The Seoul High Court (15th Civil Division) recently ruled in a case (2004 Na 69047) that a securities company is liable to a customer for the failed option investment amount since the company was negligent in supervision of its employee who induced the customer into making the option investment with the company, thus confirming the lower court’s decision which ruled in favor of the investing customer in part.

The facts of the case are as follows. A customer, Y, was induced by a branch head, G, of a securities company, D, into entering option trade and entrusted to G such option trade and remitted 130 Million Won to G’s bank account. G could have avoided large losses in the option trade, but could not do so because he was late for work due to the heavy drinking the night before. And the customer Y filed a lawsuit against G’s employer D for damage compensation, and the Seoul district court ruled in part in favor of the customer G.

In rendering its decision, the High Court stated that the act of the employee G agreeing to bear losses resulting from making trade in the course of recommending securities investment to a customer is a prohibited act under the Securities Exchange Act (Paragraph 1 of Article 52 of the Securities Exchange Act), and that the employee’s act of incurring large losses to the customer, which was attributable to the employee’s delinquency in preventing loss and creation of profits, is a tortuous act. Thus the High Court said that the securities company D must compensate the customer Y as employer of G.

However, the High Court also stated that the customer is also negligent for 30% of the investment loss since the customer remitted money to G even though he was aware that the option investment with an account in another person’s name was unusual and was also totally reliant on the employee G, never making any efforts to check on the option investment through other routes.