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.

Defence, remedies and pleading

Defences

What defences present special issues in the securities litigation context?

As explained in question 9, the defendant will have to prove that there is no causation between his or her wrongdoing and the damages incurred by the plaintiff. For example, the defendant often uses a statistical method (eg, event study) to show that factors other than the defendant’s act affected the stock price at issue, which has been admitted as evidence by some courts but not others.

Remedies

What remedies are available? What is the measure of damages?

The remedy available for claims under the FSCMA is primarily monetary compensation. The damage amount can be estimated as the difference between the securities purchase price and the disposal price. If the plaintiff has not disposed of the securities at the time of calculation, the disposal price will be the market price of the relevant securities when the last trial is closed.

If there was fraud or error, the relevant transaction may be cancelled (as if such a transaction did not take place in the first place) under the KCC. However, such a remedy is quite rare because it is often difficult to prove that fraud or error occurred.

There are no provisions under the FSCMA providing for remedy by way of removal of directors.

Pleading requirements

What is required to plead the claim adequately and proceed past the initial pleading?

To plead a claim based on violation of public disclosure rules, there must be a misstatement or omission of a material fact.

To plead an unfair trading claim, there must be was a wrongdoing committed by the defendant. However, such wrongdoing is typically proved by the prosecutors or financial regulatory authorities through a criminal proceeding or a regulatory sanction proceeding.

Procedural defence mechanisms

What are the procedural mechanisms available to defendants to defeat, dispose of or narrow claims at an early stage of proceedings? What requirements must be satisfied to obtain each form of pretrial resolution?

Defendants may dismiss securities claims if the statute of limitation period has lapsed. For details of the statute of limitation period, see question 11.

Liability

Secondary liability

Are the principles of secondary, vicarious or ‘controlling person’ liability recognised in your jurisdiction?

For a public disclosure violation claim arising out of securities offerings, there is no secondary or vicarious liability. Any persons who are engaged in the solicitation of, or sale to, investors (eg, directors at the time when the relevant public disclosure was made, persons who instructed or engaged in the drafting of the securities registration statement, accountants, credit appraisal experts, underwriters or persons who drafted or circulated the prospectus) may be held liable.

‘Persons who instructed or engaged in the drafting of the securities registration statement’ include the following:

  • a person who gave an instruction to a director using his or her influence over the company;
  • a director who himself or herself engaged in the drafting; or
  • a person who is not a director but uses a title that is considered to have the authority to conduct the company’s business, such as CEO, president, vice president or managing director, and is instructed or engaged in the drafting.

For a public disclosure violation claim based on secondary-market purchases of securities, there is no secondary or vicarious liability. Directors at the time of submitting a business report, persons who instructed or engaged in the drafting of the business report, accountants, credit appraisal experts and persons who confirmed the contents of the business report may be held liable.

For unfair trading claims, vicarious liability and controlling person liability exist. To avoid vicarious liability, the company must show that the wrongdoing was committed by an employee who is not a director of the company and the company exerted sufficient care to prevent the employee from committing the wrongdoing.

Claims against directors

What are the special issues in your jurisdiction with respect to securities claims against directors?

In addition to FSCMA liability, a director may be held liable under the KCC to a third party who suffered damages as a result of wilful misconduct or gross negligence on the part of the director. If the director’s act was approved by the board of directors, the directors who approved such an act are jointly liable.

Claims against underwriters

What are the special issues in your jurisdiction with respect to securities claims against underwriters?

Underwriters are liable for any misstatement or omission of a material fact in offering documents (eg, securities registration statement).

Recently, a Korean court held that a disclosure made by a non-expert (eg, issuer company) requires a higher level of scrutiny from underwriters than a disclosure made by an expert (eg, accounting firm).

Claims against auditors

What are the special issues in your jurisdiction with respect to securities claims against auditors?

Auditors may be held liable for a breach of their duty with wilful misconduct or gross negligence under the FSCMA, as well as under the External Audit Law of Korea.

Collective proceedings

Availability

In what circumstances does your jurisdiction allow collective proceedings?

