Korea Investment Corporation (KIC), South Korea’s sovereign wealth fund, has lodged a lawsuit against Volkswagen on behalf of the South Korean government and the Bank of Korea over the German carmaker’ emissions cheating scandal, in its first legal action against a foreign company to seek damages, government sources said on Oct. 3.
The South Korean government, as a shareholder of the carmaker, estimates to recover 15 billion won to 40 billion won ($14 million to $36 million) in compensation for the loss in the share price. It was filed just ahead of the first anniversary on Sept. 18 of the disclosure of the U.S. authorities on Volkswagen’s cheating on emission tests, in order to comply with the one-year statute of limitations for material claims under German securities law.
The estimated damages the government and the central bank are pursuing is tiny, compared with those being sought by other institutional investors from around the word and state governments in the United States. But the legal action is intended to fend off criticism of not properly managing foreign currency reserves.
“KIC submitted the lawsuit in a regional court in Braunschweig, Germany on the 17th of last month on behalf of the South Korean government and the Bank of Korea,” a senior South Korean government official told the Korea Economic Daily.
A source of the finance ministry said that KIC was delegated by the justice minister to file the suit. “As KIC manages (part of) foreign currency reserves entrusted by the Ministry of Strategy and Finance and the Bank of Korea, the plaintiff of the suit is the South Korean government and the central bank,” he added.
Like hundreds of other institutional investors around the world, KIC claims that Volkswagen management failed to inform investors of the emissions cheating scandal in a timely manner, which took a heavy toll on their shares in the carmaker
The legal action came after the National Pension Service, South Korea’s public pension fund, filed collective claims last March, together with about 280 pension funds including the California pension fund CalPERS in the same vein.
FIRST IN KIC’S 11-YEAR HISTORY
Since its establishment in 2005, KIC had never been involved in any securities-related lawsuits, excluding the pending case connected with Volkswagen.
After posting its worst return in four years in 2015, KIC expects to avoid criticism that it had been sitting on its hands over Volkswagen’s violation of emission regulations. KIC’s investment return of negative 3% last year was reportedly the poorest among the world’s seven biggest sovereign wealth funds. It is not known how many of Volkswagen shares the KIC currently owns.
KIC managed $91.8 billion in overseas assets at end-2015. Of the total, $36.2 billion were put into stocks mostly in a passive strategy, tracking the MSCI All Country World Index, excluding Korea. Its stock portfolio posted a negative return of 1.82% last year, although outperforming the benchmark by 1.53% points.
In general, damage sought in shareholder lawsuits are calculated by multiplying the number of shares which the shareholder made a net purchase of during a certain period by the difference between the corporate value and the share price inflated by accounting fraud or other illegal methods.
The regional court in Braunschweig, near Volkswagen’s headquarters in Wolfsburg, said it had registered more than 1,400 complaints from institutional and individual shareholders seeking €8.2 billion in damages, as of late September. Because German law has no provision for class-action litigation, the German court will use a system of a model case, in which a rule on a single case out of the 1400-odd lawsuits applies to all the other cases.
Flooded with a raft of lawsuits from Volkswagen investors, the German court cleared the way for investors in the carmaker to submit collective claims by using the German Market Model Case Act in August. As the court is expected to make a judgement on a model case by the end of this year, the damages that both KIC and NPS may receive from Volkswagen appear to be determined later this year or early next year.
By Chang Jae Yoo
<Edited by Yeonhee Kim>