Labor Mediation (Attorney Lee Jong-soo, Counsel for defendant-appellant)

Mez Securities Co., Ltd. and one other (Law Firm Square, Attorneys Park Jong-wing et al., Counsel for the plaintiff-appellant)

May 7, 2004

Seoul Central District Court Decision 2002Gahap68213 Delivered on September 19, 2003

1. The plaintiff's appeal is dismissed.

2. The costs of appeal shall be borne by the Plaintiff.

1. Purport of claim

The Defendants jointly and severally pay to the Plaintiff 1,160,000,000 won with 5% interest per annum from August 2, 2001 to May 31, 2003, and 20% interest per annum from the next day to the day of full payment.

2. Purport of appeal

Of the part against the plaintiff in the judgment of the first instance, the part ordering payment shall be revoked. The defendant 2 shall jointly and severally pay to the plaintiff Mez securities company 467,670,000 won with 5% interest per annum from August 2, 2001 to May 31, 2003, and 20% interest per annum from the next day to the date of full payment. The defendant Mez securities company shall jointly and severally pay to the plaintiff 2 the amount equivalent to 1,160,000 won per annum from August 2, 2001 to May 31, 2003, and the amount equivalent to 20% interest per annum from the next day to the date of full payment.

1. Basic facts

The following facts are not disputed between the parties, or acknowledged in full view of Gap evidence 1, Eul evidence 2-1 through 86, Eul evidence 1-3, Eul evidence 4-1 through 5, Eul evidence 5, and Eul evidence 5.

A. Status of the parties

Defendant Matz Securities Co., Ltd. (hereinafter “Defendant Company”) is a securities company that engages in the sale and purchase, consignment sale, brokerage or agency, investment advice, and investment agency business of securities. Defendant 2 worked as an investment adviser at the same location of the Defendant Company from October 1998 to October 12, 2001. The Plaintiff was solicited by Defendant 2 to invest in securities option and invested in Defendant 2.

B. The Plaintiff’s receipt of investment and dividend in futures options

(1) On March 15, 1999, the Plaintiff, as a university professor, invested 4% of the monthly investment amount in the futures option (hereinafter “securities option”) from Defendant 2, who had been well aware of his knowledge in terms of the literature and information department of Sung Pung-si University on March 15, 1999, as a profit-making dividend, and requested the return of the principal, he recommended Defendant 2 to enter into an investment contract on the condition that he would return the principal within seven days, and he would make an investment of KRW 160,000,000 in total over ten times as indicated in the attached Table, such as the payment of investment amount to Defendant 2.

(2) The Plaintiff is completely entrusted to Defendant 2 with the determination of all terms and conditions of transaction, such as the management of the foregoing investment fund (hereinafter “the instant investment fund”) and the type, price, and quantity of futures option trading, etc., and requested Defendant 2 to offer security for the said investment. The Defendant refused such demand and subsequently withdrawn the demand and instead, instead, prepared an investment contract to guarantee the return of the investment fund and the monthly amount of profit dividends, regardless of the above Defendant’s profit at each time of investment (hereinafter “the instant investment contract”), and a cash custody certificate for each investment fund.

(3) The main contents of the above investment contract are as follows.

(A) The Plaintiff provided investment funds to Defendant 2, and the said Defendant invested the said investment funds in futures trading.

(B) Defendant 2, regardless of whether the above investment was made to the Plaintiff each month, wired online an amount equivalent to 4% or 5.5% of the investment amount to the Plaintiff’s passbook account. As to the investment amount raised by the Plaintiff through a real estate mortgage loan, Defendant 2 separately transfers interest on the real estate mortgage loan amount.

(C) Defendant 2 shall return the full amount of the investment money to the Plaintiff within seven days from the date the Plaintiff requested, and the Plaintiff may not request Defendant 2 to repay each investment money during the first six months from the date the Plaintiff provided each investment money, and the term of the contract shall be two years from the date the respective investment contract was made.

(D) The Plaintiff’s terms and conditions of the above contract are confidential to a third party.

(E) When the Plaintiff breached the above contract, the above contract becomes null and void, and the Plaintiff cannot claim for the return of the investment amount, and if Defendant 2 breached the contract, he shall compensate for the amount invested by the Plaintiff.

