[1] Whether liability for damages by an auditor under Article 170(1) of the former Financial Investment Services and Capital Markets Act and Article 17(2) of the former Act on External Audit of Stock Companies is recognized in cases where the auditor’s liability for damages is not recorded by negligence or made a false statement (affirmative)

[2] Requirements for investors, etc. to claim damages due to false entries, etc. in an audit report pursuant to Article 170(1) of the former Financial Investment Services and Capital Markets Act and Article 17(2) of the former Act on External Audit of Stock Companies

[3] In the case of liability for damages caused by false statements in a business report, etc. based on Article 162(1) of the former Financial Investment Services and Capital Markets Act, and liability for damages caused by false statements in an audit report based on Article 170(1) of the same Act, and Article 17(2) of the former Act on External Audit of Stock Companies, whether the person who submitted the business report, etc. or the auditor may be exempted from all or part of liability by proving that there is no causation between the damage and all or part of the damage (affirmative) and the method and degree of proving the absence of causation

[4] In the case of a claim for damages governed by Articles 162 and 170 of the former Financial Investment Services and Capital Markets Act, whether comparative negligence may be set off or liability may be limited pursuant to the equitable principle (affirmative)

[1] Article 170(1) of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 12383, Jan. 28, 2014); Article 17(2) of the former Act on External Audit of Stock Companies (Amended by Act No. 12148, Dec. 30, 2013); / [2] Article 170(1) of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 12383, Jan. 28, 2014); Article 17(2) of the former Act on External Audit of Stock Companies (Amended by Act No. 12148, Dec. 30, 2013); Article 17(2) of the former Act on External Audit / [3] Article 16(1) and (3) of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 12383, Jan. 28, 2014; Act No. 1230148, Jul. 17, 2014

[2] [2] [4] Supreme Court Decision 2006Da16758, 16765 Decided October 25, 2007 (Gong2007Ha, 1806) / [2] Supreme Court Decision 96Da41991 Decided September 12, 1997 (Gong1997Ha, 3078) / [3/4] Supreme Court Decision 2014Da207283 Decided January 29, 2015, Supreme Court Decision 2015Da218099 Decided October 27, 2016

Private School Teachers and Staff Pension Corporation and two others (Law Firm Han LLC, Attorneys Kim Il-Jon, Counsel for the plaintiff-appellant)

Han JinT Co., Ltd and six others (Attorneys Jeong Jin-young et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2014Na2040457 decided August 21, 2015

All appeals are dismissed. The costs of appeal are assessed against the Defendants.

The grounds of appeal are examined.

1. As to the ground of appeal No. 1 by Defendant Sam Il Accounting Firm

A. The lower court determined that the Plaintiffs neglected to collect sufficient evidence at the time of conducting external audits on the 9th period and 10th financial statements, and without finding any reasonable opinion on the auditor’s duties as an auditor’s audit report, on the following grounds: (a) the Plaintiffs filed a claim for damages under Article 170(1) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 12383, Jan. 28, 2014; hereinafter “former Financial Investment Services and Capital Markets Act”); and (b) Article 17(2) of the former External Audit of Stock Companies Act (amended by Act No. 12148, Dec. 30, 2013; hereinafter “former External Audit Act”); and (b) based on the facts stated in its reasoning, the lower court neglected the procedures for collecting and checking adequate audit evidence at the time of performing external audits on the 9th period and 10th financial statements; and (c) neglected to indicate the audit report’s reasonable financial statements on Defendant 10.

B. Examining the reasoning of the lower judgment in light of the relevant legal doctrine and the evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine regarding the standard of determining whether an auditor neglected to perform his/her duties, or by exceeding the bounds of the principle of free evaluation of evidence

2. As to the ground of appeal No. 2 by Defendant accounting corporation

A. The liability of an auditor for damages under Article 170(1) of the former Capital Markets Act and Article 17(2) of the former External Audit Act is recognized not only where an auditor intentionally fails to enter important matters in an audit report or makes a false statement in an audit report, but also where an auditor fails to enter important matters by negligence or makes a false statement.

B. As stated in its reasoning, the lower court recognized the liability for damages under Article 170(1) of the former Capital Markets Act and Article 17(2) of the former External Audit Act with respect to the Defendant accounting corporation’s negligence to make a false entry in the audit report on the nine and ten financial statements of the Defendant Company.

Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and the evidence duly admitted, the lower court did not err by misapprehending the legal doctrine on the scope of application of Article 170(1) of the former Capital Markets Act and Article 17(2) of the former External Audit Act.

3. As to the ground of appeal No. 3 by the defendant accounting firm

A. Under Article 170(1) of the former Financial Investment Services and Capital Markets Act and Article 17(2) of the former External Audit Act, an investor or a third party shall have used the audit report to claim damages arising from false entries, etc. in the audit report against the auditor. Meanwhile, in stock transaction, the financial status of the subject company is one of the most important factors for forming the stock price. An audit report prepared through the audit by an external auditor for the financial statements of the subject company is provided and published as the most objective material for revealing the financial status of the subject company and has a critical effect on the formation of the stock price. Thus, an investor who invests in stocks must be deemed to have traded the subject company’s stocks, under the presumption that the investor believed that the financial statements of the business report showing the most well-known financial status of the subject company and the audit report on them were prepared and published properly, and that the stock price was formed based on them (see, e.g., Supreme Court Decisions 96Da4191, Sep. 12, 1997; 2076Da676865, Jul.

