Victims of JoongAng Group bond investments, including JTBC, claim misselling, saying lead manager Shinhan Investment & Securities sold the bonds without adequately disclosing key risks. The legal team says that, in light of recent Supreme Court precedents, a lead manager can be liable for damages if it failed to properly inform investors of information that would materially affect their investment decisions, even if it did not sell the product directly to them.
◇"Principal and interest repayment should be smooth"…ratings firm excludes possibility of affiliate support
According to the JoongAng Group bond investors' legal team on the 13th, when JTBC issued 93 billion won in corporate bonds on Feb. 13 this year, lead manager Shinhan Investment & Securities wrote in the prospectus that "repayment of principal and interest should be smooth." It cited the view that short-term liquidity risks would be limited if the possibility of support from affiliates in an emergency were considered.
But the credit rating agency differed. At the time, Korea Ratings wrote in the credit report prepared for the same bond issuance that "financial burdens across the group are on the rise," and said it "did not reflect the possibility of support, given that there is not a large gap between JTBC's standalone creditworthiness and that of the supporting affiliates."
Shin Dong-hwan, an attorney at Changcheon, part of the legal team, said, "Shinhan Investment & Securities presented a conclusion that there would be no problem with principal and interest repayment, based on grounds that directly conflict with the rating agency's assessment prepared for the bond issuance," adding, "Even after the (JTBC) default, support from affiliates did not materialize." Some investors say they trusted the prospectus prepared by Shinhan Investment & Securities, invested, and incurred losses.
◇Supreme Court: "Obligation to disclose key risks even without direct sales"
The legal team is focusing on the Supreme Court ruling related to the 2018 asset-backed commercial paper (ABCP) debacle involving China Energy Reserve and Chemical Group (CERCG). At the time, Hanwha Investment & Securities and Ebest Investment & Securities (now LS Securities) led the issuance and sale of 163.5 billion won in ABCP backed by bonds of CERCG affiliates, and Busan Bank purchased 20 billion won of it.
Afterward, a cross-default occurred on bonds of a CERCG affiliate, and when CERCG failed to honor its payment guarantee, Busan Bank could not recover its principal investment.
Busan Bank filed a damages suit, saying the two securities firms failed to adequately disclose the key risks of the ABCP, causing losses.
The Supreme Court said, "As ABCP issuers and distributors are entities with access to information on securitized assets, they must provide accurate information and data so that the relevant risks can be properly reflected during the credit rating process," and ruled, "If they knew or could have known that the risks were not properly reflected in the credit rating, they must take reasonable measures to prevent the inappropriate information from being provided to investors as is." The intent is that liability can be recognized even if they did not sell to or solicit investors directly.
◇"Direct sales to individuals…more room to apply the precedent"
The legal team believes the key issue in this case will be whether Shinhan Investment & Securities faithfully fulfilled its investor protection obligations.
Lee Bok-hyun, a former Financial Supervisory Service governor who joined the legal team, said, "A lead manager is responsible for providing accurate information to investors, and under recent Supreme Court precedents can bear certain responsibilities not only to investors to whom it sold products directly but also to investors who purchased products in the secondary market," adding, "Even after the underwriting work ends, if information that would materially affect investment decisions is confirmed, it must be disclosed to the market in an appropriate manner."
He added, "While the CERCG case involved an institutional investor purchasing products in the secondary market, this case involves numerous individual investors who invested directly through Shinhan Investment & Securities, so there is more room for the precedent to apply more directly."