Samsung Securities Ordered to Compensate Investors in “Phantom Stock” Dividend Error Case
An appellate court has ruled that Samsung Securities must compensate investors for half of their losses incurred due to the dramatic stock price decline stemming from a significant dividend error in 2018. This landmark decision partially upholds a previous ruling, providing a measure of financial recourse for those affected by the “phantom stock” incident.
The case centers on a critical error that occurred on April 6, 2018. A Samsung Securities employee mistakenly entered a dividend amount for employee shares as “1,000 shares” instead of the intended “1,000 Korean won per share.” This administrative blunder resulted in the system erroneously recording over 2.81 billion “phantom shares,” a figure vastly exceeding the company’s statutory issuance limits.
The consequences were immediate and severe. Sixteen employees who received these erroneous dividends proceeded to sell a substantial 5.01 million shares on the open market. This mass sell-off triggered a sharp and precipitous decline in Samsung Securities’ stock price, which plummeted by more than 11% during intraday trading on that fateful day.
Following the stock market turmoil, investor A initiated legal action against Samsung Securities, seeking damages for the losses sustained as a direct result of the stock price collapse.
In 2021, the initial trial court found in favor of investor A, concluding that Samsung Securities bore responsibility for the stock price crash. The court cited the company’s failure to establish a robust emergency risk management plan for financial accidents and other contingencies, as well as its inadequate handling of the post-incident response.
Samsung Securities subsequently appealed this decision. However, the appellate court has now largely affirmed the initial ruling, dismissing the company’s appeal. The appellate division, specifically the Civil Appeals Division 2-3 of the Seoul Central District Court, presided over by Judge Yeo Ji-hee, reiterated the sentiment that Samsung Securities had fallen short of its obligations.
The court stated that Samsung Securities had failed to fulfill its duty of care as a prudent administrator, which is essential for the secure processing of electronic financial transactions. Furthermore, the ruling highlighted the absence of adequate internal control systems specifically for the employee share dividend program, which directly contributed to the dividend error incident.
Apportioning Responsibility: A 50% Liability
While the appellate court found Samsung Securities liable, it crucially limited the company’s financial responsibility to 50% of the total damages suffered by investors. This decision to cap the liability was based on a nuanced assessment of the circumstances leading to the stock price crash.
The court acknowledged that a significant contributing factor to the stock price decline was the “criminal acts” of individual employees. These actions included violations of the Capital Markets Act and breaches of trust, as these employees knowingly sold the erroneously recorded shares.
The court reasoned that holding Samsung Securities fully accountable for 100% of the investors’ damages would be excessively harsh, given the direct involvement of individual employees in exacerbating the situation. The appellate court explained that since the actual stock price crash was significantly driven by the actions of these individual employees who were aware of the erroneous share recording, it would be inequitable to impose complete financial responsibility on the company for all the losses incurred.
The ruling orders Samsung Securities to pay approximately 28,520,000 Korean won to investor A, representing half of their proven damages. This decision sets a precedent for how such systemic errors and subsequent market impacts will be addressed in South Korea, emphasizing both corporate responsibility for internal controls and the accountability of individuals for their direct actions. The case underscores the critical importance of rigorous risk management and robust internal procedures within financial institutions to prevent catastrophic errors and protect investor confidence.