B. The lower court, as indicated in its reasoning, determined that there was a transaction causal relationship between the false statement in the audit report prepared by the Defendant accounting firm and the purchase of the Plaintiff’s shares by the Defendant accounting firm, and that the circumstance that the Defendant accounting firm satisfys or the evidence submitted thereto alone was insufficient to destroy such presumption.

Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and the evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine regarding causation in the liability for damages under Article 170(1) of the former Capital Markets Act and Article 17(2) of the former External Audit Act, or by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules.

4. As to the ground of appeal No. 4 by Defendant accounting corporation and the remaining Defendants’ ground of appeal No. 1

A. In the event of liability for damages caused by false statements in a business report, etc. based on Article 162(1) of the former Capital Markets Act, and liability for damages caused by false statements in an audit report based on Article 170(1) of the former Act and Article 17(2) of the former External Audit Act, the amount of damages is estimated as calculated in accordance with Articles 162(3) and 170(2) of the former Capital Markets Act, and the person who submitted the business report, etc. or the auditor may be exempted from all or part of the liability by proving that there is no causation between the damage and the false statements in the business report, etc. or audit report, etc.

In this case, where it is assumed that a specific case did not occur on the basis of the data before the occurrence of the specific case, the method of investigating the expected return and analyzing whether the specific case has a statistical meaning as to the share price by using the presumption of excess return, which is the difference between the expected return and the actual return on the market, may be used. However, in light of the legislative intent of Articles 162(3) and 170(2) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 162(3) and Article 170(2) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 16213, Jan. 29, 2015) which provides for presumption of damages in terms of investor protection, losses incurred after the announcement of the annual report, etc. or audit report, which includes false descriptions, caused a decline in the price of shares purchased after the publication of the annual report, etc. or audit report, the presumption of damages cannot be deemed to be broken solely on the basis that it is unclear whether the stock price decline falls after the announcement of the annual report, etc.

B. The lower court rejected the Defendants’ assertion that there was no causation between the non-existence of damages, on the grounds stated in its reasoning, that the Defendant Company and its directors and auditors were liable under Article 162(1) of the former Capital Markets Act with respect to Defendant 2, Defendant 3, Defendant 4, Defendant 5, and Defendant 6, and that the Defendants were liable under Article 170(1) of the former Capital Markets Act with respect to Defendant accounting firms and Article 170(2) of the former External Audit Act, and that the Plaintiffs’ damages amount was estimated pursuant to Articles 162(3) and 170(2) of the former External Audit Act with respect to the acquisition of shares by Samsung Heavy Industries Co., Ltd. and its directors and auditors, and the share price decline due to the so-called “dumping” was not related to the false entry in the Defendant Company’s business report, etc. and the Defendant’s audit report.

Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and the evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine regarding the presumption of absence of causation under Articles 162(4) and 170(3) of the former Capital Markets Act, or by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules.

5. Ground of appeal No. 5 by Defendant accounting corporation and ground of appeal No. 2 by the remaining Defendants

A. In cases of a lawsuit seeking compensation for damages governed by Articles 162 and 170 of the former Capital Markets Act, the basic ideology of the Act on the Compensation for Damages, namely, fair burden of damages, may be applied. As such, comparative negligence or liability may be limited based on the equitable principle on the ground that the victim was negligent in contributing to the occurrence and expansion of damages. In particular, given that there are extremely diverse and multiple factors at the same time, it is extremely difficult to estimate when and to what extent certain factors have exercised influence, it may be difficult to determine when and to what extent, other than the false statement in the business report, etc. or audit report, to prove that there was an overall change in the situation of the relevant company or the stock market during the period from the purchase until the occurrence of damages, and that it is extremely difficult to prove the daily amount of damages caused by such other circumstances, in light of the principle of equitable apportionment of damages (see, e.g., Supreme Court Decisions 200Da16819, Jan. 29, 2015; 2007Da16208197, Feb. 197, 20197.

B. The lower court, on the grounds indicated in its reasoning, limited the Defendants’ liability for damages according to each of its respective ratios.

Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and the evidence duly admitted, the lower court did not err by misapprehending the legal doctrine on offsetting negligence or limitation of liability.

6. As to the remaining Defendants’ ground of appeal No. 3

A. The court below acknowledged that with respect to the amount cited in the court below's additional amount, it is reasonable that the defendant company, the defendant 2, the defendant 4, and the defendant 6 raised an objection as to the existence or scope of the duty to perform. However, with respect to the amount of damages cited by the court of first instance and maintained as it is in the court of first instance, it is reasonable that the above defendants raised an objection only until the court of first instance renders a decision, and it is not reasonable that the above defendants raised an objection from the next day to the time when

B. Examining the relevant legal principles and evidence duly admitted, the above judgment of the court below is just and acceptable. Contrary to the allegations in the grounds of appeal, the court below did not err by misapprehending the legal principles on Article 3 of the Act on Special Cases Concerning the Promotion, etc. of Legal Proceedings

7. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Jae-hyung (Presiding Justice)