(4) Meanwhile, Defendant 2, as well as the Plaintiff, entered into an agreement to guarantee similar profits and return principal to the Plaintiff’s 23 investors (However, the other investors did not prepare an investment contract as the Plaintiff) with the deposit of approximately KRW 3 billion in their own account in the form of a passbook and operated the investment in the form of a fund. All investors were entitled to all of the above futures option transactions with the Defendant 2, and received a certain amount of dividend on the monthly amount of the investment. Defendant 2 was not able to trade under their real name in the relationship as an investment consultant. From March 15, 199 to September 10, 199, Defendant 2 operated Nonparty 1’s name, the next account opened by the said Defendant, from September 10, 199 to July 9, 201, Nonparty 301 and Nonparty 2’s securities operation from September 201 to May 29, 201.

(5) At the time of investment, the Plaintiff considered all cases where the Plaintiff opened and invested in its own account under the management of the above Defendant, and where it invests in a kind of investment fund operated by the above Defendant, and determined that it is effective to invest as an investment fund due to the nature of futures option transaction requiring prompt order and mass transaction, and transferred the investment money specified in the attached investment details to the above Defendant 2’s foreign exchange bank, bank, and national bank account. The Plaintiff’s investment money was integrated with the investment money of other investors into Defendant 2’s account and operated in the form of the fund.

(6) From April 15, 1999 to August 1, 2001, Defendant 2 paid to the Plaintiff KRW 344,670,00 (the dividend amount of KRW 280,670,000 + the amount of KRW 64,00,000 with Defendant 2’s foreign exchange remittance at the Plaintiff’s request) as profit dividends under the said investment contract.

(7) Meanwhile, in the instant investment process, the Plaintiff did not open an account under the name of the Plaintiff with respect to the Defendant Company, and did not check the details of futures option transactions with respect to the Defendant Company as well as Defendant 2 during the said investment period. Defendant 2 continued to make profits by transferring profit dividends under an agreement, and the investment amount was well managed, as well as its own real estate, and continued to make the instant investment by offering its parent and female apartment as well as by raising funds.

C. The defendant 2's fraud of investment funds and violation of the Securities and Exchange Act

(1) However, Defendant 2 reported a large number of losses in the course of performing futures option transactions through the above fund method, and around February 11, 2001, Defendant 2 did not fully make profits through futures option transactions to the extent that the loss of the investment principal is serious and the Plaintiff would pay dividends to other investors in the amount invested. However, Defendant 2 concealed the fact and continued to pay to the Plaintiff a large amount of profits by investing in futures option transactions. Further, Defendant 2 would continue to pay a large amount of profits if an additional amount of money is paid upon receiving a loan from a bank as collateral and making an additional investment by adding the money to the money. In short, Defendant 2 continued a futures option transaction with an additional investment amount of KRW 750,00,000 in total (attached Form 5) from the Plaintiff, and the Plaintiff’s investment amount was lost on October 12, 2001.

(2) Defendant 2 was sentenced to three years in imprisonment with labor on February 11, 2003, on the ground that: (a) the Plaintiff was in the current state of investment; (b) acquired additional investment money of KRW 750,000,000; (c) recommended investment through an investment return guarantee agreement as seen earlier as an employee of a securities company; and (d) made a comprehensive discretionary transaction after being entrusted with a transaction without any restriction on the types and issues of securities and the classification and methods of the sale; and (b) the said judgment was finalized on May 16, 2003 by dismissal of the appeal.

2. Plaintiff’s claim against Defendant 2

(a) Occurrence of liability for damages;

(1) Determination on the assertion of fraud

According to the above facts, on February 11, 2001, Defendant 2, by deceiving the Plaintiff as above, obtained a total of KRW 750,000,000 from the Plaintiff by deceiving the Plaintiff, and the said Defendant is liable to compensate for the loss equivalent to the same amount that the Plaintiff suffered (hereinafter referred to as the “loss caused by fraud”) and the damages for delay.

