[1] Where a securities company issued and sold securities, the investment profits of which are determined in connection with the underlying asset price or index on the agreed appraisal base date, the duty to protect investors whose interests conflict in the course of avoiding risks

[2] In a case where Company A’s ordinary share price, which is a closing price as of the interim evaluation date, based on the underlying assets of Company A, was higher than the base price, which is a closing price as of the issue date, or where the same is applicable, Company B, etc., issued the stock-linked bonds that pay the redemption amount, and sold them to investors, including B, etc., at a price below the base price at a price below the base price at a price lower than ten minutes prior to the expiration of the interim evaluation date, and the fulfillment of the conditions of redemption before maturity was omitted, the case holding that it is sufficient to view Company C’s act as impeding the fulfillment of the conditions

[1] Articles 2 and 150(1) of the Civil Act, Article 52 subparag. 3 of the former Securities and Exchange Act (repealed by Article 2 of the Addenda to the Financial Investment Services and Capital Markets Act, Act No. 8635 of Aug. 3, 2007), Article 36-3 of the former Enforcement Decree of the Securities and Exchange Act (repealed by Article 2 of the Addenda to the Enforcement Decree of the Financial Investment Services and Capital Markets Act, Presidential Decree No. 20947 of Jul. 29, 2008) / [2] Articles 2 and 150(1) of the Civil Act, Article 52 subparag. 3 of the former Securities and Exchange Act (repealed by Article 2 of the Addenda to the Financial Investment Services and Capital Markets Act, Act No. 8635 of Aug. 3, 2007), Article 36-3 of the former Enforcement Decree of the Securities and Capital Markets Act (repealed by Article 2 of the Addenda to the Enforcement Decree of the Financial Investment Services and Capital Markets Act)

Plaintiff 1 and one other (Law Firm Hannuri, Attorneys Kim Sang-won et al., Counsel for the plaintiff-appellant)

Daewoo Securities Co., Ltd. (Attorneys Son Ji-yol et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2010Na71761 decided December 14, 2012

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. The exercise of rights shall be in accordance with the principle of trust and good faith (Article 2 of the Civil Act); the parties to legal relations shall not exercise their rights or perform their obligations in such a way as to undermine equity or trust (see, e.g., Supreme Court Decisions 9Da53490, May 15, 2001; 2002Da1321, Mar. 10, 2006). Article 52 subparag. 3 of the former Securities and Exchange Act (repealed by Article 2 of the Addenda of the Financial Investment Services and Capital Markets Act, No. 8635, Aug. 3, 2007) prohibits investors from exercising their rights or from taking appropriate measures to prevent conflict of interest between the securities company and its executives or employees from exercising their rights to protect investors’ interests or from taking appropriate measures to prevent any inevitable conflict of interest between the securities company and the securities company under Article 36-4 of the former Enforcement Decree of the Securities and Exchange Act (amended by Presidential Decree No. 20147, Jul. 29, 2008).

Therefore, even if a securities company issues the securities in which investment profits are determined in connection with the underlying asset price or index on the agreed appraisal base date and sells them to investors to avoid risks associated with the price fluctuation in underlying assets and to ensure the soundness of asset management, where conflicts of interest arise between investors and securities companies according to the underlying asset price or index on the agreed appraisal base date, the transaction of risk-hedging by the securities company related to the underlying asset shall be recognized as economic rationality in light of the time, method, etc., and shall not affect the fair price formation of underlying assets in the process, thereby unfairly impairing investors’

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

A. The Defendant’s new shares issued on March 16, 205 are calculated on an average of Samsung 10,00 won listed on the Korea Securities and Futures Exchange; the base price of Samsung 108,500 won, whichever is earlier, shall be the intermediate valuation date and the intermediate valuation date shall be the closing price of Samsung 18, 205, Nov. 16, 2005, and the intermediate valuation price, whichever is earlier, shall be earlier than the base price of the 10,000-end 7,000-end 7,000-end 7,000-end 1,000-end 7,000-end 7,000-end 1,000-end 7,000-end 1,000-end 7,000-end 7,000-end 1,000-end 7,000-end 16,07.

