206Na78260 Damages

Seoul High Court Decision 200Da14148 delivered on May 2, 2012, 2007; 200Da1328 delivered on May 2, 2007; 200Da3220 delivered on May 1, 200

Incheon District Court Decision 2005Gadan28121 Decided July 27, 2006

January 26, 2007

March 9, 2007

1. All appeals by the Defendants are dismissed.

2. The costs of appeal are assessed against the Defendants.

1. Purport of claim

The defendants pay to each plaintiff 82,00,000 won with interest rate of 20% per annum from the next day of the delivery of the complaint of this case to the day of full payment.

2. Purport of appeal

The judgment of the first instance is revoked. The plaintiff's claim against the defendants is dismissed in entirety.

1. Basic facts

A. Status of the parties

Defendant 1, 200 (hereinafter “Defendant Company”) is a company that carries on business related to the development and manufacture of mobile devices, and is a KOSDAQ-listed corporation. Defendant 2 is the largest shareholder of the Defendant Company and the representative director of the Defendant Company from February 25, 200 to March 30, 2006.

(b) Settlement of accounts by division;

(1) On March 2004, Defendant 2 prepared financial statements for the 16th business year (2003 fiscal year) accounting audit of Defendant Company with respect to Defendant Company, and prepared false financial statements because Defendant 2’s personal loan repayment, etc. was made by appropriating the amount equivalent to KRW 27.1 billion, which led to the shortage of corporate funds, Defendant 2 obtained a loan of the total amount of KRW 57.5 billion from financial institutions to another person’s name, which is a part of the assets of Defendant Company, as security, equivalent to the total amount of KRW 57.5 billion from financial institutions, and did not include the same in the debt account on the balance sheet even if the liabilities of the Defendant Company were incurred. The financial statements did not state the above principal contents

(2) On March 2005, Defendant 2 prepared financial statements for the accounting audit of Defendant Company for the 17th business year (2004 fiscal year) (2004), and prepared false financial statements by failing to enter the above provision in the statement of financial statements and failing to enter the fact of offering the above provision in the statement of financial statements. When Defendant 2 used the amount equivalent to 68.8 billion won for the redemption of Company’s obligations, etc., and the company’s funds were insufficient, Defendant 2 did not hold a short-term financial instrument equivalent to 69 billion won.

(3) As a corporation listed on the KOSDAQ, the Defendant Company is obligated to submit a business report to the Financial Supervisory Commission and the Exchange within 90 days after the lapse of each business year pursuant to Article 186-2 of the Securities and Exchange Act. The Defendant Company submitted the business report containing false financial statements on March 30, 2004 with respect to the business year No. 16 of March 30, 2004, and the business report containing false financial statements on March 17, 2005 to the Financial Supervisory Commission and the Securities Futures Exchange and made it public.

(c) Publication of accounting for window dressing;

(1) On September 9, 2005, the Securities Futures Exchange demanded the Defendant Company to disclose the facts and details of the window dressing accounting theory to the p.m. on September 10, 2005, and ordered the Defendant Company to suspend trading of the Defendant Company’s stock certificates until 60 minutes after the inquiry results.

(2) The Defendant Company announced that it was “in the process of confirming whether it was a true fact,” and the Securities Futures Exchange extended the period of suspension of trading on the ground of an unknown cause, such as a rumor, to the time when the window dressing accounting suspicion was resolved.

(3) On September 9, 2005, the window dressing accounting theory for the Defendant Company began to be known after reporting the above contents in a newspaper.

(4) On September 23, 2005, the Defendant Company recognized that the assets of 70 billion won, among the short-term financial instruments of the Defendant Company, were processed in the form of a certificate of deposit. Accordingly, the stock transaction was resumed.

(5) The share price of the Defendant Company was 1.80 won to 1,900 won on or before September 9, 2005, but on September 10, 2005, the transaction was suspended on or before September 10, 2005, and 1,585 won on September 25, 2005, 1,350 won on September 27, 2005, and 1,150 won on September 28, 2005, and 1,100 won on September 29, 2005, and 980 won on September 30, 2005.

