A management company that did not disclose the ‘limited audit opinion’ even though it knew about it… Law "violation of investor protection obligation"

The Supreme Court ruled that a management company that failed to inform investors of the fact that the underlying fund received several “qualified opinions” in accounting audits violated its obligation to protect investors.

According to the legal community on the 8th, the 2nd Division of the Supreme Court (Chief Justice Kwon Young-joon) overturned the original trial's ruling that the plaintiff lost last month in a lawsuit seeking compensation filed by a domestic securities company against an asset management company and sent the case back to the Seoul High Court.

In 2019, the defendant asset management company set up and managed an indirect fund that invested in two funds set up by an overseas basic fund manager.

One fund sought profits through investment advisory services for small and medium-sized companies in North America and other regions, and the other fund sought profits by providing financial restructuring services to companies in difficult financial environments.

The plaintiff, a securities company, sold the beneficiary certificates of these funds to 71 investors pursuant to a consignment sales agreement.

The problem arose the following year when suspicions of accounting fraud arose in one of the basic funds.

Eventually, redemptions of the fund stopped, and it became difficult for domestic funds to pay redemptions at maturity.

Accordingly, the securities company agreed to pay fund investors an amount equivalent to 80% of the investment principal, and took over damages compensation bonds for the fund. The compensation paid by the securities company to investors was 10.2 billion won.

The securities company later filed a lawsuit against the asset management company, demanding compensation for damages.

The first and second trials did not recognize the asset management company's liability for compensation.

It was determined that it could not be said that the asset management company failed to properly investigate and inspect the insolvency of the underlying fund during the fund establishment and operation process.

However, the Supreme Court judgment was different. The Supreme Court noted that the underlying fund received a ‘qualified opinion’ in accounting audits in 2014, 2016, and 2017, and that the defendant received a due diligence questionnaire with this content from the overseas management company.

A qualified opinion means that the financial statements may contain material errors, but may not be general, or sufficient and appropriate audit evidence cannot be obtained, and the undetected errors may be material but not general.

The Supreme Court stated that the mere fact that it received a qualified opinion cannot determine that the fund is insolvent or unsuitable for investment, but it may be a circumstance that calls into question accounting transparency.

The Supreme Court ruled, "The defendant emphasized accounting transparency by stating in each fund's product description that '(the basic fund) is evaluated by an external accounting agency on a quarterly basis,'" and added, "Even in light of this, if there were circumstances that could raise doubts about accounting transparency, it is a matter that could have a significant impact on the reasonable judgment of investors."

At the same time, he said, "If we confirmed the specific contents of the relevant audit opinion and discovered matters that could have a significant impact on rational investment decisions in relation to the profit structure and size of the underlying assets and accounting transparency that the defendant himself emphasized, we should have taken action, such as confirming or verifying related data through the underlying fund management company."

Even if, as an investor in an offshore fund, there are limitations in directly conducting due diligence and checking the data provided by the underlying fund management company, he explained, "At least, you should have confirmed the contents of the qualified opinion notified by the underlying fund management company and then notified the investor of the fact that you received the qualified opinion and its contents."

The Supreme Court said, “In the end, the defendant violated its obligation to protect investors by failing to investigate specific details or provide necessary information to investors, even though it knew that it had repeatedly received limited opinions.”

Accordingly, the case was sent back to the original court for retrial and judgment.