2013Da17674 Damage, etc.

1. A;

2. B

UN Investment Securities Co., Ltd. (former trade name: Korea Investment Securities Co., Ltd.)

Seoul High Court Decision 2012Na2189 Decided February 8, 2013

April 23, 2015

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. We examine the plaintiffs' ground of appeal No. 1.

A financial investment business entity shall grasp information about the investment purpose, status of property, experience in investment, etc. of an ordinary investor through interviews, inquiries, etc. before recommending investment to an ordinary investor, and shall not make an investment recommendation deemed inappropriate for the ordinary investor in light of the investment purpose, status of property, experience in investment, etc. of the ordinary investor [Article 46(2) and (3) of the Financial Investment Services and Capital Markets Act (hereinafter “Capital Markets Act”).

For the reasons indicated in its holding, the lower court determined to the effect that it is insufficient to recognize that the Defendant’s solicitation to conclude each of the instant specific money trust contracts (hereinafter “each of the instant trust contracts”) with the content that the Defendant would make an investment in and operate the corporate bills (hereinafter “instant corporate bills”) issued by ELI Construction Co., Ltd. (hereinafter “ELI”) on the Plaintiffs, in light of the circumstances indicated in the lower judgment regarding the career, property status, investment experience, investment purpose, etc. of the Plaintiffs and their agents C, was insufficient to recognize that it violated the suitability principle.

Examining the reasoning of the lower judgment in light of the relevant statutes and the evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine on the suitability principle, including the base point of time for determining whether the suitability principle is observed, or by omitting judgment on the violation of the duty to deliver investor information confirmation and failing to exhaust all necessary deliberations, as alleged in the grounds of appeal

2. We also examine the plaintiffs' grounds of appeal Nos. 2 and the defendant's grounds of appeal Nos. 1 and 2.

A. (1) A financial investment business entity shall, when it makes an investment recommendation against an ordinary investor, explain the details of the financial investment instrument, risks associated with the investment, and other matters prescribed by Presidential Decree so that the investor can understand them, and shall not make a false or distorted explanation or omit any material fact that may have a significant impact on the investor's reasonable judgment of investment or the value of the relevant financial investment instrument, and shall be liable for damages to the ordinary investor arising therefrom (Articles 47(1) and (3), and 48(1)(2) of the Financial Investment Services and Capital Markets Act). In such cases, whether a financial investment business entity shall explain to an investor to a certain extent shall be determined by comprehensively taking into account the characteristics and risk level of the relevant financial investment instrument, investor's investment experience and ability, etc. (see, e.g., Supreme Court Decision 2008Da52369, Nov. 11, 2010); however, if an investor or his/her agent has sufficiently known such information, the financial investment business entity is not obligated to explain.

11. Supreme Court Decision 2010Da55699 Decided January 1, 201

B. For reasons indicated in its holding, the court below held that (1) the Defendant cannot be held liable for violation of the duty of explanation because it knew the Defendant’s employees D's credit rating "A3-" meaning, and it cannot be deemed that the Defendant provided a credit rating company's evaluation report on the possibility of supporting the ELI Construction, or that (2) the Financial Supervisory Service's improvement proposal did not lead to a separate legal obligation for the Defendant. (3) it is difficult to view that the Defendant provided a conclusive judgment on the possibility of supporting the ELII Corporation's ELI Corporation's ELI Corporation's ELI Corporation's ELI Corporation's ELI Corporation's ELI Corporation's ELI Corporation's ELI Corporation's ELI Corporation's ELI Corporation's ELI Corporation's ELI Corporation's ELI Corporation's 3- "credit rating of the commercial paper of this case notified by the Defendant's employees D', and it cannot be deemed that it did not meet the duty of explanation.

C. First, the defendant cannot be held liable for violating the duty to explain. B. (1) through (4)

Examining the reasoning of the lower judgment in light of the evidence duly admitted, the lower court’s determination is consistent with the aforementioned legal doctrine. In so doing, contrary to what is alleged in the Plaintiffs’ grounds of appeal, there were no errors of misapprehending the legal doctrine on the duty to protect investors, duty to explain, and burden of proof, or failing to exhaust all necessary deliberations, which affected the conclusion

D. However, it is difficult to accept the judgment of the court below on the following grounds that the defendant violated the duty to explain risks associated with investment, such as the financial situation or asset soundness of ELI Construction.

(1) According to the reasoning of the lower judgment and the evidence duly admitted, the following facts are revealed.

(A) The Korea Development Bank and the Korea Assets Management Corporation agreed to each of the instant trust contracts as the representative of the Plaintiffs, for more than 30 years, and after retirement the representative director, E Co., Ltd and F Co., Ltd.