B. Plaintiff 1 purchased 42,000 shares of the stock-linked securities of this case from the Defendant in KRW 420,000,000, and Plaintiff 2 purchased 7,000 shares of the stock-linked securities of this case in KRW 70,00,000, respectively.

C. A securities company that issued stock-linked securities can use as a financial source for the redemption of stock-linked securities the risks arising from price fluctuation by trading underlying assets in a way of “deelta hedge”, which is a financial entity that owns an adequate quantity of underlying assets based on the deel value, which represents the sensitive value of options for the price fluctuation of underlying assets by itself or through a third party, so that profits and losses of underlying assets held by options can be offset. The Defendant also engaged in a transaction in deel hedging by adding the entire stock-linked securities with underlying assets to the entire stock-linked securities operated by SamsungSD common stocks from the middle of July 2005 to the intermediate evaluation date of the instant interim evaluation. The Defendant also adjusted the increase and decrease in the deteel value by maintaining the quantity of stocks held by approximately 15%, compared to the deel value.

D. On November 16, 2005, the second interim evaluation date of the stock-linked securities of this case (hereinafter “instant interim evaluation date”) trading KRW 108,50,50, which was the base price, from 12:00 to 14:50,000, which was 10 minutes before the end of the transaction, at the price of KRW 108,500 or KRW 109,000, which was 12:00. Meanwhile, the Defendant held KRW 287,221, which was 287,21, which was the preceding day, around November 15, 2005, and the detonel value of the entire stock-linked securities based on the underlying assets of the Defendant, which was 108,500,00 won when the intermediate evaluation date of this case was 127,137,137,108,100,300,010.

E. On the day of the intermediate evaluation of this case, the Defendant sold 180,000 shares in connection with SamsungTRI’s common shares through the product account of the Defendant’s OTS derivatives department, and 134,00 shares in a single unit during the connection trading period, and sold 98,190 shares among them. The specific details are as follows.

1) The Defendant issued an order to sell orders to sell 11:15:32 to 11:17:10 on six occasions a total of KRW 160,00,00, from KRW 100 to KRW 11:11,00,00, which is the immediately preceding conclusion date, from KRW 109:50 to KRW 11:00. However, the Defendant concluded an order to sell orders to sell 11:15:32 on the same day only KRW 10,00 (as the sale price is KRW 109,00), and the remainder of orders were not concluded. The Defendant concluded an order to sell 14:27:14 and KRW 14:48:10 on the same day to KRW 109,00, KRW 100, KRW 100 on the immediately preceding conclusion date, and the order to sell 100,000 among the orders to sell 109,00,000 among the orders to sell 14:27:14.

2) In addition to the above sales order, the Defendant issued an order to purchase 70,000 shares in total on seven occasions from 10:48:51 to 11:28:44 on the intermediate evaluation date of the instant case, but the contract was not concluded.

3) The Defendant issued an order to sell KRW 107,50 for each of the 14:52:54 of the instant interim assessment date with respect to SamsungSDI’s common shares at KRW 14:52:54 of the instant interim assessment date, KRW 14:53:10 of the instant interim assessment date (the order was revoked in 14:53:48), KRW 8,000 of the 14:53:27 of the 14:53; KRW 14:500 of the 14:54:50 of the instant interim assessment date; KRW 108,500 of the sales price at KRW 109:50 of the instant interim assessment date; KRW 108,500 of the instant interim assessment date; KRW 20,000 of the 14:5:40 of the instant interim assessment date; KRW 108,501 of the instant orders; KRW 4008,501 of the instant interim assessment date.

4) The Defendant’s sales order volume with respect to SamsungSID’s common shares during the single provisional sale period of the instant interim evaluation date reaches approximately KRW 79% of the total sales order volume, and the contract conclusion ratio reaches approximately KRW 95%.

F. On March 19, 2008, Plaintiff 1 received 280,645,161 won, which was due and payable from the Defendant on March 19, 2008, the maturity date of the share-linked securities of this case, and Plaintiff 2 also received 39,901,372 won as the repurchase price of the share-linked securities of this case on January 23, 2008.

