Court: "ChabioTech with 'False Accounting' Must Fully Compensate Stock Investors for Losses"

All Claimed Damages Fully Recognized

In a civil lawsuit filed by investors against ChabioTech, a KOSDAQ-listed company, and its executives for losses incurred due to a decline in stock prices after believing false disclosures, the court recognized the company's liability for damages. ChabioTech is a holding company of the Cha Hospital Group, which includes Cha Hospital and Cha University of Medicine and Science. This ruling is expected to have a significant impact on investors' claims for damages under the Capital Markets Act related to accounting practices and false disclosures by biotech companies.

According to the legal community on the 20th, the Civil Division 30 of the Seoul Central District Court (Presiding Judge Jung Chan-woo) recently ruled in a lawsuit filed by four investors against ChabioTech and its CEO, demanding about 200 million KRW in damages, ordering the company, the two CEOs at the time, and the disclosure officer to jointly pay each investor the full claimed amount ranging from 4.25 million to 17 million KRW. In a similar lawsuit filed by 12 investors claiming about 2 billion KRW, the court also ruled that ChabioTech and others must pay the full claimed amount. The court recognized liability for damages for the full amount claimed by each victim, except for plaintiffs with errors in calculating some of the damages. In some cases, liability for damages was recognized up to approximately 780 million KRW.

Previously, Samjong Accounting Corporation, the external auditor of ChabioTech, issued a qualified opinion in March 2018 regarding ChabioTech's 2017 fiscal year. This meant that some items in the financial statements were incorrectly prepared, making it impossible to accurately assess the financial condition. Samjong Accounting Corporation pointed out that ChabioTech had treated large-scale research and development expenses as "intangible assets," which should have been expensed. As a result, ChabioTech became a company that posted losses for four consecutive fiscal years since 2014, was designated as a management item by the Korea Exchange, and its stock price plummeted on March 23 of that year.

Typically, new drug development takes at least 15 years through various stages such as new drug candidate discovery, clinical trials, and approval review, leading to much debate over whether research and development expenses should be treated as costs or assets. That year, the Financial Supervisory Service also launched an accounting audit of 10 biotech companies including ChabioTech, and this case led to a 'accounting controversy' in the biotech industry. Investors who bought stocks after seeing the problematic disclosures filed a lawsuit, claiming that "ChabioTech falsely stated operating profit-related matters in its 2017 semi-annual and third-quarter reports. It made false disclosures by capitalizing development costs that did not meet asset recognition criteria."

The court acknowledged the 'false statement' and ruled in favor of the investors. The court stated, "At that time, ChabioTech did not have the technical feasibility or methods to generate future economic benefits. Since ChabioTech failed to submit any documents even four years after the lawsuit was filed, the company's claim that the statements were not false cannot be accepted." Furthermore, "Since the company had comfortably recorded operating profits up to the third quarter, a reasonable investor would have excluded the risk of being designated as a management item when investing in the stock. The stock price plummeted the day after the false statement was revealed, so liability for damages under the Capital Markets Act is recognized." However, the court did not accept the claims of investors against Samjong Accounting Corporation and one director who did not sign the semi-annual and third-quarter reports. Another lawsuit filed by 48 investors seeking about 2.85 billion KRW in damages related to this case is scheduled for a ruling on the 12th of next month.

A representative of Law Firm Pyeongan, which represented the investors in this lawsuit, said, "This ruling came after intense legal disputes over whether there was a false statement and the causal relationship between the transaction and the damage," adding, "It will be a meaningful precedent for future claims for damages under the Capital Markets Act." They also added, "Due to litigation costs such as recognition fees, we initially claimed only about half of the damages, but the court recognized the full amount of damages and the liability of ChabioTech and its CEOs. We plan to expand the scope of the claim in the appeal."

A representative of the Chabio Group stated, "We cannot accept the court's judgment that it was a 'false disclosure' based on the Financial Supervisory Service's subsequent recommendation guidelines," and said they plan to appeal.

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