[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 a case where a normal share price was formed by removing all the parts supported by false information after the false statement in the business report, etc. or audit report was revealed, whether there exists a causal relationship between the price fluctuation after the normal share price formation date and the false statement (negative in principle)

[5] 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 principle of fairness (affirmative)

[1] The liability of an auditor under Article 170(1) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 12383, Jan. 28, 2014); and Article 17(2) of the former Act on External Audit of Stock Companies (amended by Act No. 12148, Dec. 30, 2013) is recognized in cases where an auditor intentionally fails to enter important matters in an audit report or makes a false statement in an audit report; or where an auditor fails to enter important matters by negligence or makes a false statement in an audit report.

[2] Under 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) an investor or a third party has trusted and used an audit report in order to claim damages from an auditor due to false entry, etc. in an audit report. However, in a stock transaction, the company’s financial status is one of the most important factors forming its share price, and an audit report prepared through an audit by an external auditor of the company’s financial statements of the subject company’s business report has a critical effect on the formation of share price by providing and publicly announcing the company’s financial status, and thus, an investor who makes stock investment should be deemed to have duly prepared and made public the financial statements of the company’s business report indicating the financial status and audit report on them, and should be deemed to have been formed based on the share price share price.

[3] In cases of liability for damages arising from false statements in a business report, etc. based on Article 162(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”), or liability for damages arising from false statements in an audit report based on Article 170(1) of the former Financial Investment Services and Capital Markets Act and Article 17(2) of the former Act (amended by Act No. 12148, Dec. 30, 2013; hereinafter “former Financial Investment Services and Capital Markets Act”), the amount of damages is presumed as calculated pursuant to Articles 162(3) and 170(2) of the former Financial Investment Services and Capital Markets Act; and the person who submitted the business report, etc. or an auditor may have no direct or indirect effect on the occurrence of causation or absence of causation between the entire or any damage and the audit report by means of false statements, etc.

In such cases, the method of researching whether the expected return was presumed to have not occurred when a specific case occurred based on the data prior to the occurrence of a specific case and can be used to estimate the expected return and to analyze whether the specific case has a statistical meaning of the impact on the share price by using the estimated return of excess return, which is the difference between the expected return of return of profit and the actual return of profit observed in the market. However, in light of the legislative intent of Articles 162(3) and 170(2) of the former Financial Investment Services and Capital Markets Act, which provides for the presumption of damages in terms of investor protection, it cannot be deemed that the presumption of damages is broken solely by proving that the price of shares purchased after the disclosure of the business report, etc. or audit report including false information was reduced after the announcement of the business report, etc. or audit report, and it is unclear whether the price decline was caused by the false entry of the audit report, etc. or audit report after the false disclosure of the annual report, etc. or audit report.

[4] Generally, if a normal share price is formed after a false statement in a business report, etc. or an audit report has been revealed, and the shock arising therefrom has emerged and all of the parts supported by false information have been removed, and there is no causation between the false statement in the business report, etc. or audit report after the normal share price formation date and the change in the stock price after the normal share price formation date does not exist any special circumstances. Thus, if it is confirmed that the shares were sold after the normal share price formation date or the ownership was continued until the closing date of oral argument, the difference between the normal share price and the actual disposal price (or the market price on the closing date of oral argument) among the damages stipulated in Articles 162(3) and 170(2) 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”) shall be deemed to have been proven in the absence of causation between the normal share price and the actual disposal price (or the market price on the closing date of oral.

[5] In cases of a lawsuit seeking compensation for damages governed by Articles 162 and 170 of the former Financial Investment Services and Capital Markets Act (amended by Act No. 12383, Jan. 28, 2014), the basic ideology of the Compensation Act, namely, fair burden of damages, can be applied. As such, comparative negligence may be set-off or liability may be limited based on the equitable principle, citing the fact of negligence that has contributed to the occurrence and expansion of damages to the victim. In particular, given that the factors of change in stock prices are very diverse and multiple factors are not combined, it is extremely difficult to estimate when certain factors have exercised influence, other than false entries in the business report, etc. or audit report, from the time of purchase until the time of occurrence of damages, it is extremely difficult to prove the amount of damages arising from other circumstances due to such other circumstances. In such a case, it can be limited in light of the ideology of the compensation system for damages.

