Plaintiff (Law Firm CSS, Attorneys Jeon Young-young et al., Counsel for plaintiff-appellant)

Defendant 1 and two others (Law Firm Domin, Attorney Kim Jong-Un, Counsel for the defendant-appellant)

April 8, 2009

Seoul Eastern District Court Decision 2007Gahap871 Decided February 20, 2008

1. Revocation of a judgment of the first instance;

2. The plaintiff's claims against the defendants are all dismissed.

3. All costs of the lawsuit shall be borne by the Plaintiff.

1. Purport of claim

The Defendants jointly and severally pay to the Plaintiff 137,534,693 won with 5% interest per annum from April 15, 2006 to the delivery date of a complaint, and 20% interest per annum from the next day to the day of full payment.

2. Purport of appeal

The same shall apply to the order.

1. Basic facts

(a) Investment agreements between the parties;

On January 27, 2006, the Plaintiff entered into an investment advisory contract (hereinafter “instant investment agreement”) with the Defendants on January 27, 2006, and the main contents are as follows (Evidence A (Evidence A 1).

Article 2 Investment Amount

The amount invested by the Defendants shall be KRW 450 million, and KRW 300 million shall be deposited in Defendant 1’s account of crowdfunding investment securities companies, and KRW 150 million shall be deposited in Defendant 3’s account.

Article IIIPeriod of Investment

The investment period shall be until March 31, 2006.

Article 4 Guarantee of Return on Investment

The plaintiff shall guarantee 495 million won including the investment amount of KRW 450 million and the investment amount of KRW 100 million and KRW 45 million, and shall, as security, issue a copy of a blank bill issued by non-party 2 Co., Ltd. (former ○○○ Co., Ltd.; hereinafter referred to as "non-party 2 Co., Ltd.").

Article 5 Fees

The Defendants shall provide 50% of the investment profits in excess of 10% as advisory fees to the Plaintiff simultaneously with the termination of investment.

Article 6 Decision on Investment Proceedings

The decision on investment will shall be decided by mutual agreement, but it shall be agreed in advance when deciding the termination of investment from 10% or less of investment return.

B. The defendants' purchase of shares and extension of investment period of non-party 2 corporation

(1) Defendant 1 deposited KRW 300 million in its own account of crowdfunding and KRW 150 million in its own account, and Defendant 3 purchased shares of Nonparty 2 Co., Ltd. listed on KOSDAQ at the Plaintiff’s direction as follows.

본문내 포함된 표 계좌 번호 매수일 (매수 횟수) 보유 주식 수 1주당 평균 매수가 총 매수 금액 피고 1 (계좌번호 1 생략) 2006. 1. 31.경~2006. 2. 2.경 (33회) 129,550주 2,306원 298,832,070원 피고 3 (계좌번호 2 생략) 2006. 2. 2.경 및 2006. 2. 3.경 (22회) 62,727주 2,381원 149,463,590원 합계 ？ 192,277주 ？ 448,295,660원

[The date of purchase in each of the statements in Nos. 11 and 12 is written after February 2, 2006 in the case of Defendant 1, and after February 6, 2006 in the case of Defendant 3. However, the same applies to the date of actual purchase in light of the low-price and high-priced situation of Nonparty 2 Co., Ltd., known by the statement in No. 30, which can be seen by the statement in No. 30.

(2) On March 31, 2006, the first maturity date of the instant investment agreement was KRW 4,850 per share of Non-Party 2 Company as of March 31, 2006. Despite the Defendants’ request for sale, the Plaintiff requested the extension of the investment period and extended the investment period on March 31, 2006 between Defendant 2, the representative of the Defendants, and Defendant 2, as of April 14, 2006. However, the fees that the Plaintiff would receive were modified as follows.

2. Fees;

Where the unit price of sale of the relevant stocks is less than 4,00 won per share, the profits from investment of the defendants shall be calculated based on 4,000 won per share, and the fees of the plaintiff shall be the remaining amount excluding the profits of the defendants among the profits from investment.

(3) As of April 14, 2006, the closing price of the shares of Non-Party 2 Company, the extended investment maturity of which was 4,005 won per share, the appraised value of the shares held by the Defendants is 770,069,385 won (=192,277 shares x 4,05 won).

