Investor protection
Brokerage held accountable for price rigging
It has been common that security houses and asset management companies have engaged in price manipulation in relation to an investment vehicle called derivate product equity linked securities (ELS). But they can no longer us this unfair practice as a local court ruled against a brokerage last Thursday.
The Seoul Central District Court found that Daewoo Securities brought losses to its investors by manipulating the share prices of Samsung SDI that were supposed to determine investment returns under an ELS contract. The ruling came after two investors filed a damage suit against the brokerage, claiming that they suffered a loss of 270 million won from their investment in the ELS product in November 2005.
The court held Daewoo accountable for dumping 130,000 Samsung SDI shares in a bid to lower the share price below the preset level that required the brokerage to make early returns to investors. It stated that the massive selling of the shares led to the firm's breach of trust. That is, Daewoo failed to meet its obligation of honoring investor rights.
The landmark ruling is the first of its kind here in South Korea. Investors had had no way of claiming their losses in the ELS-related share price rigging. But now, securities houses and asset management companies are no longer allowed to shirk their responsibility for such losses. They should feel ashamed of their illicit practice of dumping shares to the detriment of investors.
The case will also affect similar lawsuits that are underway. Last December, the Financial Services Commission requested the prosecution to investigate Daewoo, Mirae Asset Securities, the Royal Bank of Canada (RBC) and BNP Paribas over ELS-related share price manipulation.
A growing number of investors are expected to bring their ELS disputes to court. Besides, investors can file a class action suit against brokerages and asset management firms if their losses take place after February 2009 when a capital market consolidation act went into effect.
In addition to the ELS products, there have been a ceaseless number of disputes between investors and financial companies over huge sums of losses. Even banks have been sued for their alleged violation of investor interests in related with the sales of stock-invested funds and foreign-currency derivates.
The financial authorities should set up a better legal framework to prevent a recurrence of such cases. It is also necessary to create an effective system to better protect investors from unfair practices by financial companies that refuse to play the game. It goes without saying that the nation cannot become a global financial hub without respecting the rights and interests of investors.