`Investment Trust Company Should Compensate Customers for Losses from Buying Bonds Issued by Daewoo`

Following the Financial Supervisory Commission (FSC)`s ruling that the investment trust company should compensate customers for losses from its purchase of bonds issued by Daewoo Corp., the courts made a similar decision.

The Seoul District Court (senior judge Choi Chul) ruled that the `H` Investment Trust company should pay the Electric Contractors` Financial Cooperative, a credit union of electric contractors, 119 million won ($92,700) in compensation. The Electric Contractors` Financial Cooperative filed a lawsuit for compensation against the `H` company on August 16th.

The court said that the FSC`s delay of redeeming bonds issued by Daewoo Corp. at that time was legal. However, `H` neglected its duty as a fund manager by purchasing Daewoo`s corporate bonds even though it was aware of Daewoo`s bad financial condition.

The court`s decision is meaningful in that it put on the break to the conventional practice in which the investment trust company aids the insolvent company and the customers suffer the losses stemming from the aiding process. Moreover, responsibility of the financial authority is likely to be raised since it has, in fact, ordered the financial circle to aid the insolvent companies. The court said that although `H` investment trust company insisted that it was not responsible for the losses because it had followed the order of the financial authority, or the decision of the creditors, to support Daewoo, this was an internal issue and could not be the ground to be exempted from its responsibility for the customers. The court said that although companies should follow the order of the financial authority according to the stipulation, there was no concrete order or command by the financial authority in this case, adding that in such a case it was wrong to buy high-risk bonds issued by a financially troubled company under the sacrifice of customers. The Electric Contractors` Financial Cooperative bought beneficiary certificates from `H` investment trust company in May 1999, and `H` bought Daewoo bonds amounting to a couple of trillion won. As the Daewoo crisis has deepened, the Cooperative filed a lawsuit since the FSC delayed the redemption of the Daewoo bonds.

Lee Jung-Eun lightee@donga.com