In Korea, the Securities-Related Class Action Act was legislated on 20 January 2004 and has been effective since 1 January 2005. However, the Act does not govern all securities-related claims, but only damage claims arising from, among other things, a violation of public disclosure rules in primary or secondary markets, a violation of fair-trading rules (eg, insider trading, stock manipulation or fraudulent unfair trading) and the liability of accountants.

Further, the securities class action must satisfy the following requirements:

  • the class should include at least 50 persons, and the aggregate amount of securities held by such class members as of the date of the cause of action is at least 1/10,000 of the total number of issued and outstanding securities of the issuer;
  • the legal or material issues in the relevant damage claim are common to all class members;
  • securities class action is a suitable or efficient way to realise the rights of, and to protect the interests of, the class; and
  • there is no defect in the statements contained in the certification application and its attachments.
Opt-in/opt-out

In collective proceedings, are claims opt-in or opt-out?

In collective proceedings (ie, securities class action), claims are opt-out. Each class member may file an opt-out report to the court during the opt-out filing period, and the court ruling will be effective for all class members who have not filed such an opt-out report. A person who filed an opt-out report may separately institute his or her own lawsuit.

Damages

Can damages be determined on a class-wide basis, or must damages be assessed individually?

Damages can be determined on a class-wide basis. The total amount of damages will be determined by the court, and will be separately distributed to each class member by a distribution administrator appointed by the court under its supervision.

Court involvement

What is the involvement of the court in collective proceedings?

Korean courts play a leading role in securities-related class actions. For example, a court may alter the scope of the class at its discretion or upon request, and such matters as the institution, withdrawal or settlement of a lawsuit or the appointment or resignation of a representative party will be invalid without permission of the court. Further, the appointment of a distribution administrator, approval of and amendments to the distribution plan, etc, are subject to the authorisation of the court.

Regulator and third-party involvement

What role do regulators, professional bodies, and other third parties play in collective proceedings?

Regulators, professional bodies and other third parties do not play any special role in collective proceedings (although an expert appraisal or opinion may be obtained from them).

Funding and costs

Claim funding

What options are available for plaintiffs to obtain funding for their claims?

In principle, there are no special funding options available for plaintiffs in collective proceedings (eg, attorneys bearing the litigation cost or the winning party seeking the refund of court fees from the government or court).

However, a distribution administrator may subtract the litigation cost and attorney’s fees from the amount awarded in a securities class action.

Costs

Who is liable to pay costs in securities litigation? How are they calculated? Are there other procedural issues relevant to costs?

In general, if a party wins a lawsuit, the losing party should bear the litigation costs. Litigation costs include a stamp duty based on the amount sought by the plaintiff and attorneys’ fees. In this situation, attorneys’ fees do not mean the entire cost actually incurred by the prevailing party for legal services, and will be paid up to the maximum amount set by the Supreme Court’s rules.

If the plaintiff has no address, place of business or business office in Korea, or it is obvious that the claim has no reasonable ground based on the complaint, brief or other court records, and it is otherwise deemed reasonable to secure litigation costs, upon a request from the defendant the court may order the plaintiff to provide security for litigation costs. Litigation costs may be secured by guarantee insurance upon approval of the court.

Investment funds and structured finance

Interests in investment funds

Are there special issues in your jurisdiction with respect to interests in investment funds? What claims are available to investors in a fund against the fund and its directors, and against an investment manager or adviser?

Various types of collective investment vehicles (eg, investment trusts (trust type), investment companies (stock company type) and private equity funds (investment partnership type)) are used in Korea. There is no special type of litigation available for investment funds and, like other securities litigation, damage claims are most common for investment funds.

Structured finance vehicles

Are there special issues in your country in the structured finance context?

The most common type of structured finance is asset backed securitisation. Asset backed securitisation may take place through an SPC (a securitisation company) or a trust. Monetary damage claims are most common for structured finance vehicles.

