The Seoul Southern District Court recognized the liability of the selling financial institution for damages in connection with the so-called "Hong Kong Gen2 Fund redemption suspension crisis" that occurred in 2020. It is understood to be the first court ruling to find a financial institution liable in tort in a dispute related to the Gen2 Fund.
The Civil Agreement Division 11 of the Seoul Southern District Court (Presiding Judge Kang Hee-seok, Director General) on the 17th ruled partially in favor of the plaintiff in a damages suit filed by domestic manufacturing company A against Shinhan Investment Corp. (formerly Shinhan Investment). The court ordered Shinhan Investment Corp. to pay A $5.58 million (about 7.25 billion won) plus delay damages. A retained attorneys Kim Jae-hwan and Kim Hyun-sung of the law firm Barun as counsel.
In 2019, A entered into a specific money trust contract through Shinhan Investment Corp. to invest in a derivative-linked security (DLS) based on the Hong Kong Gen2 Partners (Gen2 Partners) fund as the underlying asset. The product was described as structured to generate revenue by investing in stable assets such as bonds of domestic commercial banks, but in 2020 the Gen2 manager notified a redemption deferral due to a decline in asset value, halting the recovery of the investment principal.
The court viewed Shinhan Investment Corp. not as a mere seller but as the DLS issuer and found that it failed to fulfill the corresponding duty to protect investors. Shinhan Investment Corp. did not specifically investigate the fund's net asset value (NAV) calculation method and the risks if calculation was impossible, and sales staff explained the product without properly understanding the NAV calculation principle.
Explanations about the leverage strategy were also at issue. Shinhan Investment Corp. knew that the Gen2 Fund could use unlimited leverage, yet, after only a formal email confirmation with the manager, it guided investors that "leverage is not used," it was found. The court viewed this as gross negligence that led investors to mistakenly perceive the product's risk level as lower than it actually was. It also found that emphasizing the inclusion of commercial bank bonds and promoting the product as having a low possibility of principal loss despite the absence of any substantive insurance or guarantee mechanism impeded investors' reasonable judgment.
Barun made the NAV calculation method, the leverage strategy, and the method of promoting stability the core issues in this suit. In particular, it emphasized that the financial institution's duty to explain and investigate cannot be lightened merely because the investor is a corporation, and that if a DLS issuer sold the product by stressing stability without verifying the risk structure of the underlying asset, it must be held liable.
The ruling came amid a trend in which investors were consecutively losing similar suits involving the Gen2 Fund. Earlier, the Seoul Central District Court dismissed a claim by an investor who suffered losses after investing in a DLS product with the Gen2 Fund as the underlying asset. At the time, the court did not recognize deception by the financial institution or a breach of the duty to explain, citing reasons such as "the prospectus stated the possibility of principal loss and the investor personally signed."
Kim Jae-hwan of Barun said, "This ruling shows that even when the same Gen2 Fund is the underlying asset, the legal assessment of liability can differ depending on rigorous proof of how the financial firm designed the product, gathered information, and sold it," adding, "This outcome will serve as a strong legal basis to protect investors' rights in the many unresolved disputes related to the Gen2 crisis going forward."