Securities Investment Disputes Rising

Kang Ji-hwan, an alias, put 100 million won in a futures options account of D Securities last December.

A brokerage firm employee who was well acquainted with Kang recommended this, saying, “Options can bring you 1-2% profits a month and there is very little risk of losing the principal amount.”

The money was invested in call options, which would bring profits only in bullish markets. But the stock market has been bearish since the beginning of the year, and as of June 9, there was only 117,751 won left.

Mr. Kang submitted an application to the Dispute Resolution Commission of Financial Supervisory Service (FSS), which last month judged the securities company recompenses Kang for his losses, 67,760,000 won. Aside from Kang’s responsibility for the loss, FSS decided that the firm was largely accountable for not fully conveying the investment risks in options.

Like the example above, there are an increasing number of people who are seeing huge losses after blindly entrusting their money to securities firms.

According to the Korea Exchange, the number of applications from January to September this year is 485, up 47% from the same period last year. There were 126 cases of discretionary dealing conflicts, an increase of 72%.

Disputes involving securities deals have sharply soared as individual investors’ losses have snowballed in the bearish stock market this year.

The problem is that most individual investors do not get compensated even if they submit applications for dispute resolution. The case of Kang, who received more than half of his loss, is an exceptional case.

Let’s look at Seo In-su (39). Seo visited a securities firm to subscribe to installment investment funds but entrusted 12 million won at the employee’s persuasion of direct investment.

Two months later, that employee notified that current equities will be sold to buy IT shares. But the prices of the new IT shares plummeted and 8.5 million won disappeared at a blink of an eye. Seo applied for dispute resolution but did not receive anything.

Lee Gi-jae, head of dispute resolution in the Korea Exchange, said, “The securities firm notified the investor of the new deals, so the responsibility of the loss is the investor’s.”

However, fairness issues are pointed out as ambiguous standards for resolving these disputes exist.

Currently, the role of dispute resolution arbitrator is divided among FSS, Korea Exchange, and Korea Securities Dealers Association. However, the standards are not unilateral, to the extent that the Korea Exchange said, “All decisions are made based on Securities and Exchange Act,” while the FSS said, “There is no legal basis, only (FSS’s) internal guidelines.”

One arbitrator stated, “We make decisions based on past experience, so the results may be slightly different even with similar cases.”

Jang Beom-sik, professor of Business Administration at Soongsil University, said, “In the U.S., there is a clear line between the National Association of Securities Dealers (NASD) regulations and the Securities & Exchange Commission’s (SEC) legal regulations, so there is virtually no confusion. Korea needs to create standards for mediating securities conflicts.”

sohn@donga.com