C. The defendants' disposal of shares in the non-party 2 corporation

(1) Around the maturity of the extended investment period, Defendant 1 sold 82,393 shares of Nonparty 2, a sum of 129,550 shares of Nonparty 2, a stock company’s 129,550 shares to KRW 6,60 on April 13, 2006, and KRW 75,793 on April 14, 2006 at an average of 3,911 shares per share. Defendant 3 also sold 26,017 shares of Nonparty 2, a stock company’s 62,727 shares, which were kept in the crowdfunding securities account on April 14, 206, to KRW 3,89 per share.

(2) Upon requesting the Plaintiff to withhold the remaining shares, Defendant 1 and Defendant 3 held the remaining shares. Defendant 1 purchased 232,000 shares of Nonparty 2 Co., Ltd. from April 2006 to another stock account from April 1, 2006 at an average of 4,103 won per share. However, the shares of Nonparty 2 Co., Ltd. were reduced to KRW 115 per share on April 7, 2006 by recording the highest price (5,400) on April 7, 2006.

(3) Defendant 1 transferred 47,157 shares remaining after June 13, 2006 to another stock account, as the stock price of Nonparty 2 Company did not deviate from the trend of the decline. Defendant 1, upon the Plaintiff’s recommendation, sold 47,157 shares as well as 232,00 shares of Nonparty 2 Company, which were additionally purchased at the Plaintiff’s recommendation, at an average of 3,554 shares per share until August 2006. Defendant 3 also transferred 36,710 shares remaining after June 14, 2006 to another stock account, and sold the entire amount of 3,328 won per share.

【Based on Recognition】 Each entry and the purport of the whole pleadings of evidence Nos. 1 through 4, evidence Nos. 6 through 8, evidence Nos. 1, 2, 11, 12, 29, and 30 (including additional numbers)

2. The parties' assertion

A. The plaintiff's assertion

At the maturity of the instant investment agreement, 320,069,385 won (i.e., appraised value of KRW 770,069,385 - Investment principal of KRW 450,00,00) was accrued on the basis of the appraised value of the shares of Nonparty 2 Company owned by the Defendants at the time of the extension of the instant investment agreement. From such profit, 137,534,693 (=320,069,358 - 45,000,00)/2) is the fee to be collected by the Plaintiff.

B. The defendants' assertion

(1) Invalidity assertion

(A) The instant investment agreement was concluded by the Plaintiff, a bond company, in collusion with Nonparty 1 (the Nonparty in the judgment of the Supreme Court), a major shareholder of Nonparty 2 Company, by using internal information, unfairly operating the share price, or spreading false information that a foreign company takes over Nonparty 2 Company. This constitutes unfair trade, such as market manipulation prohibited under Article 188-4(2) and (4) of the Securities and Exchange Act.

(B) In addition, the instant investment agreement is null and void as it constitutes an unfair legal act under Article 104 of the Civil Act because it is against the nature of stock investment and is a juristic act against social order in violation of Article 103 of the Civil Act, or it was concluded by the Plaintiff to bring about an interest or to bring about an existing loss of investment.

(2) Grounds for revocation

The plaintiff made a false statement to the defendants that the financial structure and management status of the non-party 2 corporation will be good and that shares will increase in the future. Therefore, the defendants are revoked on the ground of deception of the investment agreement in this case.

(3) The assertion that the actual time of sale of shares ought to be considered as the “ended date”

(A) Upon the Plaintiff’s request, the instant investment agreement guarantees KRW 4,00 per share of Nonparty 2’s stock, and extended up to April 14, 2006. The Defendants commenced sales prior to the expiration date, the Plaintiff demanded that the Plaintiff hold the remainder after selling 50% of the shares, waiting for the time of acquisition by a foreign company, and recommended that the Plaintiff hold the remainder after selling the shares. Thereafter, Defendant 1 and Defendant 3 sold the entire amount from June 2006 to August 2006 without any choice to delay the acquisition by a foreign company.

