[1] Details of the duty to protect investors borne by an asset management company under the former Indirect Investment Asset Management Business Act, and whether the same applies to cases where a third party actually led to the creation of an investment trust (affirmative)

[2] In a case where there are special circumstances to deem that an asset management company under the former Indirect Investment Asset Management Business Act actually led to the creation of an investment trust even though it was not directly created or operated by the asset management company, whether the investor is obligated to protect investors by reasonably investigating the profit structure and risk factors of the investment trust when recommending investors to make an investment trust products (affirmative)

[1] According to Articles 4(2) and 56(1) and (4) of the former Indirect Investment Asset Management Business Act (repealed by Article 2 of the Addenda to the Financial Investment Services and Capital Markets Act, Act No. 8635 of Aug. 3, 2007), an asset management company is in a position to create an investment trust and manage the investment trust property in a primary position to produce and distribute information on the investment trust. Investors also believe that the investment information provided by an asset management company with the knowledge and experience of the asset management company is correct and make investment decisions depending on their belief that the investment information provided by the asset management company is correct. For this reason, the asset management company is obliged to provide correct information on the investment trust and to inform investors of such circumstances where information on the profit structure and risk factors of the investment trust is insufficient. This does not change with the fact that the third party actually led the establishment of the investment trust.

[2] Under the former Indirect Investment Asset Management Business Act (repealed by Article 2 of the Addenda to the Financial Investment Services and Capital Markets Act, Act No. 8635 of Aug. 3, 2007), an asset management company engaged in the business of managing the indirect investment property is required to obtain permission from the Financial Services Commission by meeting certain requirements (Article 4(1)). A person, other than the asset management company, is prohibited from using the word “asset management”, “investment trust”, or any similar word in its trade name (Article 7(2)). In addition, there is a difference between the asset management company and investors in terms of the knowledge, experience, and ability of investment trust. In light of the general characteristics of indirect investment, etc. of indirect investment, in which the collection and provision of investment data in the market, as a matter of principle, can only be entrusted to professional investors due to separation of the functions of providing information and investment management, if there is any special reason to deem that an asset management company actually led in the establishment of an investment trust, such as profit structure or risk factors of the investment trust property.

[1] Articles 4(2) and 56(1) and (4) of the former Indirect Investment Asset Management Business Act (repealed by Article 2 of the Addenda to the Financial Investment Services and Capital Markets Act, Act No. 8635 of Aug. 3, 2007) / [2] Articles 4(1), 7(2), 56(1), (2), and (4) of the former Indirect Investment Asset Management Business Act (repealed by Article 2 of Addenda to the Financial Investment Services and Capital Markets Act, Act No. 8635 of Aug. 3, 2007)

[1] Supreme Court Decision 2014Da15996 Decided November 12, 2015 (Gong2015Ha, 1877)

National Credit Union Federation of Korea (Law Firm LLC, Attorneys Kim Dong-dong et al., Counsel for the plaintiff-appellant)

Alternative Asset Management Co., Ltd and one other (Law Firm LLC et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2015Na2032248 decided April 22, 2016

The part of the lower judgment on KRW 2,682,56,346 and damages for delay thereof shall be reversed, and this part of the case shall be remanded to the Seoul High Court.

The grounds of appeal are examined.

1. Case history

Review of the reasoning of the lower judgment and the record reveals the following facts.

A. Defendant Alternative Asset Management Co., Ltd. (hereinafter “Defendant Substitute”) decided to invest in a development project to build a guest room and a contact store hotel (hereinafter “instant development project”) in the area of the U.S. Pluda Mool City (regional name omitted), and created an alternative investment trust property of KRW 10 billion on December 7, 2007, an investment trust property of KRW 10 billion on December 27, 2007, an investment trust property of KRW 8.5 billion on an investment trust property of KRW 8.5 billion on December 27, 2007, respectively. Institutional investors, such as the Construction Workers’ Mutual Aid Association, purchased the beneficiary certificates of KRW 1 and 2, and each of the said funds was used to acquire the shares of the Investment Limited Co., Ltd. established on behalf of the Construction Workers’ Association, and each of the said funds was to acquire the shares of the Investment Limited Co., Ltd. 100% on behalf of the Construction Workers’ Association.

B. On May 16, 2008, the Defendant, instead of an investment trust property of KRW 19 billion, set up KRW 3 of the investment trust property of KRW 19 billion and KRW 4 billion of the investment trust property of KRW 4 billion, and the property of each of the above funds was used for acquiring the shares (10%) of the U.S. companies that are controlled by the Defendant on behalf of the Defendant, and as loans to the above companies, for acquiring the shares (10%) of the U.S. companies that are controlled by the Defendant on behalf of the Defendant and for acquiring the shares (10% of the shares) and loans to the above companies, and the Raar 2 acquired the shares of KRW 13% of the Raar.

