[1] Whether an unfair trading person who is liable for damages under Articles 178(1)1 and 179(1) of the former Financial Investment Services and Capital Markets Act includes a person who has a conflicting interest with an investor in relation to the exercise of rights or fulfillment of conditions by trading another financial investment instrument related to the financial investment instrument (affirmative)

[2] Meaning of determining whether the act of fixing the market price of listed securities, etc. under Article 176(3) of the former Financial Investment Services and Capital Markets Act is an act of fixing the market price of listed securities, etc.

[1] In Articles 178(1)1 and 179(1) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013; hereinafter “Capital Markets Act”), an unfair trading person, who is liable for damages arising from the trading of financial investment instruments, is not only the issuer or seller involved in the trading of financial investment instruments, but also the issuer and seller who traded other financial investment instruments related to financial investment instruments, such as a trading contract, and thereby has a conflict of interest with investors in relation to exercise of rights or fulfillment of conditions.

[2] Article 176(3) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013; hereinafter “Capital Markets Act”) prohibits a series of transactions, entrustment, or consignment of securities or exchange-traded derivatives with a view to fixing or stabilizing the market price of listed securities or exchange-traded derivatives.

Here, “fixed market price” of listed securities, etc. refers to the formation and fixing of market price or fixing already formed market price by artificially manipulating the market price of securities, etc. to be formed in a free competition market according to normal supply and demand based on other factors not attributable to market factors. As such, whether an act intended to fix market price is an act of determining whether an act intended to fix market price is an act of determining market price by comprehensively taking into account indirect factors such as nature of securities, etc., total number of issued securities, etc., price and trading volume trends, transaction situation before and after the issuance of securities, etc., economic rationality and fairness of transaction, degree of market intervention rate, continuous closing price

Therefore, the liability for damages to another person by fixing the market price through the sale and purchase of listed securities in violation of Article 176(3) of the Financial Investment Services and Capital Markets Act is liable to the extent of proximate causal relation. This legal doctrine likewise applies to cases where damages are inflicted on another person by fixing the market price of securities, which are underlying assets of financial investment instruments.

[1] Articles 178(1)1 and 179(1) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013) / [2] Article 176(3) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013); Article 750 of the Civil Act

[1] Supreme Court Order 2013Ma1052, 1053 dated April 9, 2015 (Gong2015Sang, 682) / [2] Supreme Court Decision 2002Do3131 Decided October 28, 2004 (Gong2004Ha, 1980) (Gong2015Ha, 108) Supreme Court Decision 2014Do11280 Decided June 11, 2015 (Gong2015Ha, 108)

Attached List of Plaintiffs (Law Firm Hannuri, Attorneys Kim Sang-won et al., Counsel for the plaintiff-appellant)

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

Seoul High Court Decision 2012Na12360 decided December 14, 2012

The judgment below is reversed and the case is remanded to Seoul High Court.

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

1. A. Article 179(1) of the Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013; hereinafter “Capital Markets Act”) that provides for financial investment instruments (referring to securities and derivatives) provides that “any person who violates Article 178 of the said Act shall be liable to compensate for damages incurred by a person who trades or makes any other transaction in financial investment instruments due to such violation in connection with the trading or other transaction.” Furthermore, Article 178(1) of the said Act provides that “any person shall not commit any of the following acts in connection with trading or other transaction of financial investment instruments” (see, e.g., Supreme Court Decision 201Da16314, Apr. 19, 201; 2013Da16314, Apr. 19, 201). Since an unfair trading related to financial investment instruments may affect many market participants and make it unsound in the capital market, such an act shall be prohibited from comprehensively regulating individual unfair trading under ordinary norms and trading.

In full view of the legislative purpose, statutory structure, and content of these provisions, whether certain acts constitute an unfair trading 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 account of the structure, method, and circumstances of the pertinent financial investment instrument, the characteristics of the market where the financial investment instruments are traded, the rights and obligations of investors arising from the financial investment instrument and the time of termination thereof, the relationship between investors and the offender, and the situation before and after the act. Therefore, in cases of financial investment instruments of which the exercise of rights or fulfillment of conditions is determined depending on the price of underlying assets at a certain point or the numerical value thereof, or where the payment of money is made, the act of exercising rights or fulfillment of conditions under the Financial Investment Services and Capital Markets Act, including market price manipulation fixing the price of securities which constitute underlying assets of the financial investment instruments, constitutes an unfair trading, and thus, constitutes an act of violating Article 178(1)1 of the Financial Investment Services and Capital Markets Act, and thus, an investor’s damages arising from such an unfair trading can be seen to 15015.

