Loss Causation by Statutory Presumption: Event Studies and the Korean Securities Litigation

Authors

Joon Buhm Lee, Inha University Law School

Abstract

In the United States, event studies are ubiquitous in securities fraud litigations. This is not so, in South Korea (hereinafter referred to as "Korea"). Unlike the United States where event studies in a securities fraud class action may even be conducted twice to show both reliance and loss causation, they are far less frequently used in Korean securities litigations, even though the Supreme Court of Korea (the "SCK") explicitly allowed the use of an event study in a securities fraud context.

This Article aims to make two contributions. First, it shows that, even though the SCK allowed the use of an event study in the securities fraud context, the Korean statutory scheme both prevents and discourages its use, not only for the plaintiff but also for the defendant. Article 162 and Article 179 of the Financial Investment Services and Capital Markets Act (the "FISCMA"), anti-fraud provisions against corporate defendants, do not require reliance. Without the reliance element, there is no need to prove or disprove reliance through an event study. Article 170 of the FISCMA, an anti-fraud provision against outside auditors, requires reliance. But the SCK adopted a rule presuming reliance, placing the burden on the defendant to disprove reliance. Even though the SCK allows the outside auditor defendant to use an event study to disprove reliance, it is actually very difficult to do so. This discourages defendants from paying for and submitting an event study.

Article 162 and Article 170 of the FISCMA have the presumption of damages clauses, again requiring the defendant to rebut the presumption by disproving loss causation. Because the presumption of damages clause means that the plaintiff need not allege a corrective disclosure, it is even more difficult, if not impossible, for the defendant to disprove loss causation through an event study. Moreover, the SCK developed a principle of fairness defense that is much easier and cheaper for the defendant to use compared to an event study.

Second, I argue that the Korean presumption of damages provisions is inefficient. Because they distort the incentives of the informed traders to trade on the knowledge of misrepresentation, they make the Korean capital market less efficient. Based on this argument, I offer a practical statutory scheme to align the incentives of the informed traders through the loss causation and damages rules.

Disciplines

Comparative and Foreign Law | Evidence | International Law | Law | Securities Law

Recommended Citation

Joon B. Lee, Loss Causation by Statutory Presumption: Event Studies and the Korean Securities Litigation, 6 Cardozo Int’l & Compar. L. Rev. 873 (2023).
Available at: https://larc.cardozo.yu.edu/ciclr/vol6/iss3/6