D-1 to the Financial Supervisory Service and Sohn Tae-seung Disciplinary Invalidity Lawsuit Verdict... Financial Sector on Alert

Seoul High Court Civil Division 8-1 to Deliver Verdict on 22nd
Financial Supervisory Service's Position Likely to Change Based on Verdict
Potential Changes in Financial Companies' Governance Structure

[Asia Economy Reporter Song Seung-seop] The second trial verdict of the ‘disciplinary invalidation cancellation lawsuit’ between the Financial Supervisory Service (FSS) and Sohn Tae-seung, Chairman of Woori Financial Group, is just one day away. As interpretations emerge on the extent of a CEO’s responsibility for financial accidents, and given its potential impact on trials of other financial companies, the financial sector is on high alert.

According to the legal and financial sectors on the 21st, the Seoul High Court Civil Division 8-1 will deliver the appellate court verdict on the lawsuit filed by Chairman Sohn, who claims the FSS’s disciplinary action was unfair, on the 22nd. The verdict was originally scheduled for the 8th but was postponed by two weeks.

The FSS imposed sanctions in 2020, citing incomplete sales during the launch of overseas interest rate-linked derivative-linked funds (DLF) by Woori Bank. Sohn Tae-seung, then the bank president, was held responsible for internal controls and received a ‘reprimand warning.’ This reprimand warning is a severe disciplinary measure that restricts reappointment and employment in the financial sector. In response, Sohn filed an administrative lawsuit in March of the same year to cancel the disciplinary action and won the case in August last year.

The FSS presented five grounds to justify the disciplinary action, but the first trial court ruled that all except for ‘deficiencies in the operation and results of the product selection committee’ were inappropriate. Reviewing the current Financial Company Governance Act, the court found that while there is an obligation to establish internal control regulations, there is no basis for sanctions simply because these were not properly followed. The judgment stated, “The FSS misunderstood the law and constituted the grounds for the disposition beyond the legally permitted scope.”

In the second trial, initiated by the FSS’s appeal, the issue of ‘effectiveness of internal controls’ was fiercely contested again. The FSS’s legal counsel even mentioned the recent 60 billion KRW embezzlement incident at Woori Bank to overturn the verdict. Regarding the other grounds not accepted by the first trial court, the FSS maintained its position, stating, “All case dispositions were made based on grounds for sanctions, and the damage is enormous, so the plaintiff’s claim should be dismissed.”

The Financial Sector Will Be Shaken Depending on the Second Trial Verdict

The impact on the financial sector will inevitably be significant depending on the trial outcome. If Chairman Sohn wins again following the first trial, judicial risks will decrease, signaling a green light for his reappointment. This will also be good news for CEOs of other financial companies currently involved in lawsuits due to private equity fund scandals.

In particular, it could influence the second trial appeal of Ham Young-joo, Chairman of Hana Financial Group, who lost in the first trial despite the same issue. The FSS and Sohn’s legal teams engaged in legal debates over Ham’s first trial verdict during the second trial. The FSS’s counsel stated, “The Hana Bank court acknowledged that standards for proper internal control were not established, resulting in only formal compliance monitoring.” Sohn’s counsel countered, “(The Hana Bank verdict) was based on the ambiguous concept of effectiveness.”

The FSS must decide whether to appeal, a decision that rests with the new head, Lee Bok-hyun, a former prosecutor. If appealed, the trial will move to the Supreme Court, extending the time until sanctions are finalized. Amid ongoing financial accidents requiring accountability, the FSS’s position may weaken somewhat. Changes in the supervisory authority’s inspection and sanction methods will also be inevitable.

Conversely, if the FSS wins the trials against both Chairman Ham and Chairman Sohn, the governance of domestic financial groups will be shaken. It will become harder to avoid severe disciplinary responsibility in incidents related to Lime Fund, where sanctions have yet to be finalized. If CEO responsibility is found in embezzlement or foreign exchange-related suspicions, the FSS will be able to take more proactive sanctions.

This content was produced with the assistance of AI translation services.