B. In addition, Article 176(3) of the Capital Markets Act prohibits “a series of transactions, entrustment, or consignment with respect to securities or exchange-traded derivatives for the purpose of fixing or stabilizing the market price of listed securities or exchange-traded derivatives.”

Here, “fixed market price” of listed securities, etc. refers to the formation and fixing of market price or fixing already formed market price by artificially manipulating the market price of securities, etc. which are to be formed in a free competition market according to normal supply and demand based on other factors not attributable to market factors. Whether an act is an act of determining market price is determined by comprehensively taking into account the nature of the securities, etc. issued, the total number of the securities, etc. issued, price and trading volume trends, transaction situation before and after the relevant securities, etc., the economic rationality and fairness of the transaction, the degree of market intervention rate, and the motive, mode, etc. of the transaction, including continuous closing price management (see, e.g., Supreme Court Decisions 2002Do3131, Oct. 28, 2004; 2014Do1280, Jun. 11, 2015).

Therefore, the liability for damages to another person by fixing the market price through the sale and purchase of listed securities in violation of Article 176(3) of the Financial Investment Services and Capital Markets Act is liable to the extent of proximate causal relation. This legal doctrine likewise applies to cases where damages are inflicted on another person by fixing the market price of securities, which are underlying assets of financial investment instruments.

2. Review of the reasoning of the first instance judgment and the reasoning of the lower judgment and the evidence duly admitted reveals the following circumstances.

A. On August 31, 2007, the Korea Investment Securities Co., Ltd. (hereinafter “Korea Investment Securities”) issued with the Plaintiffs (hereinafter “instant stock-linked securities”) is an underlying asset of a common share of a national bank (hereinafter “instant shares”) and Samsung Electronic Co., Ltd., and the initial base price is KRW 74,600, the instant shares were KRW 572,000, and the Samsung Electronic Co., Ltd. was given an automatic opportunity for redemption every six months prior to August 31, 2009, when it is a kind of derivative-combined securities issued by the Plaintiffs.

B. The profit structure of the stock-linked securities of this case where (i) the closing price of August 26, 2009, which is the basic date of two underlying assets, reaches the maturity without early repayment; (ii) the principal and 28.6% investment profits are paid to investors when all the closing price exceeds 75% of the initial base price (hereinafter “the terms “the terms of redemption for profit-making maturity”); and (ii) there is a drop below 60% of the initial base price even if the maturity date falls short of 75% of the initial base price; and (iii) there is a difference in any of the two issues where the closing price is less than 75% of the initial base price.

C. On August 30, 2007, Korea Investment Securities concluded an agreement with the Defendant on August 30, 2007 with respect to KRW 8.89 billion of the amount acquired through the issuance of the stock-linked securities of this case with a view to avoiding the risk that investors should pay to the early redemption condition of the stock-linked securities of this case or upon the fulfillment of the terms of redemption at the maturity of profit, with respect to the amount of KRW 8.89 billion of the amount acquired through the issuance of the stock-linked securities of this case (USD Sap Rating) of the same structure as the stock-linked securities of this case.

D. After that, the early redemption of profits to investors did not occur. At the time of the instant base date, the Samsung Ordinary Shares price was much more than 75% of the initial base price, whereas the instant stock price was repeated in the vicinity of 54,740 won (hereinafter “instant base price”) which is 75% of the initial base price.

E. On August 26, 2009, the Defendant repeated the sale and purchase of the instant shares, and sold 8,182 shares to KRW 53,500,00 as of August 26, 2009 (1) during the connection sale and purchase period, which is the base date of the instant case, (2) sold 106,032 shares in total at 14 times in the line with the base price of the instant shares, due to the rise in the price of the instant shares, and (2) sold 14:500 through ○○ Securities Branch, which is not an affiliate, through △△△△△ Branch, for a total of 128,00 shares in total (hereinafter referred to as the “instant stock sale”), not an affiliate, through ○○ Securities Branch (hereinafter referred to as the Defendant’s comprehensive sale of shares as of the base date of the instant case).

