By Kang Seung-woo
Woori Bank has decided to accept a high court ruling that holds it responsible for losses incurred by a fund invested in derivatives products and ordered to pay fund holders 70 percent of their investment losses from its Woori Power Income Fund, citing an improper sale.
The Woori decision is being followed by a move to take a legal action against Citigroup, Bank of America (BoA)-Merrill Lynch and Royal Bank of Scotland (RBS) with a U.S. court to hold them responsible for losses in derivatives investments of as much as $300 million.
Eighty-seven investors of Woori Power Income Fund initially filed a damage suit of 2.9 billion won, but the compensation was settled at 2.03 billion won by the high court.
The 70 percent is the highest compensation ruled by a court on fund sellers or asset management firms. The previously highest compensation was 40 percent.
The fund was launched by Woori Credit Suisse Asset Management in 2005 and Woori Bank and other fund agencies sold about 170 billion won worth of the funds to 2,300 or so investors in the name of Woori Power Income Fund 1 and 2.
However, the funds, which invested in bonds and derivatives, including those of U.S. home mortgage giants Fannie Mae and Freddie Mac, were hit hard by the global financial crisis in 2008 because the fund was a derivatives product that can incur losses when the prices of the underlying assets drop below a certain level.
As a result, investors lodged a lawsuit, claiming that the fund sellers misled them about the investment risks of the derivative fund.
According to the financial industry, Woori Power Income Fund 1 that expired last week sustained 100 percent in investment losses and the second fund is also expected to record another 100 percent loss in January next year.
The ruling also reflected flaws in the derivates product itself, along with the bank’s irresponsible sales.
The court reached a conclusion that Citigroup, BoA-Merrill Lynch and RBS sold such risky investment vehicles to Woori Bank without properly giving information about entailing risk.
In a related move, Woori, Korea’s second-largest lender, intends to sue the three foreign banks.
According to Woori, the improper sales of risky derivatives with the likes of collateralized debt obligations (CDOs) and credit default swaps (CDSs) resulted in the bank suffering 1.62 trillion won in losses following the U.S. subprime crisis and claiming former CEO Hwang Young-key.
Woori plans to file a lawsuit against the three foreign banks to New York federal court within this year and the legal action would be linked to the lender’s losses worth $200 million to $300 million.