Taihan Electric Wire Former Executives Lose D&O Lawsuit Over Accounting Fraud Case [Invest&Law]

After the 2014 Accounting Fraud Scandal, Civil and Criminal Lawsuits Ensued
Insurer Claims, "Management Concealed Legal Issues When Signing Policy"

The former management of Taihan Electric Wire, who spent hundreds of millions of won in civil and criminal legal fees due to an accounting fraud case in 2014, filed a civil lawsuit against an insurance company demanding a payout under a Directors and Officers (D&O) liability insurance contract. However, they lost in the first trial.

According to the legal community on September 2, the 31st Civil Division of the Seoul Central District Court (Presiding Judge Nam Insu) recently ruled against the plaintiffs in a lawsuit filed by Mr. A, a member of the founding family of Taihan Electric Wire, and two others against Insurance Company B, seeking an insurance payout.

In 2014, Mr. A and two then-CEOs entered into a D&O insurance contract worth approximately 67 million won with Insurance Company B through Taihan Electric Wire. The contract stipulated that if a claim for damages was filed against an executive, the insurer would provide compensation up to a maximum of 30 billion won.

However, at the end of the same year the insurance contract was signed, the Securities and Futures Commission imposed a fine of 2 billion won on Taihan Electric Wire, stating that the company committed accounting fraud by preparing and disclosing financial statements in violation of accounting standards from 2011 to 2012. The company's stock price hovered around 2,000 won from 2012 to 2014, but trading was suspended at around 1,200 won when the accounting fraud incident surfaced. After trading resumed, the price plummeted to the 400 won range.

Some minority shareholders filed civil lawsuits against Mr. A and others, and due to reports by the Securities and Futures Commission and others, some executives also faced criminal trials. Although no direct charges were found, Mr. A and the two CEOs each incurred legal expenses of approximately 200 million to 600 million won, including attorney fees and success fees, while responding to the civil and criminal cases.

They demanded insurance payouts for these legal expenses, but the insurance company refused, stating, "The management deceived us during the process of signing the D&O contract, so the insurance contract itself should be canceled." Specifically, the insurer pointed out that the application form asked, 'Are any executives of your company or its subsidiaries aware of any acts or omissions that might give rise to a claim covered by this insurance?' but Mr. A and others answered 'No.' As a result, Mr. A and others filed a civil lawsuit against Insurance Company B.

In the first trial, the court found that "it is recognized that Mr. A and others deceived the insurance company." The court noted, "Although Mr. A and others were found to have breached their duty of care in the civil and criminal cases, there was no direct ruling on whether they intentionally prepared and disclosed false financial statements." Nonetheless, the court emphasized, "The key issue in this case is whether they failed to disclose relevant circumstances despite recognizing the possibility of a lawsuit being filed."

The court stated, "Mr. A and others may not have been accounting experts and thus may not have been able to make precise accounting judgments. However, at the time of the contract, they were the CEOs of Taihan Electric Wire or internal directors and actual controllers." The court added, "Even if they were cleared of charges after being reported by shareholders in 2013, they were fully aware that there was a possibility of additional civil and criminal lawsuits regarding future accounting treatment." Mr. A and others have appealed the first trial's decision.

Meanwhile, after the accounting fraud case, the largest shareholder of Taihan Electric Wire changed from Mr. A's family to a private equity fund, and in 2021, Hoban Group acquired a 40% stake to become the largest shareholder. Taihan Electric Wire itself has also filed a lawsuit against Insurance Company A, seeking approximately 13.4 billion won in insurance payouts related to the accounting fraud case. Taihan Electric Wire also lost in the first trial due to failure to disclose information and other errors, and an appeal is currently underway at the Seoul High Court.