Furthermore, the Plaintiff asserts that Defendant 2, who invested from March 1999 to November 21, 200, acquired 410,000 won (the sum of investment funds in attached Form 1 to 4) by fraud. However, even according to all the evidence mentioned above with respect to the above investment funds, the Plaintiff is deemed to have made an investment in trust and without permission with Defendant 2, and it is difficult to recognize that Defendant 2 had made a fraudulent act. Thus, this part of the Plaintiff’s assertion is without merit.

(2) Determination on the assertion of violation of duty to protect

Next, the Plaintiff asserts that the Defendant committed an unlawful act committed against the Plaintiff, a customer, such as interfering with the Plaintiff’s proper perception of risks associated with futures option transaction through an agreement on guaranteeing investment returns, etc., thereby incurring losses equivalent to the above amount. Therefore, the Plaintiff is liable to compensate for such losses.

However, Defendant 2 did not notify the Plaintiff of the risk of futures option transaction with a much risk than the ordinary stock transaction because it is possible for Defendant 2 to invest up to 6.6 times of equity capital. In violation of Article 52 of the Securities and Exchange Act, Defendant 2 recommended the Plaintiff to make an investment by preparing an investment contract as above and guaranteeing the return of investment profits and principal, and later, Defendant 2 did not notify the Plaintiff of the loss incurred while performing futures option transaction with the Plaintiff’s investment deposit. The above Defendant’s act interfered with the Plaintiff’s right formation of awareness of the risk which inevitably entails futures option transaction, or actively recommended transactions with excessive risk in light of customer’s investment situation, and thus, Defendant 2 is liable to compensate the Plaintiff for losses incurred by the Plaintiff and losses incurred by the violation of the duty to protect the Plaintiff (hereinafter referred to as “liability to protect the Plaintiff”) and damages for delay.

(3) As to this, Defendant 2 asserted that Defendant 2 could not claim damages from Defendant 2, an accomplice, because the Plaintiff traded futures options through a borrowed account with Defendant 2 for personal benefit and committed joint tort in violation of the Act on Real Name Financial Transactions and Guarantee of Secrecy. However, the Plaintiff’s claim for damages from the ground of tort as stated in the above paragraphs (1) and (2) is not a claim for damages from the Defendant’s tort on the ground of the content as alleged above. Thus, the Defendant’s claim based on a different fact is without merit.

(b) Offset of negligence:

However, with respect to Defendant 2’s loss 410,00,000 won due to Defendant 2’s violation of the duty to protect the Plaintiff’s occupation and experience, the Plaintiff also has the ability to recognize the risk of his own investment in light of the Plaintiff’s occupation and experience and to analyze the results of investment management. As seen earlier, Defendant 2’s failure to check the management status of the above Defendant’s investment when he believed only 2’s horse and paid a large amount of investment more than 10 times for 2 years and 4 months, and neglected it without examining the above Defendant’s investment fund management status. Furthermore, it was erroneous in raising the investment fund by offering the apartment as security of his parents and a woman’s apartment as well as his own real estate, disregarding the risk of the futures option transaction and receiving monthly high-rate dividends. Since such negligence of the Plaintiff caused the above damages and expansion, it is reasonable to consider the calculation of the amount of damages. However, in light of the contents of the Plaintiff’s negligence, it is reasonable to limit Defendant 2’s liability to 70% based on the victim’s negligence.

(c) Set-off of profits;

The fact that the plaintiff received 344,670,00 won from the defendant as profit dividends is the same as mentioned above. This amount is the profit that the plaintiff acquired from the plaintiff's beliefing the defendant's end and making the investment in this case and should be deducted from the above amount of damages (the plaintiff's above assertion is without merit since the defendant 2 paid the interest and fees on loans and fees 34,494,456 won as the plaintiff paid the interest and fees on loans and fees 34,494,456 won. Thus, the amount to be deducted from the plaintiff's investment amount is 310,175,544 won (the profit dividends 344,670,000 - interest and fees - 34,494,456 won). However, there is no evidence to acknowledge that the plaintiff paid the above interest and fees on the real estate security loan.)

