Court Ruling Seen as Move to Bring More Accountability to Financial Firms

By Park Si-soo
Staff Reporter

A Seoul court ordered an asset management firm and a bank to pay 6.1 billion won ($5.25 million) in compensation to 214 private investors, Monday, for losses incurred by their arbitrary change of terms of investments.

The amount of compensation, which virtually covers the investors' total losses, is the largest ever awarded in a collective damages suit of this kind.

It will likely trigger a flood of similar lawsuits, considering the huge losses investors sustained during the global financial crisis. The management firm said it will appeal the ruling.

In previous rulings, courts have limited the liability of financial firms for compensation of losses to 50 percent of the original investment. This time around, the court cited "mutual responsibility."

"The investors suffered losses because, arbitrarily and without consultations, the asset management firm changed the manager of the derivatives," said presiding Judge Lim Bum-seok of the Seoul Central District Court. "Woori and Hana, thus, should be held responsible for the losses as they breached their contract with the investors."

In 2007, the 241 plaintiffs had invested in an equity-linked fund called "Woori 2 Star Derivatives KW-8."

This was part of 28.4 billion won's worth of investments made by some 980 private investors on the back of bullish stock markets at home and abroad.

The fund, which was managed by Woori CS Asset Management and marketed by Hana Bank, was supposed to subscribe to derivatives being handled by BNP Paribas, but Woori CS changed the partner to Lehman Brothers without notice, apparently believing that returns would be bigger.

The investors filed a damage suit against Woori and Hana because their investments evaporated as a result of the bankruptcy of Lehman Brothers in September last year.

They claimed they had lost their money because the two companies had invested in an over-the-counter derivative issued by the now-defunct Lehman Brothers, not by BNP Paribas, as stated in the contract.

Lawyer Cho Sang-wook, who represented Woori, refuted the verdict.

"The bottom line is whether the change of guarantor to Lehman from BNP was justifiable," Cho told reporters during a briefing. "No rule banning the change in question is stipulated in a contract, meaning the firm is not liable for the losses incurred by it."

The lawyer underlined that this decision runs counter to a decision in June on a similar case.

A total of three damage suits stemming from "Woori 2 Star Derivatives KW-8" have been filed. The first ruling was in favor of Woori and Hana, exempting them from any financial compensation.

In that case, a total of 52 private investors filed a suit against Woori CS, seeking 1.8 billion won in compensation for their losses as a result of Woori's unapproved switch to Lehman Brothers.

The investors claimed that "Lehman Brothers' credit rating was lower than that of BNP Paribas at the time of the investment," proving that Woori and Hana had not been prudent enough.

But the court rejected their claim, saying, "The management firm is entitled to change where it makes investments without notice, in order to get higher returns."

Meanwhile, Woori CS has halted redemptions on the derivatives fund since Lehman Brothers filed for bankruptcy in September.

About 900 people in total bought the derivatives.

pss@koreatimes.co.kr