CONTENTS
- 1. Damages Lawsuit, What Were the Detailed Circumstances?
- - Damages Lawsuit, What Are the Relevant Statutes and Precedents?
- 2. Damages Lawsuit, What Was the Lower Courts' Determination?
- 3. Damages Lawsuit, What Was the Supreme Court's Determination?
- 4. Damages Lawsuit, What Was Daeryun's Strategy?
1. Damages Lawsuit, What Were the Detailed Circumstances?
The plaintiffs who filed the damages lawsuit were several hundred investors.
Between 2014 and 2015, these investors acquired shares of Company A, a well-known domestic shipbuilding company.
The problem began around that time, when Company A became embroiled in allegations of accounting fraud.
Company A was accused of preparing and disclosing financial statements and other documents that concealed losses amounting to several trillion won.
In addition, Accounting Firm B, which served as Company A's auditor, also failed to conduct a proper audit and issued an “unqualified” opinion on a report that contained the accounting fraud.
The following year, the press raised a series of suspicions surrounding Company A.
First, in May, a report appeared stating that Company A would record its first deficit since 2006, and then, in July, an article was published reporting that Company A had concealed losses of several trillion won by not reflecting them in its financial statements.
Once the allegations of accounting fraud were raised in earnest, Company A's stock price plummeted. In a single day, the closing price fell sharply from 12,500 won to 8,750 won.
Company A's stock price, which continued to decline, even fell to 5,750 won by the end of August.
Accordingly, the investors filed a lawsuit claiming damages against Company A, Accounting Firm B, and others.
Damages Lawsuit, What Are the Relevant Statutes and Precedents?
📌 Relevant Statutes
Financial Investment Services and Capital Markets Act, Article 162 (Liability for Damages Arising from False Statements, etc.)
(1) Where an acquirer or disposer of securities issued by a corporation subject to the submission of business reports suffers loss because of a false statement or indication of, or the omission to state or indicate, a material fact in the business report, semiannual report, quarterly report, report on material matters, or attached documents thereto under Article 159 (1) (excluding the audit report of the auditor), the following persons shall be liable for such loss:
1. The submitter of such business report, etc., and the directors of the corporation subject to the submission of business reports at the time of submission;
2. A person who falls under any of the subparagraphs of Article 401-2 (1) of the “Commercial Act” and who directed or executed the preparation of such business report, etc.;
3. A certified public accountant, appraiser, or person specializing in credit rating, etc. (including the entity to which such person belongs) who, having certified that the descriptions in such business report, etc., and the attached documents thereto are true or accurate, signed them, or any other person prescribed by Presidential Decree;
4. A person who consented to having his or her evaluation, analysis, or confirmation opinion stated in the descriptions of such business report, etc., and the attached documents thereto, and who confirmed the content so stated.
Article 170 (Liability for Damages of an Auditor)
(1) Article 31 (2) through (9) of the “Act on External Audit of Stock Companies, etc.” shall apply mutatis mutandis to the liability for damages of an auditor (including a foreign auditor; hereinafter the same shall apply in this Article) where a bona fide investor suffers loss by relying on the audit report of the auditor attached to a business report, etc.
📌 Relevant Precedents
“In stock transactions, the financial condition of the target company is one of the most important factors in forming its stock price, and the audit report prepared through the external auditor's accounting audit of the financial statements in the target company's business report is the most objective material revealing the company's financial condition. As it is provided and disclosed to investors and exerts a decisive influence on the formation of the stock price, absent special circumstances, an investor trading in stocks should be regarded as having traded the target company's shares in the belief that the financial statements in the business report, which best reflect the target company's financial condition, and the audit report thereon were duly prepared and disclosed, and on the understanding that the stock price was naturally formed on that basis.” (See Supreme Court, Decision of September 12, 1997, 96 Da 41991; Supreme Court, Decision of December 15, 2016, 2015 Da 243163, etc.)
2. Damages Lawsuit, What Was the Lower Courts' Determination?
In broad terms, the determinations of the lower courts that heard the damages lawsuit were aligned.
That is, they held that Company A and Accounting Firm B had to pay compensation to the plaintiff investors.
However, regarding the amount, the determinations of the first-instance and second-instance courts diverged.
First, the first-instance court rendered a judgment ordering payment of 10.2 billion won in damages, corresponding to approximately 60 percent of the amount the plaintiffs had claimed.
The appellate court likewise expressed the view that Company A and others had to compensate the investors for their loss.
However, with respect to the “period” for which loss was recognized, it differed from the first-instance court.
The appellate court took the position that the decline in the stock price that occurred between April 2014 and early May 2015 was not Company A's responsibility.
April 2014 was the day immediately after Company A disclosed its false financial statements and audit report, and early May of the following year was the day after the press reported that “Company A would record its first deficit since 2006.”
For about a year after the false information was disclosed, no such fact had been raised as an issue by the press or others, and for that reason it was difficult to conclude that the false disclosure itself had affected the decline in the stock price.
As the period of liability for damages was reduced, the amount payable to the plaintiffs was also reduced by about 1 billion won.
Against this judgment of the appellate court, the plaintiffs, Company A, and Accounting Firm B all indicated their intention to file a final appeal.
3. Damages Lawsuit, What Was the Supreme Court's Determination?
The Supreme Court, which reheard the damages lawsuit, reversed the appellate judgment and remanded the case to the lower court.
The Supreme Court held that the appellate court had erred in calculating as loss only the decline in the stock price that occurred from early May 2015 onward.
Its reasoning was that, absent clear grounds to find that Company A's accounting fraud had no effect on the decline in the stock price, it should be regarded as having had such an effect.
The appellate court, however, had determined that there was no causal relationship between the decline in the stock price and the false disclosure, on the ground that information regarding Company A's false disclosure was not known to the market during this period; the Supreme Court added that this determination contained an error in misapprehending the legal principles on the presumption of the amount of loss under the Financial Investment Services and Capital Markets Act.
4. Damages Lawsuit, What Was Daeryun's Strategy?
We have analyzed the Supreme Court's judgment holding that, in a case in which shareholders claimed damages against a company that had committed accounting fraud, where there is no clear evidence that the false disclosure had no effect on the decline in the stock price, the disclosure should be regarded as having had such an effect.
Company A's accounting fraud case was one of the issues that drew nationwide attention at the time.
As there were many shareholders, damages lawsuits followed in various parts of the country, and this Supreme Court judgment is expected to influence the judgments in other investors' cases as well.
Daeryun Law Firm LLP operates a 🔗“Civil and Damages Group” staffed by numerous attorneys who have handled many related lawsuits.
Drawing on extensive trial experience and data accumulated through a wide range of cases, our attorneys work to protect the rights and interests of their clients.
If you have any inquiries regarding a damages lawsuit, you are welcome to reach out to Daeryun Law Firm LLP at any time.
