567 Crude Oil Futures ETF Investors Lose Compensation Lawsuit Against Samsung Asset Management

"The defendant (Samsung Asset Management)'s measure to diversify futures contracts was a defensive action in anticipation of further declines in oil prices. If the oil prices had actually fallen further and the defendant had taken no action, causing losses to the plaintiffs (investors), the plaintiffs might have filed a damages lawsuit on the same grounds, claiming 'no action was taken.'" (Court)

More than 560 investors who invested in Samsung Asset Management's crude oil futures exchange-traded fund (ETF) claimed damages against the asset manager, alleging that "by arbitrarily diversifying and replacing specific futures contracts, they failed to gain profits from the futures price increases," but lost in the first trial.

On the 23rd, according to the investment banking (IB) industry and legal circles, the Civil Division 21 of the Seoul Central District Court (Presiding Judge Kim Ji-hye) recently ruled against 567 investors including Mr. Kang in a damages lawsuit worth about 2.2 billion KRW filed against Samsung Asset Management.

Previously, Mr. Kang and others invested in Samsung Asset Management's crude oil futures ETF product, 'Kodex WTI Crude Oil Futures Special Asset Listed Index Investment Trust (Crude Oil Derivative Type)(H)'. This product tracked the futures price of West Texas Intermediate (WTI) crude oil traded on the New York Mercantile Exchange as its underlying index. Futures are contracts to buy or sell a specific asset at a predetermined price at a specific future date, meaning trading on future value.

In April 2020, when the COVID-19 pandemic caused international crude oil spot prices to plummet, Samsung Asset Management held an emergency meeting and decided to 'early diversify' some of the 'June contracts' held into July to September contracts. This was to hedge against the risk of a sharp drop in June contract prices.

Following the emergency meeting's conclusion, the futures diversification measure was implemented just before the market opened on the 23rd of the same month, changing the June contract composition in the fund from 73% to 34%. However, actual prices defied expectations. The June contract price rose significantly more than the July and September contracts.

Subsequently, Mr. Kang and others filed a lawsuit against Samsung Asset Management, claiming "compensation for the substantial investment losses that could have been gained as the June contract price rose." They argued, "The invested product is a passive fund tracking the WTI futures price as the underlying index. According to the investment contract and prospectus, specific contracts should be changed at predetermined times and methods, but Samsung Asset Management arbitrarily diversified the futures contracts," and "also violated the obligation of timely disclosure due to the diversification."

However, the court dismissed the investors' claims, stating, "Based on the submitted evidence alone, Samsung Asset Management's futures diversification measure cannot be seen as a violation of the contract or investment prospectus."

The court explained, "According to the trust contract, Samsung Asset Management has discretionary authority to select and change investment targets among the underlying index, WTI crude oil futures, spot products, and related products at least. The fact that the fund composition differed somewhat from the underlying index composition does not immediately mean it failed to track the underlying index."

The court also emphasized that at the time of the futures diversification measure, the market consensus was a 'forecast of further decline in June contract prices.' It noted, "This was a time when crude oil supply and demand sharply decreased due to COVID-19. The May contract price fell from over $40 at the end of February 2020 to a historic low of minus $37.63 in April of the same year. The market widely expected the June contract price to plunge or even fall into negative territory like the May contract."

Furthermore, the court stated, "If the June contract proportion had remained at 73% and the price had fallen into negative territory, investors would have faced almost total principal loss and possible delisting. Some investors even requested 'early futures diversification and other proactive measures' due to these concerns."

Regarding investors' claims of 'violation of disclosure obligations,' the court judged, "The prospectus does not contain provisions requiring prior notice when timely disclosure matters arise." Since Samsung Asset Management decided on the futures replacement on the day of the emergency meeting and disclosed the details and reasons to the Korea Exchange and on its website, it complied with the timely disclosure obligations stipulated by capital market laws and the prospectus.

Additionally, the court stated, "if oil prices had actually fallen further, investors would have been significantly protected by the futures diversification measure," and "if oil prices had fallen but no action was taken, investors might have filed damages lawsuits claiming 'the asset manager took no action.'" It also noted that Samsung Asset Management had previously won similar lawsuits filed by other Kodex WTI Crude Oil Futures ETF investors.

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