C. In its original plan to plan the size of the investment trust property of the Fund 3 and 4 as KRW 32 billion, and around May 2008, the Plaintiff solicited the Plaintiff to purchase KRW 9 billion of the said Fund’s beneficiary certificates, and explained about the instant development project and issued the investment prospectus. Although the Plaintiff intended to purchase the said Fund’s beneficiary certificates, it was prohibited from purchasing the beneficiary certificates of the said Fund, and thus, the Plaintiff’s investment was impossible. For this reason, the total size of KRW 3 and 4 of the Fund was reduced to KRW 23 billion.

D. In the event that it was impossible for the Plaintiff to purchase the beneficiary certificates of the Alternative Capital Fund as seen above, the Plaintiff agreed to make an investment in Mada 2 upon consultation between the Defendant and the person in charge of the asset management company (the trade name before the change: Mada Asset Management Co., Ltd.; hereinafter “Defendant Myasset”) and the Defendant Myasset Asset Management Co., Ltd., and upon the creation of real estate investment trust, the Plaintiff agreed to make an investment in Mada 2 by means of purchasing the beneficiary certificates. At that time, Defendant Myasset issued an investment prospectus called “Mada Royasset Investment Trust” to the Plaintiff, and it also contains the same contents as the investment prospectus and the fund’s profit structure, risk factors, etc. issued by Defendant Myasset in soliciting the investment of the Alternative Capital Fund while inducing the investment of the Fund. However, unlike the investment prospectus issued by Defendant Myasset, there is no contingent remuneration agreement for the Asset Management Company, and there is an additional content that Defendant Myasset created the right to share of the investment trust and the special purpose fund.

E. According to the above agreement, the Plaintiff purchased 8 billion won of the beneficiary certificates of a real estate fund established by Defendant Myasset (hereinafter “instant investment trust”) and paid the management fees corresponding to 0.94% of the investment trust funds every year to Defendant Myasset. In fact, Defendant Myasset received the management fees from the Plaintiff. Defendant Myasset established an texck Investment Company (hereinafter “Texco”) which is a domestic special purpose company for real estate development business, etc., and loaned the instant investment trust property to texco, and tex acquired part of the shares of tex 2 and loaned funds to tex 2.

F. Finally, alternative Liber fund 3 and 4 obtained 72% of the equity interest of alternative Liber 2 and 28% of the equity interest of Alternative Liber 2. Alternative Liber 2 acquired 13% of the equity interest of Alternative Liber 2.

G. However, the instant development project failed ultimately, such as where the construction loan originally planned was nonexistent, and the construction project was not commenced until June 16, 201, which is the expiration date of the instant investment trust.

2. The judgment of the court below

For the reasons indicated in its holding, the lower court dismissed the Plaintiff’s claim on the following grounds as to whether the Defendants, as an asset management company of the instant investment trust, violated the duty to protect investors at the time of soliciting the investment trust, and breached the duty of due care as

A. Defendant Substitute is not an asset management company of the instant investment trust.

B. Defendant Myasset, an asset management company of the instant investment trust, agreed between the Plaintiff and the Plaintiff that the instant investment trust property should not be actually managed, and it should be deposited into the account of Dara 2 controlled by the Defendant, instead of the Defendant.

C. Therefore, all the Defendants do not bear the duty to explain the instant investment trust to the Plaintiff, the duty to protect investors, and the duty of due care as a good manager.

3. Judgment of the Supreme Court

(a) An obligation to protect investors borne by a person soliciting investment trust products;

1) According to Articles 4(2) and 56(1) and (4) of the former Indirect Investment Asset Management Business Act (amended by Act No. 8635, Aug. 3, 2007; hereinafter “former Indirect Investment Act”), an asset management company is a person who creates an investment trust and manages the investment trust property, and is in the first position to produce and distribute information on the investment trust. An investor also assumes that the investment information provided by an asset management company is correct by reliance on the expertise and experience of the asset management company, and makes a decision on investment. For this reason, an asset management company bears the duty to protect investors, who will provide correct information on the investment trust, and inform investors of such circumstances where information on the profit structure and risk factors of the investment trust is insufficient. This does not change because a third party actually led the establishment of the investment trust (see, e.g., Supreme Court Decision 2014Da1596, Nov. 12, 2015).

