Court: Asset management firms buying 'Chinese Kkangtong promissory notes' must compensate investors

Seoul Central District Court. / Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Kim Daehyun] The court ruled that a domestic asset management company operating 'empty promissory notes' based on non-performing bonds of a Chinese company must compensate investors.

On the 21st, according to the court, the Seoul High Court Civil Division 16 (Presiding Judges Cha Munho, Lee Yanghee, Kim Kyungae) partially ruled in favor of the plaintiffs, overturning the first trial's dismissal, in a damages lawsuit worth a total of 650 million KRW filed by about 50 investors against Golden Bridge Asset Management. The court recognized compensation responsibility for 455 million KRW of the claimed amount.

The court held that if an asset manager blindly trusts only the information provided by credit rating agencies during the selection and management of investment assets without proper investigation, resulting in losses to investors, the manager must take responsibility and compensate. In particular, since the fund had never invested in Chinese bonds before, it was an unusual investment that required special caution.

The court stated, "It is not enough to simply trust asset information provided by third parties and offer it to investors. Necessary matters must be reasonably and sufficiently investigated within possible limits, and the work must be handled carefully."

It added, "If the credit rating reports and corporate reports had been examined more carefully, it would have been easy to see that they were insufficient to evaluate the stability and profitability of the ABCP, but the investment proceeded without due caution." "The failure to timely recognize the primary default facts and details of CERCG's bonds caused a missed opportunity to prevent further losses to investors."

However, considering that bond-type funds carry the risk of principal loss due to bond default, that investors were sufficiently informed of this possibility, and that Golden Bridge did not profit from investors' losses, the compensation amount was set at 70%.

Regarding this ruling, a Seoul High Court official explained, "It encourages fund management that better protects investors and imposes a duty of specialized and meticulous caution when selecting unusual investment target assets."

Previously, investors suffered losses when asset-backed commercial papers (ABCP) issued domestically based on bonds issued by a subsidiary of the Chinese energy company China National Energy Chemical Group (CERCG) defaulted in 2018. At that time, a default crisis occurred on CERCG bonds amounting to 165 billion KRW, and fund management companies that purchased and operated these bonds also suffered losses one after another.

The first trial ruled that Golden Bridge checked two credit rating agencies' corporate reports and credit rating reports during the acquisition process of the problematic fund and invested believing CERCG's credit rating was stable based on this. It was judged that it was difficult to hold the asset management company responsible for the fund default because it made efforts to evaluate creditworthiness.

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