3. We examine these facts in light of the legal principles as seen earlier.

A. The stock-linked securities of this case are securities, the fulfillment of the terms and conditions of the redemption before maturity are determined according to the closing price on the interim evaluation date of SamsungSI, a underlying asset, and the period and amount of the redemption before maturity of the Defendant’s payment to investors varies. In addition, the terms and conditions of the redemption before maturity of the stock-linked securities of this case depends on the facts that the legal act becomes effective in the future is uncertain. The Defendant is obligated to pay to investors of the instant stock-linked securities with the amount of the redemption after adding the proceeds agreed at par value to the investors of the instant stock-linked securities in accordance with the sales contract of the instant stock-linked securities where the said suspension conditions are fulfilled. As such, there is a conflict of interest with the investors of the instant stock-linked securities depending on whether the said suspension conditions are fulfilled.

B. The Defendant’s sale of SamsungSID’s common shares in the instant stock-linked securities is basically conducted for the sake of its own interest of avoiding risk, and thus, it does not unfairly infringe the investor’s trust or interest in the process. As such, as in the instant case, the underlying asset price on the intermediate evaluation date is close to the price meeting the conditions of redemption before maturity. As such, there is a high possibility that the conditions of redemption before maturity may be fulfilled depending on the closing price, and thus, there is a conflict of interest between the Defendant and the investor, the Defendant shall not engage in hedge transactions by any content or method that may undermine the investor’s trust, and is obliged to protect investors by doing hedge transactions in a manner that may affect the fulfillment of the conditions of redemption before maturity

다. 그런데 피고는 이 사건 중간평가일의 삼성SDI 보통주 종가가 이 사건 주가연계증권의 상환 기준가격인 108,500원으로 결정되는 경우 그 델타값인 -127,137에 따라 보유하고 있던 삼성SDI 보통주 287,221주 중 약 160,000주(≒ 287,221주 - 127,137)를, 종가가 상환조건이 성취되지 아니하는 108,000원으로 결정되는 경우 그 델타값인 -192,137에 따라 약 95,000주(≒ 287,221주 - 192,137)를 매도할 필요가 있었으므로, 상환조건 성취 여부와 무관하게 보유한 삼성SDI 보통주 중 상당량을 이 사건 중간평가일의 접속매매시간대 전체에 걸쳐 분산하여 매도함으로써 중도상환조건 성취 여부를 결정하는 요소인 종가 결정에 미치는 영향을 최소화하여야 할 주의의무가 있었다. 그럼에도 피고는 이 사건 중간평가일의 접속매매시간대에는 매도 주문 시 그 호가 대부분을 직전체결가보다 높게 제시하여 대부분의 계약 체결이 무산되는 결과를 초래하고 오히려 매수 주문을 내기도 하는 한편, 단일가매매시간대에 같은 시간대 전체 매도 주문의 약 79%를 차지하는 134,000주에 관하여 매도 주문을 하면서 그중 94,000주에 관하여는 기준가격인 108,500원에 미치지 못하는 호가를 제시하였고, 그 결과 삼성SDI 보통주의 이 사건 중간평가일 종가가 108,000원으로 결정되어 이 사건 주가연계증권의 중도상환조건 성취가 무산되었다. 피고의 이러한 행위는 원고들에 대한 투자자보호의무를 소홀히 한 것으로 신의성실에 반하여 이 사건 주가연계증권의 중도상환조건 성취를 방해한 것이라고 볼 여지가 충분하다.

D. Nevertheless, on the grounds indicated in its reasoning, the lower court determined otherwise as follows: (a) the Defendant’s act of selling a large volume of SamsungSI’s common shares around the end of the interim evaluation date of the instant case was a justifiable transaction for the purpose of managing the risk of the financial institution that issued the stock-linked securities; and (b) thus, even if the redemption condition of the stock-linked securities was not fulfilled, it cannot be deemed that it obstructed the fulfillment of the conditions against the good faith and good faith. In so doing, the lower court erred by misapprehending the legal doctrine on the duty of care under the good faith and good faith in the

4. Conclusion

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

Justices Lee In-bok (Presiding Justice)