Unauthorized Fund-Raising Fraud | Supreme Court Judgment Finding That Sales Commissions Received by an Investment Solicitor May Also Be Returned for the Repayment of Victims

The Act on the Regulation of Conducting Fund-Raising Business without Permission prohibits raising funds from an unspecified number of persons without authorization or permission.

This Act prohibits unauthorized fund-raising in order to protect investors and maintain a sound financial order, and a violation may be subject to criminal punishment.

The lower court held that, because the sales commissions were paid in the course of an illegal solicitation of investment funds, they constituted a performance rendered for an illegal cause.

On the ground that, under Article 746 of the Civil Act, the return of a performance rendered for an illegal cause cannot be claimed, the lower court did not accept the plaintiff's claim.

The Supreme Court first held that it should be recognized that the defendants had received the sales commissions from the company.

In the course of the litigation, the defendants did not clearly dispute the fact itself that they had received the amounts from the company. Under the Civil Procedure Act, where a party does not clearly deny a fact asserted by the opposing party, this may be regarded as an admission.

Accordingly, it held that the lower court's determination that it was unclear whether the payer was the company ran counter to the principle of party presentation.

The Supreme Court regarded as significant the point that the actual source of the sales commissions was the investments made by the investors.

The company in this case had maintained a structure of paying sales commissions and dividends with new investment funds.

In the end, the commissions received by the sales personnel could be regarded as having come from the funds of the victims of the unauthorized fund-raising.

The Civil Act provides that the return of a performance rendered for an illegal cause cannot be claimed.

The Supreme Court, however, held that, in light of the principles of fairness and good faith, a claim for return may exceptionally be allowed.

In particular, it took into account that, in this case, the amounts recovered through the rehabilitation proceedings were to be applied to the repayment of the investment victims.

If the claim for return were not recognized, the sales personnel who participated in the process of soliciting investments would retain the profits obtained through their illegal acts, while the victims' losses would remain unremedied.

The Supreme Court held that such a result runs counter to the principle of fairness.

The precedents, however, hold that a claim for return may exceptionally be allowed in the following cases.

In this case, the points that the sales commissions originated from the funds of the unauthorized fund-raising victims and that the returned amounts would be used for the repayment of the victims were important considerations.

In an unauthorized fund-raising investment structure, solicitors, brokers, freelance sales personnel, and others are often involved in the process of attracting investments.

Because they are paid a fixed commission based on their performance in soliciting investment funds, they may be assessed as having substantially contributed to the illegal investment structure.

This judgment is significant in that it showed that, in cases of unauthorized fund-raising fraud, the sales commissions paid to investment solicitors may also be subject to return.

In particular, where rehabilitation proceedings or bankruptcy proceedings are underway, such recovery lawsuits may be filed in order to secure the funds for the repayment of victims.

Accordingly, those who are involved in the process of soliciting investments need to bear in mind that legal liability may arise even from what is merely sales activity.

When you seek advice from Daeryun Law Firm, a corporate attorney closely reviews the investment structure and the flow of funds and comprehensively analyzes matters such as whether unjust enrichment is established, the scope of any liability for return, and the possibility of joint liability.

In addition, where a recovery lawsuit linked to rehabilitation proceedings or bankruptcy proceedings is underway, the firm can assist in organizing the facts with a focus on the financial transaction records, the investment structure, and the circumstances of the sales commission payments, so that a systematic litigation response strategy can be prepared.

If you need assistance with a related matter, you are welcome to arrange a consultation through the corporate attorney legal consultation booking with Daeryun.