Woori Bank ordered to pay back on faulty fund

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Woori Bank ordered to pay back on faulty fund

A local court ordered Woori Bank, the nation’s No. 2 commercial bank, to pay back some 2 billion won ($1.7 million) to customers who had bought a mutual fund product from the bank that recorded a 100-percent loss.

The ruling found that Woori Bank was especially at fault for selling the product without fully ascertaining the high-risk nature of the derivatives that made up the mutual fund. The bank was ordered to compensate customers at a higher rate of principal investment than any similar precedent.

A spokesman for Woori Bank said it would not contest the ruling and would compensate customer losses, but said the bank currently had no plans to pursue legal action against Credit Suisse, which designed the derivatives that caused the loss.

The Seoul High Court last week ordered Woori Bank to compensate some 70 percent of the losses sustained by customers who invested in a mutual fund sold by the bank in late 2005 and early 2006 - amounting to 2.34 billion won in compensation to the 87 plaintiffs.

The extent of the compensation granted was notable, as until now Korean courts have only ordered up to 40 percent compensation in cases of faulty mutual fund sales.

The investment vehicle in question, called “Power Income Fund,” was popular when it first hit the market six years ago, gathering some 2,300 customers to the tune of 170 billion won over two subscriptions.

It was marketed by both commercial and regional banks as having U.S. and European blue chip stocks as underlying assets, with a promised return rate of a stable 6.7 percent per annum every three months.

However, the product consisted of derivatives designed to sustain major losses when underlying stocks prices fell below a certain level - and its return rate was decimated in the wake of the 2008 financial crisis.

The “Power Income Fund 1,” which was set up in November 2005, matured on Nov. 22 of this year with 100 percent of principal investment written off as losses - and a similar performance is expected of Power Income Fund 2, which will mature in early January.

The court’s decision came from the conclusion that Woori Bank was at fault for selling a clearly flawed product without properly checking for such flaws, thereby overlooking its duty to warn the buyer.

“The court made its ruling based on the fact that there were fraudulent aspects to the selection of the underlying assets in the derivatives that the fund invested in,” said Kim Joo-young, legal counsel for the plaintiffs. “It’s meaningful that the court went beyond the simple sales process and noted the structure of the mutual fund.”

Since 2008, Woori Bank had previously accepted responsibility for some of the sales of this particular fund, having reimbursed investors to the tune of 20 billion won.

By Lee Jung-yoon [joyce@joongang.co.kr]

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