D. Sub-determination

Therefore, Defendant 2 is obligated to pay the Plaintiff damages amounting to KRW 692,30,00 [total damages amounting to KRW 1,160,000,000 (amounting to KRW 750,000,000 due to fraud + damages amounting to KRW 410,000 due to fraud + KRW 410,000 x 0.3 (Contributory Negligence) - KRW 344,670,000 (gains-off)] and damages amounting to KRW 344,670,00 after the date of the above Defendant’s tort, which the Plaintiff seeks after the date of the above Defendant’s tort, 5% per annum as stipulated in the Civil Act from August 2, 2001 to May 31, 2003; and 20% per annum as stipulated in the Act on Special Cases Concerning Promotion, etc. of Legal Proceedings from the following day to the date of full payment.

3. Plaintiff’s claim against Defendant Company

A. Claim for damages due to unlawful acts in violation of the Securities and Exchange Act

The plaintiff asserts that the defendant company is liable for all damages suffered by the plaintiff since it committed a tort in violation of the Securities and Exchange Act by arbitrarily selling futures options without the plaintiff's decision as to the type and issue of securities and the classification and method of trading (see Article 107 (1) of the Securities and Exchange Act), although the type and issue of securities and the classification and method of trading are required to be decided by the customer (see Article 107 (1) of the Securities and Exchange Act).

According to Gap evidence No. 4-13 of the Securities and Exchange Act, it can be acknowledged that the defendant company received a final judgment of conviction against the crime of violating Article 107 of the Securities and Exchange Act, which provides for the restriction on discretionary sale and purchase. However, Article 107 of the Securities and Exchange Act on the restriction on discretionary sale and purchase is a provision for protecting customers, and its purpose is to establish transaction order by stipulating the procedure for securities transaction. Thus, as long as it is clear that the customer expressed his intention of delegation of sale and purchase, there is no reason to deny its judicial effect, and if it is denied its validity, there is an unreasonable result that may undermine legal stability among the parties to the transaction. Thus, the agreement of violation of Article 107 of the Securities and Exchange Act on discretionary sale and purchase is also effective under private law (see, e.g., Supreme Court Decision 94Da38199, Aug. 23, 196).

B. Demanding employer liability

(1) Main argument

The plaintiff asserts that the defendant 2's tort, like the above paragraph 2, was committed in appearance with respect to the execution of the defendant company's business, so the defendant company is jointly and severally liable with the defendant 2, who is the defendant 2's employer, for all damages incurred to the plaintiff by the defendant 2.

First, as to whether Defendant 2’s tort was committed in connection with Defendant 2’s execution of business, it was difficult for the Plaintiff to take account of the above facts. ① from October 198 to October 12, 2001, Defendant 2 engaged in this case’s futures option transaction at its own office while working as an investment consultant at its port office. ② The fact that Defendant 2’s borrowed-name account was established at the Defendant company is as mentioned above. However, the Plaintiff did not have established its own futures option account at all, and accordingly, the Plaintiff deposited the instant invested money into Defendant 2’s personal account in addition to the above fact that it was difficult for the Plaintiff to take account of the above fact that Defendant 2 did not know of the fact that it was committed by the above Defendant 2’s act of raising funds to Defendant 2, and that it was difficult for the Plaintiff to take account of the above fact that it did not receive the investment option account from Defendant 2, as well as the fact that it did not receive the investment option account from Defendant 2’s own bank account.

(2) Preliminary assertion

Defendant 2’s assertion that Defendant 2’s act of managing the instant investment money in this case as the employer of Defendant 2 is difficult to be seen as an act related to the management of the Defendant Company’s business, and even if it is acknowledged as an act related to the execution of the Defendant Company’s business by appearance, it shall be deemed that the Defendant’s act was either known or did not know by gross negligence that it does not fall under the scope of the Defendant Company’s business performance, and thus, the Plaintiff cannot be held liable for the employer’s liability. Thus, Defendant 2’s assertion that Defendant 2’s act did not fall under the scope of the Defendant Company’s business performance.

4. Conclusion

If so, the plaintiff's claim against the defendant 2 is justified within the above scope of recognition, and the remaining claim against the defendant 2 and the claim against the defendant company against the defendant 2 are dismissed without merit. Since the judgment of the court of first instance is justifiable, the plaintiff's appeal is dismissed. It is so decided as per Disposition.

【Attached Investment Details omitted】

Judges Lee Sung-sung(Presiding Judge)