[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) of the Financial Investment Services and Capital Markets Act (Amended by Act No. 12383, Jan. 28, 2014; Act No. 12513, Jan. 28, 2014>

[2] [2] [3/4/5] Supreme Court Decision 2006Da16758, 16765 Decided October 25, 2007 (Gong2007Ha, 1806) / [2] Supreme Court Decision 96Da41991 Decided September 12, 1997 (Gong1997Ha, 3078) / [3/4/5] Supreme Court Decision 2015Da218099 Decided October 27, 2016 / [3/5] Supreme Court Decision 2014Da207283 Decided January 29, 2015

National Bank Co., Ltd. and 10 others (Law Firm Han & Yang LLC, Attorneys Kim Il-young et al., Counsel for the defendant-appellant)

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

Seoul High Court Decision 2014Na2040433 decided September 11, 2015

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

The grounds of appeal are examined.

1. As to the grounds of appeal Nos. 1 and 2 by Defendant Sam-il Accounting Corporation

A. As to the Plaintiffs’ claim for damages under the proviso to Article 17(5) of the former External Audit Act (amended by Act No. 12383, Jan. 28, 2014; hereinafter “former Financial Investment Services and Capital Markets Act”), the lower court determined that the Plaintiff’s failure to perform its duties as an auditor’s auditor’s financial statements by collecting and proving that the Plaintiff’s financial statements and/or accounting firm’s failure to perform its duties as an auditor’s financial statements and/or accounting firm’s failure to perform its duties should be proven if the Plaintiff Company’s failure to perform its duties as an auditor’s financial statements and/or accounting firm’s failure to comply with its stated reasoning (see, e.g., Supreme Court Decision 9Da12148, Dec. 30, 2013; hereinafter “former External Audit Act”).

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 his/her duty of audit, or by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules

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

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 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. 4 by 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 in trust in order to claim compensation for damages caused by false entries, etc. in the audit report against the auditor. However, in stock transactions, 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 on the financial statements of the subject company after the audit by the external auditor 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 in view of the belief 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, Sept. 12, 1997>

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 evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine regarding causation in the liability for damages pursuant to 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. Ground of appeal No. 5 by Defendant accounting corporation and ground of appeal No. 1 by the remaining Defendants

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 liability by proving that there is no causation between the damage and the false statements in the business report, etc. or audit report, etc. based on Article 162(4) and Article 170(3) of the former Capital Markets Act. Such proof of absence of causation can be said to have directly or indirectly affected the occurrence of damages by a method other than false statements in the business report or audit report, etc. in question, or by a method of proving that there was no causation between the damages and the false statements in the 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 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 Capital Markets Act, which provides for presumption of damages in terms of investor protection, losses occurred due to the decline in the price of the purchased stocks after the disclosure of the business report or audit report including false information, etc., and the fact that it is unclear whether the price decline after the publication of the business report or audit report after the publication of the business report or audit report, etc., or after the publication of the false information on the business report or audit report, it cannot be deemed that the presumption of damages is broken solely on the basis of the proof that it is unclear whether the price decline was due to the false entry of the business report or audit report after the publication of the audit report (see, etc.

Meanwhile, in general, if a normal share price is formed after a false statement in a business report, etc. or an audit report has been revealed, the shock arising therefrom has come and all of the parts supported by such false information have been removed, and there is no causation with the false statement in the business report, etc. or audit report, barring special circumstances. Thus, if the sale of the pertinent shares after the normal share price formation date or it is confirmed that the pertinent shares were held until the closing date of oral argument, the difference between the normal share price and the actual disposal price (or the market price on the closing date of oral argument) among the amount of damages as stipulated in Articles 162(4) and 170(2) of the former Capital Markets Act shall be deemed to exist with respect to the difference between the normal share price and the actual disposal price (or the market price on the closing date of oral argument). In this case, the amount of damages shall be the amount calculated by deducting the share price on the date of normal share formation from the purchase price (see, e.g., Supreme Court Decision 2006Da176816, Oct. 25, 2076867.

B. The lower court rejected the Defendants’ assertion that there should be no causation between the Defendants’ damages, on the grounds that the lower court rejected the Defendants’ assertion that the Defendants’ damages should be excluded from the calculation of damages on the ground that the lower court did not relate to the false entry in the Defendant Company’s business report, etc. and the audit report’s audit report, and that the Plaintiffs’ damages amount should be estimated pursuant to Articles 162(3) and 170(2) of the former External Audit Act, recognizing the Defendant Company’s liability under Article 170(1) of the former Capital Markets Act and Article 162(2) of the former External Audit Act, and the Plaintiff’s damages amount should be assessed on July 28, 2012, on the grounds stated in its reasoning.

Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and 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 in violation of logical and empirical rules.

5. As to the ground of appeal No. 6 by Defendant accounting corporation and the remaining Defendants’ ground of appeal No. 2

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. 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 Park Poe-dae (Presiding Justice)