Claims

General climate

Describe the nature and extent of securities litigation in your jurisdiction.

Securities litigation in Korea includes civil and criminal proceedings pursuant to the Financial Investment Services and Capital Markets Act of Korea (FSCMA). Claims for damages that arise from wrongdoings related to securities transactions may be based on general tort under the Korean Civil Code (KCC) as well. However, under the KCC, the plaintiff must prove the amount of actual damage that was caused by the wrongdoings while the FSCMA allows the damage amount to be estimated simply based upon the difference in prices of the securities. For this reason, most plaintiffs tend to base their claims primarily on the provisions of the FSCMA. A securities class action would be available for certain violations such as insider trading, market manipulation and fraudulent accounting under the FSCMA (see below for further details).

Available claims

What are the types of securities claim available to investors?

Securities litigation in Korea is mostly damages claims. Remedies by way of transaction cancellation and return of profit (for example, where the profits were earned from an erroneous trading order) are available, but allowed only in exceptional cases. Damage claims are mostly based on a violation of public disclosure or fair trading rules. A purchaser of securities who incurred losses or damages as a result of a violation of public disclosure rules, insider trading, market manipulation or fraudulent trading has a claim for damages. Such actions are typically subject to criminal investigations as well. In principle, damages are limited to actual damages, and punitive damages are not allowed under Korean law.

Offerings versus secondary-market purchases

How do claims arising out of securities offerings differ from those based on secondary-market purchases of securities?

Claims arising out of securities offerings do not differ in substance from those based on secondary-market purchases of securities, except that the applicable provisions of law are different and that the underwriters, the persons who drafted or circulated the offering documents and the sellers are also held liable for any violation relating to securities offerings.

Public versus private securities

Are there differences in the claims available for publicly traded securities and for privately issued securities?

For publicly traded securities, all the claims under the FSCMA are available, including damage claims based on violation of public disclosure rules or fair trading rules. In the case of privately issued securities, non-listed companies that issue securities are also liable for damages incurred as a result of a violation of public disclosure rules because non-listed companies over a certain size are required to publicly disclose their business reports and are subject to public disclosure rules. However, market manipulation claims are not applicable to non-listed companies. Insider-trading claims are applicable to non-listed companies if their securities are due to be listed within six months.

Primary elements of claim

What are the elements of the main types of securities claim?

To make a claim that there has been a violation of public disclosure rules, (i) a person (who is required to make an accurate or fair disclosure under the relevant laws) must make a false statement or omits to state a material fact on a document, (ii) which causes damages to the purchaser of securities, and (iii) there must be a causal relationship between the person’s act and the damages. As a defence, the person being accused must successfully prove that he or she could not have known of such misstatement or omission despite exercising due care, or that the claimant knew about such a misstatement or omission.

Unfair trading claims pertain to insider trading, market manipulation and fraudulent unfair trading. The elements of an insider-trading claim are that the insider uses or causes others to use material non-public information in connection with the trading of certain equity securities or other transactions. Market manipulation claims may be based on unfair matched transactions or wash transactions, price manipulation through actual trading or price pegging or stabilisation. The elements of a fraudulent unfair trading claim are that a person employs improper means, or an improper scheme or device, in connection with the sale, purchase or other trading of financial investment products.

There are no different jurisdictions (ie, federal v state) within Korea.

Materiality

What is the standard for determining whether the offering documents or other statements by defendants are actionable?

If there is a misstatement or omission of a material fact in a securities registration statement, prospectus, business report, quarterly report, semi-annual report or a ‘report on material matters’ filed by the defendant, the plaintiff may have a claim for damages. Under Korean securities law, a material fact means any information that may have a significant impact on the investment decision of an investor.

Scienter

What is the standard for determining whether a defendant has a culpable state of mind?

For claims based on a violation of public disclosure rules, the person who prepared the document at issue shall be held liable unless he or she could not know about such violation despite exercising due care (namely, if he or she is negligent). On the other hand, to be held criminally liable based on unfair trading, the defendant should have committed the violation with intent.

Reliance

Is proof of reliance required, and are there any presumptions of reliance available to assist plaintiffs?

Under Korean securities law, there is a presumption of reliance so that the stock purchaser does not need to prove his or her reliance on the misstatements made by the defendant. However, if the stock purchaser knew about the misstatements but still executed the transaction, the defendant is not liable for any damages incurred by the stock purchaser.

Causation

Is proof of causation required? How is causation established?

In principle, causation must be proved by the plaintiff in damage claims. However, because the FSCMA allows the damage amount to be estimated (for a claim based on a violation of public disclosure rules) and because there is a presumed causal relationship between the damages and the unfair securities trade (for an unfair trading claim), the defendant would need to prove that there is no causation between his or her wrongdoing and the damages incurred by the plaintiff. Therefore, Korean courts often require the defendant to prove what the market price of the relevant securities would have been in the absence of the defendant’s wrongdoing.

Other elements of claim

What elements present special issues in the securities litigation context?

Proof of materiality is important because the defendant will be liable for a misstatement or omission of a material fact in public disclosure violation cases, or for the use of ‘material non-public information’ in insider-trading cases. However, ‘materiality’ is an ambiguous term under the FSCMA, which defines a material fact or information merely as a fact or information that may have a significant impact on the investment decision of an investor or the value of the relevant financial investment product.

Limitation period

What is the relevant limitation period? When does it begin to run? Can it be extended or shortened?

The statute of limitations for claims involving market manipulation, insider trading and fraudulent unfair trading are two years from becoming aware of the wrongdoing or five years from the time that the wrongdoing was committed while those for all other claims under the FSCAM or External Audit Law of Korea including damage claims arising from misstatements or omission of material facts or improper audits are one year from becoming aware of the wrongdoing or three years from the time that the wrongdoing was committed. The statute of limitation for tort liability claims under the KCC is three years from becoming aware of the wrongdoing or 10 years from the occurrence of such act. These periods cannot be extended or shortened.