[Invest&Law] Only 17 Lawsuits Filed in 20 Years Since Introduction Due to High Barriers

The Path Forward for the Securities Class Action System
Accounting Fraud, Stock Price Manipulation, Insider Trading, and More
A Key Relief Mechanism for Retail Investors
Strict Requirements Lead to Investor Apathy
Need for Streamlined Procedures and Systemic Reform

Although the Lee Jaemyung administration has declared a "one-strike-out" policy against stock price manipulation, the "securities class action system," which is a key mechanism for protecting retail investors, is being largely ignored by investors. This is because, at the time of its introduction, the requirements for filing a lawsuit were set very strictly due to concerns that there would be a flood of lawsuits. Now, however, concerns have shifted to the system's effectiveness.

According to data submitted by the office of Representative Joo Jinwoo of the People Power Party, a member of the National Assembly Legislation and Judiciary Committee, to the Court Administration Office on August 6, only 17 securities class action lawsuits have been filed over the past 20 years. The securities class action system was established to provide relief to investors harmed by illegal activities such as accounting fraud, inadequate audits, stock price manipulation, and insider trading. The system was introduced in 2005 based on the judgment that it would not be effective for a large number of retail investors to file individual lawsuits against companies, either from the perspective of investor protection or litigation efficiency.

The problem is that the procedures are so complicated and cumbersome that few investors are willing to pursue lawsuits. In fact, before filing a securities class action in court, plaintiffs must first obtain court approval to proceed with the main lawsuit. It takes several years just for the court to decide whether to grant this approval. Since up to three levels of appeal can be pursued all the way to the Supreme Court before the main case is even heard, it can take up to six rounds of trials. For example, in the GS Engineering & Construction case, which became an issue in 2012, the first trial on the merits did not begin until 2020.

For instance, the so-called "C-Motech stock price manipulation" case, which caused damages of approximately 14.5 billion won to 4,972 domestic investors, took five years just to obtain approval for the class action, and the entire process lasted nine years. Before a securities-related class action can proceed, the court must verify that there are at least 50 plaintiffs and that the total securities held by the plaintiffs amount to at least one ten-thousandth of the total number of securities issued. This approval process is what causes significant delays.

Shareholders of C-Motech filed their lawsuit in October 2011 and finally received court approval from the Supreme Court in November 2016. In the end, it took nine years for them to receive compensation for only 10% of their losses. Because the compensation amount was small and the lawsuit took so long, even those who won partial victories described the outcome as a "pyrrhic victory."

The barriers to entry are also high. The biggest obstacle is the difficulty of proving investment losses. Most of the evidence needed for litigation is held by the companies, making it virtually impossible for victims to access it. Even if the court issues an order for document submission, there are no effective sanctions if the company fails to comply. Additionally, the fact that some victims must pay litigation costs upfront on behalf of all plaintiffs is another barrier to entry.

As investor losses from stock price manipulation, accounting fraud, and false disclosures by listed companies continue to increase, calls for expanding and reforming the securities class action system have been persistent. A legal expert commented, "There are countless embezzlement and breach of trust cases in the capital market, but there are no adequate monitoring systems to oversee internal accounting controls or to sanction misconduct after the fact. The procedures need to be simplified and the barriers to litigation lowered through institutional reform."

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