(B) The return on investment shall be determined not by the appraised value of the shares held but by selling and cashing the shares. Therefore, the “date at which the investment was ended,” which is the date on which the return on investment is based, shall be based on the date on which the return on investment was realized by selling shares. Based on this, the Plaintiff’s claim for fee is unreasonable, since the average sales price per share is less than 4,00

(4) Claim for separate benefit

Defendant 2 is merely arranging the instant investment and is not liable for profit distribution. Meanwhile, even if Defendant 1 and 3 are liable for paying the agreed fee on the basis of the expiration of the investment period extended by Defendant 1 and 3, Defendant 2 managed its own independent account, and thus, the agreed fee shall be individually paid to the Plaintiff according to the share ratio.

3. Determination

I first examine the invalidity of the instant investment agreement.

A. Prohibition of market price manipulation

(1) Relevant provisions

(A) Article 188-4(2) of the former Securities and Exchange Act (amended by Act No. 8315, Mar. 29, 2007; hereinafter the same) provides that “No person shall independently or in collusion with other persons for the purpose of soliciting the sale and purchase transaction at the securities market or at the KOSDAQ market, make a false and misleading transaction, or entrust or be entrusted with such transaction, creating a fluctuation in the market price, with the intention of inducing the sale and purchase transaction at the securities market or the KOSDAQ market.”

(B) In this context, the term “purpose to attract trade” refers to the purpose of inducing investors to trade securities by misunderstanding that the market price was formed by the principle of natural demand and supply in the securities market, despite of the fluctuation of the market price through artificial manipulation. Meanwhile, the term “trade that misleads investors as if the securities transaction were sexually active, or makes changes in the market price” refers to a trade that is likely to cause an artificial change in the market price and trading volume to be formed in the free competition market due to normal demand and supply, due to other factors that are not based on market factors. To the extent that the market price actually does not need to be changed, and where a series of acts were conducted, the overall act is likely to cause a change in the market price.

(C) Whether the above manipulation constitutes an act of price manipulation can be determined by comprehensively taking into account such indirect facts as the nature of the securities and the total number of outstanding securities, the price and trading volume trend, the transaction situation before and after, and after, the transaction situation, the economic rationality and fairness of the transaction, whether the transaction is the most or falsely traded, the degree of market intervention rate, the continuous management of the closing price, etc. (see Supreme Court Decision 2003Do4320, May 11, 2006).

(2) Facts of recognition

(A) Relationship between the Plaintiff and Nonparty 1

1) The Plaintiff was accompanying a securities company from March 2004 to June 2005, while working for a bond company of about one year from around 2004 to around 2005, and became aware of Nonparty 1, which is the real owner of Nonparty 2’s company, while taking charge of stock security loan. The Plaintiff introduced the bond company upon Nonparty 1’s request and borrowed the company’s bonds as security.

2) On May 21, 2008, Nonparty 1 disseminated the false M&A at the Seoul Central District Court (Seoul Central District Court) on ① January 2004 and September 2004, and ② around March 2006, Nonparty 1 was convicted of committing a violation of the Securities and Exchange Act, such as preparing and publicly announcing false financial statements (Seoul Central District Court Decision 2007Da1197, Seoul High Court Decision 2008No147, Supreme Court Decision 2008Do98666).

3) Meanwhile, in March 2007, Nonparty 2 Co., Ltd. (hereinafter “○○○○”) offered capital increase of approximately KRW 2 billion and KRW 18.6 billion on May 2007. Nonparty 2 offered funds on the bond market by requesting the Plaintiff as a general investor was not raised. In May 2007, the Plaintiff drafted a written investment agreement to participate in the capital increase with Nonparty 2 Co., Ltd. and the company’s capital increase. In the process, the Plaintiff lent KRW 1.853 billion to Nonparty 1 on the security of securities such as cashier’s checks, etc. amounting to 30% of the loans in May 2007. The Plaintiff sold the increased capital to Nonparty 2 Co., Ltd. and recovered the bonds by selling them.

(B) The process of entering into the instant investment agreement

1) The Plaintiff: (a) provided Defendant 2 with blank bills issued by Nonparty 2 Co., Ltd. as security; (b) solicited Nonparty 2 to purchase shares of Nonparty 2 Co., Ltd. in the amount of KRW 1 billion to KRW 2 billion in the interest of major shareholders when Nonparty 2 Co., Ltd. becomes M&A to a foreign company.