2) However, in order to become an asset management company that runs the business of managing indirect investment property under the former Indirect Investment Act, a person who is not an asset management company shall meet certain requirements and obtain permission from the Financial Services Commission (Article 4(1)), and refrain from using the word “asset management”, “investment trust”, or any similar word in its trade name (Article 7(2)). In addition, there is a difference between the asset management company and investors in terms of the knowledge, experience, and ability regarding investment trust as seen earlier. In light of the general characteristics of indirect investment in which the collection and provision of investment data in the market, as a matter of principle, should be entrusted to the professional investment manager due to separation of the functions of providing information and the functions of managing investment, etc., even if the asset management company does not directly create or operate an asset management company, if there are special circumstances to deem that the asset management company actually led the establishment of an investment trust by practically determining the main contents related to the profit structure or risk factors of the investment trust property, the asset management company is required to make recommendations to investors for investment trust products, and to provide investors with correct information protection obligation.

B. As to the claim against the defendant substitute

Examining the factual relations of this case in light of the aforementioned legal principles, the lower judgment denying the Defendant’s liability is difficult to accept for the following reasons.

The Plaintiff first intended to purchase the beneficiary certificates of Madro Fund according to the Defendant’s solicitation. However, as a result of regulation under the Credit Unions Act, it was impossible to purchase the beneficiary certificates of Madro Fund, which is a special asset fund, the Plaintiff decided to purchase the beneficiary certificates of the instant investment trust with the same profit structure in that it would make profits from the investment in the instant development project instead of Madro Fund after consultation with the Defendant, Defendant Myasset. The investment prospectus issued by Madro Fund by Madro Fund and the investment prospectus issued by Madyasset regarding the instant investment trust by Madro Fund stated the difference between the remuneration and the investment structure of the instant investment trust received by Madro Fund as each asset management company, but the explanation on the profit structure and risk factors is substantially the same as the Plaintiff purchased the beneficiary certificates in light of the fact that Madro Fund had already been in fact made in the form of the instant investment trust with the aim of making profits from the instant investment trust in lieu of Madro Fund and the instant investment trust with the intent to sell the instant beneficiary certificates.

Therefore, even if Defendant Alternative did not assume the fiduciary duty at the asset management stage, as it is not an asset management company of the instant investment trust, it is assumed that the Plaintiff is obliged to reasonably investigate profit structure and risk factors in the process of soliciting the purchase of beneficiary certificates of the instant investment trust and to provide correct information. Nevertheless, the lower court determined otherwise on the grounds stated in its reasoning, that Defendant Alternative did not assume the fiduciary duty against Plaintiff at the stage of soliciting investment insofar as it is not an asset management company of the instant investment trust. In so doing, the lower court erred by misapprehending the legal doctrine on the investor protection duty borne by the person soliciting investment trust products under the former Indirect Investment Act, thereby adversely affecting the conclusion of the judgment.

C. As to the claim against Defendant Myasset

Defendant Myasset is an asset management company of the instant investment trust, which entered into the instant investment trust agreement with the Plaintiff and received lawful remuneration from the Plaintiff. As can be explained in the investment prospectus issued by Defendant Myasset, the investment prospectus issued by Defendant Myasset to the Plaintiff also indicates that the instant investment trust property is invested in Mayasset 2 via teco, a domestic special purpose company, and that there is a difference between the investment structure of the instant investment trust and the alternative Lyasset fund. While Defendant Myasset entered in the investment prospectus that he was paid contingent fees in addition to regular management fees from investors of the instant investment trust delivered by Defendant Myasset, Defendant Myasset is only paid regular management fees and does not receive contingent fees. In addition, Defendant Myasset continued to receive asset management fees from the Plaintiff even after depositing the Plaintiff’s investment funds into the account of Mayco 2.

Considering such circumstances, Defendant Myasset bears the duty of care to protect the Plaintiff, an investor, at the time of solicitation for concluding an asset management contract as an asset management company of the instant investment trust, and at the time of asset management, it shall be deemed that it bears the duty of care to manage the Plaintiff’s assets, an investor, with the care of a good manager. This does not change on the ground that the third party, such as Defendant Myasset, actually led to the establishment

Nevertheless, the lower court determined that Defendant Myasset did not bear the duty of protecting investors and the duty of due care of a good manager as an asset management company, notwithstanding the absence of reasonable grounds for recognizing the existence of special circumstances that could escape the duty of care to be borne by Defendant Myasset as an asset management company. The lower court erred by exceeding the bounds of the principle of free evaluation of evidence in violation of logical and empirical rules, and by misapprehending the legal doctrine on the duty of an asset management company under the former Indirect Investment Act

4. Conclusion

Therefore, without further proceeding to decide on the remainder of the grounds of appeal, the part of the judgment below concerning KRW 2,682,56,346, which is the purport of the appeal, is reversed, and this part of 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 Seon-soo (Presiding Justice)