By Kim Jae-won

The Supreme Court allowed investors to file a collective compensation lawsuit against Royal Bank of Canada (RBC) over its alleged stock manipulation regarding equity-linked securities (ELS) sales, the highest court said Tuesday.

ELS are hybrid debt instruments linked to equity markets. They can be in the form of a single stock, a group of stocks or an equity-based index, such as the SampP 500.

The top court overturned a lower court’s ruling that Yang, 60, and Choi, 40, have no right to file a lawsuit against the Canadian investment bank. The highest court said that the investors can sue the bank if they lost money due to the bank’s sales of equities related to them

It is the first time that the court acknowledged investors’ right to file collective lawsuits connected to securities. The decision favoring investors came two months after the Seoul Central District Court ruled that investors can file a collective lawsuit against GS EampC over the builder’s alleged accounting fraud. The Seoul High Court also affirmed the district court’s decision.

“If an ELS hedge firm sold a large scale of basic assets of the debt instrument, causing losses to investors, then the investors can file a compensation lawsuit, or a collective suit,” said the court in a ruling.

Hannuri Law, a legal representative of the investors, suspected that RBC sold shares of SK Holdings, basic assets of the ELS, intentionally not to pay high returns to the investors.

“RBC sold SK shares just 10 minutes before the ELS matured. With the sale, 437 investors lost a combined 32 billion won ($3 million),” said Song Seong-hyun, an attorney at the law firm

Song said that the ELS were designed to pay returns to investors if SK shares did not fall below some levels. But with the abrupt selling, they tumbled below the line, causing losses to investors, the lawyer said.

According to industry sources, RBC sold some 70,000 SK shares on April 22, 2009, the day when the ELS matured, pulling down the stock price to close at 119,000 won, 625 won lower than the standard line. Because of the trade, investors could get 75. 6 percent of their principals, failing to gain 22 percent of additional returns.

RBC did not respond to requests from The Korea Times for comment.

RBC case is the latest legal dispute between investors and financial firms over ELS returns. In April 2013, the Seoul Central District Court ruled that Kim, 41, a former trader at Mirae Asset Securities was innocent because evidence was insufficient to believe that he intentionally sold shares of SK Energy to avoid paying returns to investors.

Market watchers said the government needs to improve measures to protect investors as ELS are gaining popularity in local stock markets amid low interest rates. According to data from the Korea Securities Depositary, sales of ELS reached 28. 5 trillion won by April 16 this year, accounting for 40 percent of the total amount of last year which stood at 71.7 trillion won.

SOURCE: The Korea Times