2) Upon entering into the instant investment agreement, the Plaintiff issued to Defendant 2 a blank note issued by Nonparty 2 (i.e., a blank note issued by Nonparty 2) and a certificate of granting the right to supplement a blank note. The certificate of granting the right to supplement a blank note is not only Nonparty 2 but also Nonparty 1’s signature and seal, the real owner, as well as Nonparty 2’s signature and seal. The Plaintiff also stated that Defendant 2 should collect the aforesaid blank note and the right to supplement, and deliver a considerable portion of the profits therefrom to Nonparty 1.

3) 원고는 이 사건 투자 약정 당시 피고 2에게 “다른 사람에게 주식을 샀다는 이야기를 하지 말라. 누설하면 손해배상을 청구하겠다”고 말하고, 투자 약정 제7조로 비밀유지 약정을 하였다. 원고가 호재로 말한 소외 2 주식회사의 M＆A, DMZ 철책 사업 수주 등은 당시 증권가에 나도는 풍문에 그쳤을 뿐 결국 실현되지 않았다.

(C) Shares purchase volume, market price fluctuations, etc. after the investment agreement

1) The Plaintiff specified the securities company and the account to be traded by the Defendants. The Defendants purchased only the shares of Non-Party 2 Co., Ltd. upon the Plaintiff’s instruction. At the time, Non-Party 2 Co., Ltd. purchased approximately KRW 3.6 billion from approximately KRW 3.6 billion in 2003 to approximately KRW 9.7 billion in 2006.

2) The shares 192,277 shares of Nonparty 2 Co., Ltd. purchased by the Defendants reach 2,234,730 shares on the pertinent date, and 8.7% of the shares purchased on February 1, 2006 are 14.4% of the daily trading volume (60,603 shares/421,470 shares).

3) On April 14, 2006, the Plaintiff demanded that the Defendants make an order to sell stocks of Nonparty 2 via the securities terminal to sell them in bulk, and that the Defendants resist and stop the sale by telephone to Defendant 2 as the price is unstable. On April 14, 2006, when the entire shares owned by the Defendants were sold on the same day, the sale amount falls under approximately 22% of the trading volume on the same day.

4) In early 2006, the Plaintiff said that Nonparty 3, etc., the partner fee for the intermediary office, had purchased shares related to the shares of Nonparty 2 corporation from the securities investment to Nonparty 2. Nonparty 3 recommended Nonparty 2 to purchase shares of Nonparty 2 corporation, especially a large volume of securities company, upon recommendation of Nonparty 3 to Nonparty 2 corporation.

5) On January 2006, the trading volume of the shares of Nonparty 2 Co., Ltd. exceeds KRW 1 million on a day between 21 business days and 16 days during the investment period of this case (from January 31, 2006 to April 14, 2006). Meanwhile, after the Defendants purchased the shares of Nonparty 2 Co., Ltd. with KRW 2,300, the shares of Nonparty 2 Co., Ltd. for about two months during the period of investment extended to KRW 2,300.

[Based on the recognition] Evidence Nos. 1, 3, 4, 11, 13-1, 2, Eul evidence Nos. 3, 11, 12-1, 14 through 30, and 31 (part), and the purport of the whole testimony and arguments of Non-party 4 in the trial

(3) Determination

(A) Examining the aforementioned indirect facts and the following circumstances revealed therefrom in light of the legal principles as seen earlier, the instant investment agreement was concluded with the intent of unfairly forming the share price of Nonparty 2, contrary to the market principle of normal supply and demand in the open stock market.

1) According to the circumstances before and after the conclusion of the instant investment agreement, the Plaintiff seems to have been involved in the raising of funds and the increase of paid-in capital for Nonparty 2, rather than as a mere shareholder of Nonparty 2.