(B) Prior to the conclusion of each of the instant trust contracts, C has invested in various financial investment products, including stocks and funds. Among them, securities with stock exchange-linked (ESS), 'BBB' similar to 'A3-B' or 'BB-B'-specific money trust products invested in commercial papers, bonds, etc. as well as 'BB-B'. (c) Each of the investment information certificates in C and the names of the plaintiffs and C arising from the signing or date of the instant trust contracts are prepared prior to the conclusion of each of the instant trust contracts, and confirmed by C and each of the investors information certificates in the names of C and the plaintiffs, which are similar to their investment experience, have been invested in securities (eLW), futures option, stocks investment funds investing in derivatives, etc. with a level of knowledge about financial product investment, or 'high' (e.g., to the extent that most of financial products that can be invested can be distinguished) or 'high' products subject to investment, including financial products, can be understood to the extent that each of the investment products can be understood.

(D) At the time of soliciting C to conclude each of the instant trust agreements, D, an employee of the Defendant, notified C that the credit rating of the instant commercial papers is “A3-,” as well as explained on the risk of default on, and the possibility of loss from, the issuance company of the instant commercial papers. (e) D, in the course of the foregoing explanation, issued to C an investment explanation data produced by the Defendant and a credit assessment statement on the instant commercial papers prepared by Korea Credit Rating Co., Ltd and Korea Credit Rating Co., Ltd., together with each of the instant commercial papers. The investment points column of the investment explanation data emphasizes the positive factors such as the possibility of support by ELI Group among the content of each credit assessment statement, and also explained based on D based on this, each of the said credit assessment statements also describe the negative factors such as the expansion of business risks due to housing competition invasion, the aggravation of business balance in the scheduled place of business, and the aggravation of business balance in the scheduled place of business.

(2) We examine the above facts in light of the legal principles as seen earlier.

Since corporate bills stipulated in Article 4(3) of the Capital Markets Act are promissory notes issued by an enterprise for raising funds necessary for its business, the risk resulting from the investment in corporate bills may be deemed as risk of not being paid due to the maturity of corporate bills, i.e., risk of the issuer’s credit risk and loss of principal due to such risk. Accordingly, in the event of soliciting investment in specified money trusts, a financial investment business entity must explain the fact that there exists credit risk of the issuer of corporate bills and the risk of loss of principal due to such risk.

However, the credit rating of corporate bills is a rating indicated by a credit rating company authorized by the Financial Services Commission using a symbol, figure, etc. as a result of evaluating the credit standing of corporate bills, and is an index showing the appropriate repayment ability or risk of the issuing company of corporate bills. In addition, Article 183(1)1 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act provides that corporate bills, which are traded, mediated, etc. by an investment trader or investment broker, shall be assessed by two or more credit rating companies. In light of the purpose and function of credit assessment and credit rating, if a financial investment business entity notifies investors of the credit rating of corporate bills as well as the credit rating of corporate bills, and explains the meaning of the credit rating and the location occupied by investors in the total credit rating, barring any special circumstance, it can be said that the issuing company explained the credit risk of the issuing company to a certain extent as a result of a comprehensive assessment of the positive

In this case, the Defendant’s employee D notified C of the meaning and structure of credit rating, not only notified C of the credit rating “A3-A-A-A-A-A-A-A-A-the credit rating of the instant commercial paper, but also explained the risk of default and the possibility of loss of the original due to the occurrence of the issuance of the instant commercial paper, which is the issuer, and furthermore, delivered each credit rating statement stating both the positive and negative factors of the branch construction. Thus, it can be deemed that the corporate paper issuer’s credit risk exists in relation to the risks associated with the conclusion of each trust agreement of this case and the possibility of loss of principal due to the occurrence

Meanwhile, the possibility of supporting ELA Group, which is indicated as a positive factor in the Investment Explanation Data, is based on the content of each credit rating statement, and is merely an uncertain possibility, not a conclusive judgment. Therefore, considering C’s investment experience and ability, it is difficult to deem C as information that has lost balance to the extent that it prevents C from forming a correct awareness of risks associated with investment.

Therefore, in light of these circumstances, even though D did not specifically explain the financial situation or asset soundness, etc. of ELA Construction based on each credit rating statement, which served as the basis for the assessment of its credit rating, based on the investment explanation data, or emphasized the positive factors of ELAD construction, and D also explained based on this, it is insufficient to readily conclude that such circumstance alone was insufficient to readily conclude that the Defendant explained that it was undermining balance to the extent that it would cause reasonable investment judgment on the risks associated with the conclusion of each of the instant trust contracts. Nevertheless, on the grounds of the above circumstances, it is insufficient to recognize the violation of the duty to explain, the lower court determined otherwise, on the ground that the Defendant did not clearly explain the balanced information on risks associated with investment at the time of entering into each of the instant trust contracts, thereby failing to exercise the duty to protect the customers, by making reasonable investment decisions based on the information.

Therefore, such judgment of the court below is erroneous in the misapprehension of legal principles as to investment risk and duty to explain corporate bills, which affected the conclusion of the judgment. The defendant's ground of appeal assigning this error is with merit.

3. Conclusion

Therefore, without further proceeding to decide on the remaining grounds of appeal by the plaintiffs and defendants, the judgment of the court below is reversed, and the case is remanded to the court below for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices.

Justices Kim So-young

Justices Lee In-bok

Justices Kim Yong-deok

Justices Go Young-young