(d) Purchase and sale of shares by the plaintiff;

On April 30, 200, after the Plaintiff disclosed the business report for the 16th period and 17th business year containing the aforementioned false financial statements (hereinafter “business report of this case”), the Plaintiff purchased 30,400 won per share of the Defendant Company totaling 89,40,000 won, totaling 7,000 won per share totaling 2,680 won per share, totaling 18,760,000 won totaling 2,60 won per share; 2,300 won per share on January 5, 2005; 1,381,50 won per share totaling 1,90,80 won per share totaling 40.5 won per share, totaling 1,700 won per share, totaling 1,91,617,000 won per share; 2,50 won per share totaling 1,500 won per share on May 3, 2004;

[Grounds for recognition: Gap evidence 1, Gap evidence 2-1, Gap evidence 1-4, Gap evidence 1-2, Eul evidence 3-1-4, Gap evidence 1-2, and Gap evidence 4-1, 2-5-2, and Gap evidence 8-2, and the purport of the whole pleadings) 2. According to the facts of recognition of the liability for damages, there are false statements or indications as mentioned above in the business report of this case against the defendant company, which is an important matter that may affect investors' judgment on investment. Since the business report of this case was published, the plaintiff acquired the shares of the defendant company, based on trust that it was correct after the public notice of the business report of this case, and caused damages due to the decline in the stock price, the defendant company is liable for the purchase of shares of the defendant company from March 30, 2004 to the public notice of the business report of this case pursuant to Articles 186-5 and 14 (1) of the Securities and Exchange Act as the defendant company's director at the time of this case.

B. As to the Defendants’ assertion of absence of causation (1), the Defendants asserted that there is no causation between the Plaintiff’s loss and false entry in the Defendant Company’s business report, etc., on the grounds that the financial situation of the Defendant Company is nothing more than one of the factors affecting share price fluctuations, and the Plaintiff also determined investment intent by taking into account various factors, such as recommendation issues of the Internet securities-related site, foreigner’s purchase trend, and future possibility of the Defendant Company.

(2) However, under Article 14 of the Securities and Exchange Act applied mutatis mutandis pursuant to Article 186-5 of the same Act, where a purchaser of securities claims compensation for damages caused by false statements in a business report against a stock-listed corporation, etc., the purchaser of securities does not need to prove the existence of causation between false statements in a business report and the occurrence of damages pursuant to Article 15(2) of the same Act, and to prove the absence of such causation in order to exempt the stock-listed corporation from liability (Supreme Court Decision 2002Da38521 Decided October 11, 2002), 3, 4, 1-7, 5-1-11 of the evidence No. 186-5 of the same Act are insufficient to acknowledge the defendants' assertion, and there is no other evidence to prove this.

Rather, in a stock transaction, the financial status of the target company is one of the most important factors that form the share price, and is provided and published to ordinary investors and has a critical effect on the formation of the share price. Since factors such as recommended issues of the securities-related site, foreigner's purchase trend, and the future possibility of the Defendant company as pointed out by the Defendants are also formed based on the target company's financial status, it shall be deemed that a general investor making a stock investment is believed to have duly prepared and made public the financial statements indicating the most well-known financial status of the target company, and that the share price has been formed based on his/her belief that the target company's financial status was formed and made public as a matter of course (see Supreme Court Decision 96Da41991, Sept. 12, 197).

Therefore, we cannot accept the defendants' assertion that there is no causation between the plaintiff's loss and the preparation and disclosure of the business report of this case.

C. Determination as to the Defendants’ assertion of limitation of liability

The Defendants asserted that Defendant 2 should limit the Defendants’ liability in light of the following: (a) Defendant 2 did not perform the window dressing accounting with the intent of embezzlement of corporate funds or to inflict damage on the company; (b) Defendant 2 and Defendant 2’s employees have made high self-help efforts to normalize the company; and (c) the existence of the company may be difficult in the event of additional lawsuits by minority shareholders; (b) however, there is no other evidence to acknowledge the existence of the aforementioned circumstances asserted by the Defendants solely on the basis of each of subparagraphs 1-11 of the evidence No. 5, and there is no other evidence to acknowledge it. Therefore, the Defendants’ assertion is without merit.

3. Scope of liability for damages;

A. According to the provisions of Article 15 of the Securities and Exchange Act applied mutatis mutandis by Article 186-5 of the same Act, the amount of compensation to be made pursuant to Article 14 of the same Act shall be stipulated as “the amount deducted from the disposal price if the claimant disposes of the securities in question from the actual amount paid before the closing of argument in acquiring the securities.

B. As to the instant case, the amount of damages to the Plaintiff is KRW 129,158,50, which is the amount actually paid by the Plaintiff when acquiring the shares of the Defendant Company, deducted KRW 47,154,500, which is the disposal price of the Plaintiff’s disposal of the said shares, from KRW 82,04,00,000.

C. Therefore, the Defendants are liable to pay each Plaintiff the amount of KRW 82,00,000 and damages for delay calculated at the rate of 20% per annum from October 11, 2005 to the date of full payment, as the Plaintiff seeks.

4. Conclusion

Therefore, the plaintiff's claim of this case against the defendants is accepted in its reasoning, and the judgment of the court of first instance is justified with this conclusion, and all appeals by the defendants are dismissed. It is so decided as per Disposition.

Judges Lee Gyeong-chul

Judge Lee Jin-hun

Judges Kim Uniform-type