법무법인(유한) 율촌 | Yulchon LLC

The National Pension Service as a plaintiff who is most powerful institutional investor in Korea invested in the corporate bonds issued by Daewoo Shipbuilding & Marine Engineering (“DSME”) who committed accounting fraud, and defaulted on its payment of the principal and interest on the bonds. The Plaintiff filed claims for damages against DSME, its representative director, financial officer, non-executive directors, Deloitte Anjin (external auditor), and underwriters. Yulchon represented the three underwriters, who are among the largest securities companies in Korea.

The plaintiff alleged that our clients failed to perform their duty of care when conducting underwriting overall. Consequently, false financial statements resulting from fraudulent accounting were included in the securities registration statement and investment prospectus, which the plaintiff relied on when investing in the corporate bonds. 

Yulchon conducted research on precedents and relevant legal theories from both domestic and foreign sources to present a legal argument that financial statements are regarded as professional information, and if there is no reason for the underwriters to suspect that such information was falsely prepared, no further investigation is required and the information shall be deemed reliable. In particular, Yulchon emphasized the fact that the duty of care imposed on the lead managers in conducting due diligence should be fundamentally different from that of statutory auditors considering the purpose of due diligence, which is not to verify the authenticity of financial statements, but to verify solvency of the bond issuer.  

This lawsuit also involves Financial Investment Services and Capital Markets Act issues such as (i) whether losses on bonds can be recognized even before its maturity, (ii) the date to start counting the statutory limitation period for the institutional investors’ damages claims, (iii) absence of loss as a result of debt-equity swap, and (iv) difference between share, corporate bond and note in respect of assessment of damages. The court’s decision on these matters will have great significance for the current and future practices.  

In this case, which involves a large-scale fraudulent accounting scandal, losses claimed by institutional investors may reach an astronomical amount, to a maximum of KRW 1.65 trillion. Various legal issues are being debated, including novel issues regarding Korea’s Financial Investment Services and Capital Markets Act and the application of the Civil Act on this matter. In particular, this case may set a precedent for limiting the role and responsibility of watchdogs, such as a company’s non-executive directors, external auditors, and underwriters.