2) In light of the fact that the Plaintiff had a blank bill issued by Nonparty 2 and a certificate of supplementary right, it appears that Nonparty 1, the actual owner of Nonparty 2, was in exchange for Nonparty 2’s investment recommendation using Nonparty 2, a blank bill, etc. [the Plaintiff] appears to have been in exchange for the Plaintiff’s prior exchange of opinion to obtain an investment recommendation for stocks of Nonparty 2, using the aforesaid blank bill, etc. [the Plaintiff is unable to obtain from Nonparty 1, as a transactional concept, it is difficult to acknowledge that the listed company delivered blank bill to the Plaintiff as a consideration for the security of stocks equivalent to KRW 150 million,00,000,000 of the Plaintiff’s stocks of Nonparty 2, the Plaintiff offered as security to the corporate bonds company as additional security and requested the return of the blank bill, etc. to Nonparty 1. However, it is insufficient to recognize otherwise solely on the basis of the evidence stated in subparagraphs 11 and 12.1].

3) Upon maturity of the initial investment agreement of this case, the Plaintiff extended the investment period by opposing the Defendants’ sales despite having reached approximately KRW 200,000,000,000,000 in addition to the investment principal when selling all the shares of Nonparty 2, which are owned by the Defendants at the initial maturity of the investment agreement of this case, and the commission under the agreement was also KRW 200,000,000,000,000 in addition to the investment principal, and accordingly, extended the investment period by opposing the Defendants’ sales. The extended maturity also stated that the Defendants’ mass sales orders of Nonparty 2, upon considering the securities terminal’s market situation, were made by themselves known, and that the Plaintiff purchased shares of Nonparty 2,00,00,000,000,000,000,000,000 won.

(B) Accordingly, the instant investment agreement is null and void as it constitutes an act contrary to good morals and other social order, which would undermine the sound investment order in the open stock market, which is a fair price formation in accordance with the market principle, and thus, attempts to promote a high rate of profit with low risk burden by the Plaintiff, who did not spend any investment money.

(b) prohibition of revenue coverage arrangements;

(1) Relevant provisions

1) Article 52 of the former Securities and Exchange Act prohibits securities companies or their executives and employees from bearing losses or guaranteeing profits from stock investment to their customers.

2) Unlike bank deposits, stock investment risks always vary depending on the type of stocks, the timing and method of trading, etc., and the risk is bound to be borne by investors in principle. However, if the principal is compensated for or guaranteed a certain profit regardless of the occurrence of loss to an individual investor, then the risks arising from the investment are always avoided and acquiring only the profit (see Supreme Court Decision 97Da47989, Oct. 27, 1998). Meanwhile, compensation for losses or guarantee of profit by a securities company, etc. is an act that damages the essence of the securities market promoting economic activities through risk management and distorted the fairness of price formation by causing a proposed decision-making, and thus, the promise or implementation of compensation for losses without justifiable grounds is null and void as it violates social order (see Supreme Court Decision 9Da30718, Apr. 24, 2001).

(2) Determination:

(A) The provisions of the Securities and Exchange Act that prohibit the act of compensating for losses or guaranteeing profits during the solicitation of stock investment are intended for securities companies and their officers and employees. Although the instant investment agreement was concluded between the securities company and those who are not customers, comprehensively taking account of the following: (a) the Plaintiff’s active investment recommendation was made; (b) the Plaintiff’s active designation of investment items and period; and (c) the Plaintiff’s exclusion of investment risks from sources and violates the essence of stock investment; (b) the degree of illegality is not less somewhat less than that of the customer’s investment in accordance with unfair solicitation by the securities company; and (c) therefore, the legal principle of prohibition, such as guaranteeing profits

(B) Therefore, the instant investment agreement, the terms of which include the guarantee of investment principal and revenue, and the agreement on fees therefor, is null and void as it harms sound investment order through the open stock market contrary to the nature of stock investment and thus constitutes an act contrary to good morals and other social order.

4. Conclusion

Therefore, the plaintiff's claim shall be dismissed as it is without merit without examining the remaining arguments of the defendant, and the conclusion of the judgment of the court of first instance is unfair. Therefore, the appeal by the defendants is reasonable, and the judgment of the court of first instance is revoked, and all of the claims against the defendants are dismissed. It is so decided as

Judges Signature Number (Presiding Judge)