F. The sale of shares during the above single-sale period was made at the time when the expected concluded price of the instant shares was sharply exceeded 54,800 won, and (1) the anticipated concluded price fell to 53,600 won by selling 96,00 shares in 14:5:19, and (2) the anticipated concluded price was lowered to 54,500 won by selling 32,00 shares in 14:58:47.

G. At the time of the instant base date, the sales share of the Defendant’s shares was 7.24% in length, but 46.9% in the closing time, and the immediately preceding price was 16% in the front time, but at the end time, 46% in the closing time.

H. Ultimately, the closing price of the instant shares on the instant base date was determined to be KRW 54,700, which was below 40 won on the instant base price. Accordingly, the Defendant paid approximately KRW 11.3 billion, which was much smaller than KRW 6.6 billion, if the Korea Investment Securities satisfied the terms and conditions for redemption of profits, and the Korea Investment Securities paid only the same amount to investors, including the Plaintiffs, thereby causing the Plaintiffs to incur principal loss.

3. A. A. In order to avoid risks arising from the price fluctuation of underlying assets, the so-called deel hedging financial investment business entity, which controls the quantity of underlying assets, based on the delta value, refers to the sensitive value of options for the price fluctuation of underlying assets, is merely a financial transaction method in which the so-called deel hedging financial investment business entity evades or manages its risk. Therefore, even if a financial investment business entity engages in certain stock transactions on the ground that it is the performance of deel hedging, whether it constitutes market price manipulation or unfair trading prohibited by the Financial Investment Services and Capital Markets Act should be re-in

B. However, according to the above facts, (1) the stock price-linked securities of this case are structures that are determined according to the closing price as of the base date for redemption of underlying assets. (2) Since the price of the stocks of this case as of the base date of this case was repeated near the base price for profit and loss quarter, the Defendant appears to have been sufficiently motiveed to reduce half of the amount to be paid to the Korean investment securities by lowering the closing price of the stocks of this case and without fulfilling the redemption condition for profit-making maturity, and (3) even considering the situation in which the act of selling the stocks of this case was committed during the connection trading period, the stocks were sold in an intensive manner between the lower price of the stocks of this case during the connection trading period and the expected price of the stocks of this case was reached during the single trading period, in particular, every time when the expected price of the stocks of this case was sold repeatedly by means of market price with a large price effect for each time exceeding the base price of this case and the actual decline in the price of the stocks of this case was caused by the low price of the stocks.

Therefore, according to the legal principles as seen earlier, the instant act of selling stocks constitutes market price manipulation or unfair trading prohibited by the Capital Markets Act in order to lower the closing price as of the base date of the instant stocks in order to prevent the fulfillment of the conditions for redemption of profit maturity with respect to the instant stock-linked securities. Moreover, the instant act of selling stocks was conducted for the purpose of avoiding risks for the Defendant in relation to the instant stock-linked securities, and it cannot be deemed that it was conducted for the purpose of

C. Nevertheless, the lower court determined that the purpose of controlling the market price of the instant shares was not recognized on the ground that the Defendant’s act of selling the instant shares was not deemed to constitute market price manipulation or unfair trading under the Capital Markets Act, and thus, dismissed the Plaintiffs’ claim for damages arising from the sale of the instant shares under Article 750 of the Civil Act, on the ground that the Defendant’s act of selling the instant shares was not deemed to constitute market price manipulation or unfair trading under the Capital Markets Act, and thus, did not constitute damages arising from the sale of the instant shares in the process of consistently selling the shares at the rate of sale in accordance with the deel value, which led to the time prior to the date of the instant reference date.

Therefore, the court below erred by misapprehending the legal principles on market price manipulation and unfair trading as stipulated in Articles 176(3) and 178(1)1 of the Capital Markets Act, and on tort liability under the Civil Act, thereby affecting the conclusion of the judgment. The ground of appeal assigning this error is with merit.

4. Therefore, without examining the remaining grounds of appeal, we reverse the judgment below, and remand the case 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.

[Attachment] List of Plaintiffs: omitted

Justices Lee Ki-taik (Presiding Justice)