Currently, regarding cases where a company has issued asset-backed commercial papers (ABCP) with its (falsified) account receivables as the underlying assets, the court is reviewing whether a creditor that extended a loan to the issuing SPC has a claim against the guarantor of the ABCP, and to what extent would the arranger be liable for the issuance of such ABCP.

Cross-border issues

Foreign claimants and securities

What are the requirements for foreign residents or for holders of securities purchased in other jurisdictions to bring a successful claim in your jurisdiction?

Korean courts have jurisdiction over cases where the litigants or the relevant issues have a substantial nexus with Korea. If the alleged wrongdoing took place within Korea or the defendant is a Korean resident, a Korean court is likely to have jurisdiction over the matter, although such determination will be made on a case-by-case basis.

On the other hand, there is no procedural requirement for a foreigner or a non-resident to appoint legal counsel where a Korean court has jurisdiction. However, it would be more helpful to retain local legal counsel for reasons such as the service of process or the language used in court documents and hearings, etc.

Foreign defendants and issuers

What are the requirements for investors to bring a successful claim in your jurisdiction against foreign defendants or issuers of securities traded on a foreign exchange?

As explained in question 29, Korean courts have jurisdiction if the litigants or issues have a substantial nexus with Korea.

If the alleged wrongdoing took place in Korea or affects the public policy or law of Korea, a Korean court is likely to have jurisdiction over the matter, although such a determination will be made on a case-by-case basis.

Multiple cross-border claims

How do courts in your jurisdiction deal with multiple securities claims in different jurisdictions?

As explained in question 5, there are no different jurisdictions (ie, federal v state) within Korea.

Enforcement of foreign judgements

What are the requirements in your jurisdiction to enforce foreign-court judgments relating to securities transactions?

The enforcement of a foreign judgment in Korea must satisfy the following requirements:

  • such a judgment was finally and conclusively given by a court having valid jurisdiction in accordance with the international jurisdiction principles under Korean law and applicable treaties;
  • the defendant was duly served with a service of process (otherwise than by publication or similar means) in sufficient time to enable the defendant to prepare its defence in conformity with applicable laws or responded to the action without being served with process;
  • in view of the substance of such a judgment and the procedures of litigation, recognition of such a judgment is not contrary to the public policy of Korea; and
  • judgments of the courts of Korea are accorded reciprocal treatment in the jurisdiction of the court which had issued such a judgment or the requirements for the recognition of a foreign judgment in the jurisdiction of the court which had issued such a judgment are neither manifestly inequitable nor substantially different in material respects from the requirements for recognition of a foreign judgment in Korea.

Alternative dispute resolution

Options, advantages and disadvantages

What alternatives to litigation are available in your jurisdiction to redress losses on securities transactions? What are the advantages and disadvantages of arbitration as compared with litigation in your jurisdiction in securities disputes?

In general, any party in a dispute may lodge a request for mediation with the applicable trial court. Also, a financial institution or any interested party may file for mediation to the Financial Dispute Settlement Committee established by the Financial Supervisory Service. If the mediation is successful, it has the same effect as a final and conclusive judgment.

Also, a legal dispute may be resolved by an arbitral award through an ex ante or ex post facto agreement. The advantages of arbitration include that arbitration respects the intention of the parties because the arbitration procedure and rules are decided upon agreement of the parties, and a dispute may be resolved by way of a one-time arbitration award. However, the disadvantage is that the dispute may only be resolved by mutual agreement.

UPDATE & TRENDS

Recent developments

What are the most significant recent legal developments in securities litigation in your jurisdiction? What are the current issues of note and trends relating to securities litigation in your jurisdiction? What issues do you foresee arising in the next few years?

The most significant recent legal development in securities litigation in Korea will be the introduction of penalties to be imposed for market disruption activities as of 1 July 2015. Any market disruption activities that do not amount to an insider trading or market manipulation will be subject to an administrative fine.

Also, recently, Korean courts tend to render decisions having the effect of restricting hedging transactions of financial institutions for protection of investors. Korean courts have held that if the price of underlying shares is affected by hedging transactions and such a change in price is against the interest of investors, hedge transactions by financial institutions may be restricted.