Incomplete sale of private equity funds to elderly investors in their 70s... Court rules for ‘full compensation’

The court ruled that a securities company that delayed the return of overdue fund investments must compensate for the full amount of damages.

In particular, it is attracting attention because it is an unusual ruling that recognizes 100% responsibility of financial institutions, breaking the existing practice of holding investors partially responsible.

According to the legal community on the 31st, the Seoul Northern District Court ruled in favor of the plaintiff in the contract deposit claim lawsuit filed by A, a woman in her 70s, against Securities Company B on the 10th, saying, "Pay the full amount of 265.88 million won, which is the investment principal minus the profits already received."

This is the result of fully acknowledging the actual damages claimed by the plaintiff.

Mr. A was introduced to an employee of Securities Company B located in the same branch through his main bank in 2019.

At the time, the employee recommended a real estate fund, a class 1 ultra-high risk private equity fund that could result in a loss of the entire principal, and Mr. A invested 304.5 million won in it.

The problem arose when a dispute with movie theater tenants arose and the sale of real estate fell through due to the COVID-19 incident. Even though the originally set fund maturity date was exceeded twice, Mr. A ultimately did not receive his investment back.

Accordingly, Mr. A filed a lawsuit, claiming that he did not receive a proper explanation about the ultra-high risk structure of the product or the possibility of principal loss at the time of investment, and that the basic principle of recommending a product appropriate for the investor's situation was not followed.

On the other hand, Securities Company B completely denied its obligation to return the money. Since the sale of the real estate has not been completed and the funds have not been cashed out, the contract cannot be considered terminated.

In addition, the securities company even refused the request, saying, “If it is difficult to return the cash, at least hand over the fund certificate.” As the Capital Markets Act was revised, the minimum investment standard for private equity funds was raised to 500 million won, so Mr. A, who invested 300 million won, is 'not qualified'.

However, the court ruled in Mr. A’s favor. The court acknowledged the violation of the duty of explanation and the principle of suitability under the Capital Markets Act, saying, “The defendant relied only on information received inappropriately from the bank without understanding the latest information of the investor, and unreasonably recommended ultra-high-risk products to the plaintiff, an elderly and vulnerable financial consumer.”

He continued, "The limit on the investment standard is only a regulation applied when issuing a new fund, and cannot be applied at the stage of settling and returning an existing contract. In a situation where there is a violation of the financial institution's obligations, it is against the principles of good faith to hold the investor responsible for failing to carefully check the terms and conditions and reduce the amount of compensation."

Attorney Nam Kwon-yul of Daeryun Law Firm, who represented the plaintiff, said, "The plaintiff was in a desperate situation where he had to support the medical expenses of his unconscious son and his family's living expenses on behalf of his widowed spouse," and pointed out, "Recommending ultra-high-risk products that are completely unsuitable for financial purposes to vulnerable financial consumers in a trustworthy space such as a bank branch is a clear mis-sale."

He continued, “This ruling, which broke the customary offsetting of investor negligence and recognized 100% responsibility of financial institutions, is a very meaningful precedent that demonstrates the court’s strong will that it can no longer grant immunity to perpetrators.”

#Accident #Court #Private equity fund #Full compensation

Shin Min-ji (sourminjee@ikbc.co.kr)

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Incomplete sale of private equity funds to elderly investors in their 70s... Court rules for 'full compensation' (link)