Hello, Attorney Kim Gwang-sik of Chungchul Law Firm here.

Recently, the Supreme Court made clear that, in relation to the sale of the Optimus fund, while it recognized a securities firm's liability for damages due to violation of investor protection duties, it also clarified that the seller is not required to return the investment principal itself as unjust enrichment.

This ruling is very significant because it did not simply ask whether the fund suffered losses, but separately considered what explanations the seller gave to investors, whether it actually reviewed the risk structure, and whether legal benefit could still be said to remain with the seller even after the investment funds had left it.

Especially amid the ongoing disputes over private funds, real estate PF funds, and structured financial products, this ruling is meaningful in that it reaffirmed the scope and limits of the investor protection duties borne by financial companies.

Today, focusing on the above ruling, I will organize in detail the structure by which a fund seller's liability for damages is recognized.

[Question] What is the standard for a fund seller's liability for damages due to a breach of the duty to explain?

[Answer]

1.  The Optimus crisis and the core of this Supreme Court ruling

The Optimus fund was introduced as a stable product investing in receivables from public institutions, but it was later revealed that the funds were actually used for private bonds of unlisted companies, leading to a massive suspension of redemptions.

In this case, the investor sought return of the investment principal from the securities firm and asserted both unjust enrichment restitution liability due to rescission of the contract and damages liability due to violation of investor protection duties.

The trial court recognized restitutionary unjust enrichment liability for the full amount of the investment funds against the seller, but the appellate court and the Supreme Court overturned this.

The Supreme Court held that since the investment funds paid by the investor had already been incorporated into the trust company and fund assets and managed, absent special circumstances, it cannot be said that the seller still held a benefit equivalent to the investment principal.

In other words, the seller merely performed the role of a broker passing on the investment funds, and because the actual investment funds were incorporated into fund assets and managed, it is difficult to say that the principal itself remained with the seller.

By contrast, the Supreme Court recognized damages liability for violation of the seller's investor protection duties. The fact that, without sufficiently reviewing the actual structure and riskiness of the product, it was explained as a stable investment product in receivables from public institutions, and that key risk factors were not properly disclosed to the investor, was considered important.

Ultimately, this ruling can be seen as a case that clearly distinguished that “unjust enrichment restitution liability” and “damages liability for breach of the duty to explain” are entirely different legal structures.

2. To what extent is the seller's duty to explain recognized 

Under the Capital Markets Act, a financial investment business operator must recommend suitable products by considering the investor's investment purpose, financial condition, and investment experience, and bears a duty to sufficiently explain the product structure and risks.

Especially where ordinary investors have difficulty directly understanding the product structure, such as in private funds or structured products, simply delivering an investment prospectus is often not sufficient.

The factors courts practically consider important are as follows.

- Whether the product structure was actually reviewed

- Whether the existence and stability of the underlying assets were confirmed

- Whether the expected return structure and the possibility of risk occurrence were explained in a balanced way

-  Whether the investor could realistically recognize the possibility of loss

-  Whether the internal review and risk management procedures actually functioned

In this case as well, the court held that the seller should not merely relay the manager's explanation, but at least independently review the product's core structure and risk factors.

In particular, the expression “investment in receivables from public institutions” is highly likely to give ordinary investors the impression of a virtually stable bond-type product. If the actual investment target was private bonds of an unlisted company, this becomes a key factor that can distort the investor's perception of risk itself.

Recently, courts have tended to scrutinize the internal control and product review systems of financial companies much more strictly than before. Therefore, it has become increasingly difficult to avoid liability merely by having prepared formal explanatory materials.

3. Why are unjust enrichment restitution and damages judged differently? 

From an investor's perspective, it may naturally raise the question, “If the product was mis-sold, shouldn't all of the investment principal be returned?” However, legally, unjust enrichment restitution and damages have different requirements and effects.

Unjust enrichment restitution is determined mainly by whether the other party currently retains a benefit without a legal basis. Damages, on the other hand, are determined mainly by whether a loss was caused by an unlawful act or breach of duty.

In this case, the Supreme Court held that since the investment funds had already been incorporated into fund assets and managed, it is difficult to say that the seller retained a benefit equivalent to the investment principal. Therefore, it did not recognize a duty to return the principal itself as unjust enrichment.

However, if the seller violated investor protection duties and induced the investor to make a mistaken investment decision, separate damages liability may arise for the resulting loss.

In practice, fund disputes often involve claims of contract rescission, mistake, fraud, breach of the duty to explain, violation of the suitability principle, and violation of the prohibition on unfair solicitation. Because the proof structure and damage calculation method differ for each cause of action, it is very important to distinguish them and approach the case strategically.

4. How is the amount of damages determined

In financial investment product disputes, even when the seller's liability is recognized, the full amount of loss is not automatically recognized. Courts generally determine the proportion of liability by comprehensively considering the following factors.

- The investor's investment experience and expertise

- Whether it was a large-scale investment

- Whether the investor could have recognized the risks on their own

- The content of the explanatory materials and the contract

- The degree of the seller's influence in the investment decision-making process

- Market conditions and external factors

In this case as well, the court calculated damages by deducting amounts already recovered by the investor and limiting the seller's liability ratio. This is a representative example showing the court's tendency in financial disputes to consider both the “seller's responsibility” and the “principle of the investor's own responsibility.”

However, recently, where structural failures in a financial company's internal controls are confirmed, there is also a trend toward recognizing higher liability ratios than before. In particular, in the sale of high-difficulty financial products or private funds, there is a stronger atmosphere of considering the need for investor protection.

In recent financial litigation, what matters more than simply “was an explanation given?” is “was the explanation actually understandable?” For example, the following factors often emerge as key issues.

- Whether the sales staff themselves understood the product structure

- Whether the risk rating was appropriate

- Whether there was additional explanation for elderly investors or investors with lower expertise

- Whether the investor suitability analysis procedure was operated merely as a formality

- Whether recordings, counseling records, and internal report documents substantiate the actual explanation process

Especially recently, internal product review materials, risk review reports, and sales guidelines of financial companies are often used as very important evidence in litigation. In other words, not only the explanation at the sales stage but the entire internal decision-making process before sales is becoming the subject of legal liability determination.

Therefore, for financial companies, it is becoming far more important to substantially establish an internal control system across product selection, review, sales, and post-sale management, rather than merely responding to disputes after the fact.

This Supreme Court ruling regarding the Optimus crisis is significant in that it more precisely organized the liability structure of fund sellers.

A seller does not always have to return the entire investment principal, but if it sold the product while emphasizing only stability without properly reviewing the product structure and risks, damages liability due to violation of investor protection duties can certainly be recognized.

Especially in today's financial markets, product structures such as private funds, real estate PF, structured products, and token securities are becoming more complex. Accordingly, the standards for financial companies' duty to explain and internal controls are also being assessed at much higher levels than before.

From the investor's perspective, it is necessary to specifically review not only the fact that a loss occurred, but also what explanations were given during the sales process, how the risk structure was conveyed, and what problems existed in the internal review system.

Conversely, from the financial company's perspective, merely preparing formal documents is not enough, and it has become essential to build a practical internal control system that can actually understand product risks and explain them to investors.

Based on our consulting experience on behalf of both investors and financial companies in disputes involving private funds and financial investment products, Chungchul Law Firm provides specialized legal advice on whether the duty to explain was breached, the adequacy of internal controls, the scope of damages, and overall litigation strategy. If you need a legal review related to losses from financial product investments, we recommend systematically analyzing the relevant materials from the initial stage and designing your response strategy.