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The White-Collar Crime Practice Group at Lee & Ko achieved a significant victory representing Company A, a leading domestic securities firm, which had been accused by several complainant companies of violating the Act on the Aggravated Punishment of Specific Economic Crimes and the Capital Markets Act. The allegations stemmed from the sale of financial products tied to mezzanine loan receivables associated with a Las Vegas resort development project in the U.S. The complainants alleged that Company A failed to properly explain the concept of “DIL (Deed in Lieu)”, a method of collateral realization unique to U.S. mezzanine loan structures. Despite these claims, Lee & Ko successfully secured a full non-prosecution decision from the Seoul Central District Prosecutors’ Office. Lee & Ko also prevailed in defending against the complainants’ appeals and petitions for adjudication before the Seoul High Prosecutors’ Office and the Seoul High Court, resulting in the dismissal of all related challenges.

This case involved the unforeseen outbreak of the COVID-19 pandemic, which led to the suspension of the Las Vegas resort development project. As a result, defaults occurred sequentially on both the senior loan and the mezzanine loan associated with the project. Ultimately, the senior borrower executed a DIL, transferring the development property, which served as collateral, to the lender. Consequently, the mezzanine loan could not be recovered, leading to a complete loss of the investment in the financial product related to this case, which was worth tens of billions of Korean won.

In this case, Lee & Ko’s White-Collar Crime Practice Group conducted an in-depth analysis not only of Korea’s Capital Markets Act but also of U.S. legal literature and Nevada state law. Lee & Ko argued in detail before the prosecution that a DIL is not a special provision in the loan agreement but a commonly used legal mechanism in the U.S., and therefore not a critical factor in deciding whether to invest in the financial product. They further demonstrated that the DIL-related provision in the relevant contractual documents had no connection to the decision to invest in the financial product or to the resulting investment loss. Lee & Ko also presented that investing in mezzanine debt inherently carries the risk of principal loss, and the complainants were fully informed of this risk. As such, there was neither any deceptive act constituting fraud nor any use of unfair means, schemes, or artifices under the Capital Markets Act. By establishing these facts, Lee & Ko successfully cleared its client of criminal liability. As a result, Company A secured a more favorable position in the related civil litigation as well.
 

On behalf of KB Securities, Lee & Ko secured a complete victory against NH investment Securities in both the first instance and appellate courts for the return of the acquisition payment for a private derivative-linked security (DLS) worth KRW 30 billion. 

In 2018, KB Securities acquired DLS linked to underlying preferred shares issued by a corporate fund managed by a Singapore-based asset management company, from NH Investment Securities for approximately KRW 33 billion. It then sold the DLS to general investors who entered into specified money trust agreements with KB Securities.

At the time of the DLS sale, NH Investment Securities stated that the asset management company of the underlying asset issuance fund would invest the acquisition payment for the DLS in a Brazilian hotel construction project. The company also stated that purchasing an insurance policy with Chinese Sunshine Insurance shall be a term of issuance for the underlying assets to guarantee the recovery of the investment principal and interest. However, the asset management company purchased insurance policy from a different provider, and the insurance payment was not made when the hotel construction project eventually failed. 

In 2021, representing KB Securities, Lee & Ko filed a lawsuit against NH Investment Securities for breaching the terms of issuance of the DLS related to the underlying assets, seeking a full refund of the investment. Both the first instance and appellate courts upheld Lee & Ko’s argument that the terms were breached when an insurance policy different from the one specified in the DLS issuance agreement was purchased, thereby necessitating the return of the DLS acquisition payment. 

Lee & Ko’s victory is particularly noteworthy, as it is extremely rare for an investor to win a lawsuit in its entirety in cases involving financial investment products among institutional investors. Yet, through an accurate understanding of the transaction structure of the DLS product and an acute analysis of the underlying assets’ significance in the DLS issuance agreement, Lee & Ko secured complete victories in both levels of the court. We are currently representing the client in the appeal before the Supreme Court. 

This decision is expected to significantly contribute to clarifying the scope of liability for companies that issue DLSs and deterring the distribution of high-risk financial investment products that deviate from investment disclosures, preventing the creation of innocent victims.