates the investment product of this case, the risk of losses in excess of the cumulative loss rate is always deemed to exist. Thus, it is reasonable to deem that the plaintiffs joined the investment product of this case due to the above tort of non-party 1 and were exposed to the risks that may incur the above losses, the causation between the tort of non-party 1 and the damage of the plaintiffs cannot be denied. However, the situation where losses were increased because the fund did not comply with the risk management standards set out in the fund of this case and made an improper investment in the fund of this case shall be considered as grounds for limitation on the liability borne by the defendants as examined below.

3. Scope of liability for damages

A. Scope of damages

In accordance with Article 48(2) of the Financial Investment Services and Capital Markets Act, damages suffered by the Plaintiffs due to Nonparty 1’s violation of the suitability principle and duty to explain are presumed to have been calculated by subtracting the total amount of money, etc. collected or recoverable by the ordinary investor by disposal of financial investment instruments or by any other means from the total amount of money, etc. paid or payable by the ordinary

The plaintiff 1 suffered loss of KRW 160,621,727, which is the balance of the account at the time of termination of the investment, after deducting the total of KRW 93,932,00,00 and KRW 9,694,00,00, which is the total of KRW 253,69,500, which is the performance fee, from KRW 27,389,50,000, which is the total of KRW 65,614,770, which is the balance of the account at the time of termination of the investment, and KRW 160,621,727, which is the balance of the account, from the total of KRW 151,584,00, KRW 12,257,840, and KRW 152,00, KRW 1709, KRW 93,840, KRW 300, KRW 3630,539,2936,0536.

B. Limitation on liability

However, it is reasonable to limit the liability for damages borne by the Defendant to 20% of the damages sustained by the Plaintiffs, considering the fact that: (a) the damage suffered by the Plaintiffs is a major cause for failure to comply with the risk management standards set by them; (b) the Defendant received sales commission as a securities trading company; and (c) did not receive any remuneration for the investment result; and (c) the Plaintiffs should bear any risk associated with the purchase of the instant investment product in order to earn profits.

Therefore, the Defendant is obliged to pay to Plaintiff 1 32,124,345 won (i.e., KRW 160,621,727 x KRW 20% x KRW 24,072,064 (i.e., KRW 120,360,321 x less than KRW 20%) to Plaintiff 2, and to pay damages for delay calculated at the rate of 20% per annum under the Civil Act from August 9, 201, which is the date on which the damage occurred, to dispute the existence or scope of the obligation to perform from August 9, 201 to May 10, 201.

3. Conclusion

Therefore, the plaintiffs' claims are justified within the above scope of recognition, and the remaining claims are dismissed as they are without merit. It is so decided as per Disposition.

Judges Kim Sung-soo (Presiding Judge)