The client was a corporation (the "plaintiff company") engaged in specialized private equity collective investment businesses under the Capital Markets Act and its representative director (the "plaintiff representative director").

(2) Case Background

The Financial Supervisory Service (FSS) notified the plaintiffs that they had violated the "restriction on cross-trading between collective investment schemes (funds)" by not trading unlisted stocks of A Airlines at a fair value. As a result, the purchasing fund recognized an unfair loss of about KRW2.4 billion, and the selling fund recognized an equivalent unfair gain. Due to this reason, the FSS issued a prior notice of suspension of duty to the plaintiff representative director.

Later, the FSS Sanction Review Committee revised the suspension disposition against the plaintiff representative director to a reprimand warning. The Financial Services Commission (FSC) deliberation committee further modified the reason for the disposition, claiming that the price of A Airlines' stock was not appropriately reduced but rather applied at an old price. Eventually, the FSC imposed a reprimand warning on the plaintiff representative director.

This sanction was the first case involving a violation of cross-trading restrictions on unlisted stocks, and the plaintiffs filed a lawsuit against the Financial Service Commission (FSC) to cancel the reprimand warning against the plaintiff representative director.

We argued that in the case of unlisted stocks, there is no market price formed through multiple transactions, and the plaintiffs had complied with their fiduciary duties under the Capital Markets Act by maintaining consistency in valuation when evaluating the price of A Airlines' stock. Thus, no grounds for the sanction existed. We provided concrete evidence through expert opinions and detailed analysis of the valuation process before and after the cross-trade.

We also argued that the defendants, who issued the administrative sanction, were responsible for proving that there were grounds to reduce the price of A Airlines' stock at the time of the cross-trade. We meticulously analyzed the facts influencing the price determination at the time of the cross-trade, asserting that the factors for price reduction, as claimed by the defendants, were either already reflected or did not need to be reflected.

The court accepted our arguments, ruling that it was difficult to conclude that there were circumstances that required the price of A Airlines' stock to be reduced around the time of the cross-trade. The court also stated that there was no ground justifying that reducing the price of A Airlines' stock around the time of the cross-trade was the only way to ensure consistency in valuation. Furthermore, the court found it difficult to conclude that the plaintiffs had violated their fiduciary duties to the investors in the purchasing fund when evaluating A Airlines' stock. As a result, the reprimand warning imposed on the plaintiff representative director was canceled.

The court explicitly stated that unless there was an intention to make the investors in the purchasing fund bear losses, it could not be concluded that the plaintiffs had violated their fiduciary duties. Moreover, given the nature of unlisted stocks, professional judgment and discretion should be recognized as broader in the fair value evaluation process. The court set a pioneering precedent regarding the restrictions on cross-trading of unlisted stocks under the Capital Markets Act.

This case holds great significance as it ensured the recognition of professional judgment and discretion in the evaluation of fair value during the operation of collective investment assets, particularly for unlisted stocks, by providing a thorough understanding of the procedures and content of cross-trades under the Capital Markets Act.

- Attorneys involved: Ryu Jong-Myoung, Ma Seong-Han and Chae Na-Ye