If a third party sold an asset that was incorrectly deposited due to a system error and the price plunged, how far does the operator's liability extend?
As the Supreme Court found in the Samsung Securities(016360) "ghost stock" case that the company could have foreseen sales following an employee's mistake, attention is turning to the scope of civil liability in the mispayment incident involving bitcoin at Bithumb in Feb.
While the Supreme Court broadened the scope of an employer's liability, it limited actual compensation to losses directly caused to the market by the incident. In Bithumb's case, the issues include causation between the mispayment and the price plunge, negligence in the exchange's system, and the calculation of damages.
◇ After an employee's mistake the stock was sold… Supreme Court: "Sales were foreseeable"
In Apr. 2018, Samsung Securities sought to pay 1,000 won per share in cash dividends to 2,018 employee stock ownership association members, but an employee's input error led to about 2.8 billion shares being deposited on the system. Twenty-two employees placed sell orders for about 12.08 million shares, and about 5.01 million shares were executed.
The trial and appellate courts recognized Samsung Securities' liability for damages on the grounds that it lacked a system to filter inputs exceeding the number of issued shares or to block sales. However, they did not recognize a substantial causal relationship or vicarious liability, noting that after the dividends officer's error, other employees' sales intervened.
On the 12th, the Supreme Court reached a different conclusion. Considering the liquidity and convertibility of stock, the transaction system, and the circumstances of the mass sales, it found that the dividends officer could also have foreseen the possibility that the wrongly deposited shares would be sold. The standard is that even if a third party's act intervenes, if it falls within the scope of what was foreseeable, the causal relationship with the initial negligence may not be severed.
◇ At Bithumb, the issue extends beyond employee error to "system negligence"
At Bithumb on Feb. 6, 620,000 BTC were erroneously reflected in user accounts during the process of paying event rewards. No new bitcoin actually came into existence; the quantity was mis-entered in the exchange's internal ledger. Of this, 1,788 BTC were transacted before cancellation, and Bithumb's bitcoin price at one point fell to 81.11 million won, widening the gap with other exchanges to about 17%.
Financial authorities pointed to internal control issues, including verification and approval of manual rewards and reconciliation between customer ledgers and actual held assets.
Attorney Choi Jin-hyeok of Barun Law said, "It is a duty of care generally expected of exchanges to have systems that block abnormal quantities from being paid or transacted," adding, "If there had been safeguards or additional approval procedures, negligence in the exchange's own system management could be recognized."
Bithumb said that after the incident it strengthened verification of asset payments and multi-approval procedures, and also upgraded systems to detect and block abnormal transactions.
◇ Liability and compensation amounts are separate… determining the "normal price" is key
In the Samsung Securities case, the National Pension Service claimed about 29.9 billion won, but the court recognized only about 3.86 billion won in losses on actual stock sales from Apr. 6 to 10, when the incident directly affected the market. Considering uncertainties in determining the normal price and other factors driving share price fluctuations, it limited Samsung Securities' liability to 50% and deducted profits from low-price purchases, ordering compensation of about 1.87 billion won.
This means that even if company liability is recognized, it does not extend to compensating all losses that occurred after the incident.
Attorney Lee Seung-min of Law Firm Seum said, "In the virtual asset market, where 24-hour trading is possible and there are no price limits, there may be a greater chance that subsequent sales were foreseeable," adding, "Bithumb can compare prices with other exchanges or global quotes, so determining the normal price may also be relatively easier."
Bithumb also implemented a "panic sell special 110% compensation" based on the period when price disparities with other exchanges occurred at the time of the incident, paying customers who sold at unfavorable prices during that window the full sales difference plus an additional 10%.
◇ At Samsung Securities employees sold; at Bithumb customers sold… will liability differ?
However, the two cases have different transaction structures. The ghost stock at Samsung Securities was not actually issued stock, but trades were executed on the securities market, and settlement later occurred by borrowing or purchasing real shares. In contrast, the 620,000 BTC at Bithumb was a mispayment in the exchange's internal ledger, not bitcoin created on the Blockchain. At Samsung Securities, employees sold, but at Bithumb, customers transacted.
Therefore, it is difficult to apply the Samsung Securities ruling directly to the Bithumb incident. Ultimately, the issues are the exchange's duty of care regarding its system and the extent to which causation is recognized between the transactions of the mispaid quantity and the price plunge.
Meanwhile, in the unjust enrichment return suit of about 194 million won that Bithumb filed against recipients of the mispayment, the plaintiff won at first instance on the 27th. However, as the case proceeded by public notice service, the reasons for the ruling were not separately presented.