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[February 2017]

Tort liability of a horse racing winning strategy dealer

The following shows a case where a consumer claimed damages against a bank based on employer's liability, because workers of the bank had induced the elderly consumer to purchase an investment trust in a way against the principle of suitability as well as accountability.

The court wholly affirmed plaintiff's claim for damages, construing that the inducement had violated the principle of suitability as well as accountability and that no negligence was acknowledged on the part of the customer. (Judgment by the Osaka District Court on February 20, 2013 - final)

  • The judgment has not been published.

Summary of the case

Plaintiff:
X (Consumer)
Defendant:
Y (Bank)
Parties concerned:
A & B (Y's workers who served X)

X (then-77-years-old woman) was a pensioner living alone. She had no experience of securities trading. She lost her husband in 2003 and had about 30,000,000 yen in the bank including deposits inherited from her late husband. X started to use a hearing aid around 1999 and was diagnosed as hearing impairment around 2004.

In July 2007, A and B visited X's home and induced her to cancel her time deposits to buy an investment trust (knock-in investment trust *).

Investments in this financial product are used for buying euro-yen bonds with a mechanism to determine redemption conditions depending on movement of the Nikkei Stock Average. In principle, the portfolio of this product is not rebalanced.

One of the characteristics of the product is that the investment principal will be redeemed and dividends will be given if the closing price of the Nikkei Stock Average will never be decreased by 30% or more of the starting price thereof in the three-year redemption period, while the value of the investment principal will be decreased according to the decreased ratio at the time of redemption if the closing price thereof will be decreased by 30% or more of the starting price thereof even just once in the period.

Although the purchaser can avoid risks of price changes by cancellation, possible dates for applying for cancellation is limited to about 15% of bank business days in the cancellable period (about 2 years and 9 months). Therefore, the possibility of avoiding risks was very limited in fact.

X did not have knowledge or experience of securities trading. Persuaded by A and B, X accepted their plan. X cancelled time deposits amounting to 21,000,000 yen, two thirds of X's financial assets, and used the money to purchase the product.

Later, stock prices declined. Being informed by A that the assessed value of the product decreased almost by half, X cancelled the product on October 26, 2009 and received about 11,800,000 yen as cancellation refund.

X filed a suit for damages against Y based on tort liability, alleging that the inducement of A and B (Y's workers) had violated the principle of suitability as well as accountability. X claimed about 9,000,000 yen as the amount of damages, deducting the cancellation refund, dividends received, and cash back before cancellation from the purchase price, adding the value of interest on the time deposits which X could have received if X had held the money to maturity, and legal fees as well.

Y alleged that Y met the principle of suitability on the grounds that X understood the explanation of A and B and decided to buy the product because of the low interest on time deposits as well as that X owned a house and declared to have financial assets amounting to more than 42,000,000 yen. In addition, Y claimed that Y did not violate accountability because the explanation had been in line with descriptions on marketing materials. They argued in the court.

  1. * Knock-in investment trust: financial products invested in bonds (structured bonds) with particular conditions (e.g. If the asset value such as the stock index will not be lower than a certain level, the yield will be paid). If the asset value will be lower than a certain level (this situation is called "knock in"), the investor will encounter a loss in conjunction with the decrease.

Reasons

(1) Principle of suitability

In order to make appropriate investment decisions such as whether or not to buy the financial product, how much amount to buy, and whether or not to make a midterm cancellation, the purchaser needs to have capacity to recognize and understand characteristics of the product as well as competence to grasp and understand transition and trends of the Nikkei Stock Average to some extent.

According to the investment experience and knowledge/ability of investment transactions X had, it can be inferred that X did not have enough capacity to understand characteristics of the product.

Considering the fact that the leaflet on the product indicated "principal protection" in bold letters and that Y was the bank at which X and X's late husband had held their accounts for many years, X could have misunderstood that the financial product was equal or similar to bank deposits with high interest rate and principal protection.

Moreover, X intended to emphasize stability of principal. The invested amount 21,000,000 yen accounted to more than 70% of the X's total financial assets. In consideration of these circumstances, it is construed that A and B induced X to conduct a too risky transaction not in line with X's asset situation and intent. Their action extremely deviates from the principle of suitability, which is illegal.

(2) Violation of accountability

It is recognized that A and B gave X a cursory explanation on the product in line with descriptions on marketing materials. Given the conditions of X including her age, background and hearing impairment, however, it is doubtful that X understood all the explanation as well as characteristics and risks of the product.

Although A and B reportedly stated that X had expressed her personal view "The Nikkei Stock Average would not depreciate by more than 30% in the next three years", there is no such fact. Therefore, it can be said that the inducement by A and B violated accountability.

(3) Comparative negligence

It can be inferred that X purchased the product in response to the inducement by A and B. X, who lacks suitability, was induced to buy the product without enough explanation. It is not acknowledged to be reasonable to use the rule of comparative negligence based on violation of the principle of suitability or violation of accountability.

Based on the above determination, the court wholly affirmed the amount claimed by X.

Explanation

The knock-in investment trust is a financial product which concentrates on investing in particular structured bonds (e.g. Nikkei Stock Average linked bonds).

Therefore, it has no function to diversify investments, and has a risk structure similar to that of structured bonds. Such products are dealt in not only by securities companies but also by banks. Elderly persons tend to misunderstand characteristics of these products if they are induced by banks at which they hold accounts.

The reference precedence (1) below is a judgment affirming liability for damages against a bank for inducing and selling knock-in investment trust.

After the precedence (1), the reference precedence (2) affirmed bank's violation of the principle of suitability for inducing knock-in investment trust (not referring to violation of accountability). (This judgment became final without appeal as with the judgment on this article.)

The reference precedence (3) is a judgment affirming violation of accountability against a securities company affiliated with a bank for inducing knock-in investment trust.

With regard to comparative negligence, the reference precedence (1) affirmed consumer's fault at 20% under the rule of comparative negligence while affirming bank's violation of the principle of suitability as well as violation of accountability. The reference precedence (2) affirmed consumer's fault at 80% under the rule of comparative negligence, considering the fact that the then-79-years-old plaintiff understood some of the explanation and that a grandchild living with him was partly involved in the purchase process and the plaintiff could have consulted with the grandchild. In this case, the consumer purchased a supplementary stock investment trust in addition to a knock-in investment trust, but the court denied illegality of the inducement concerned.

The judgment on this article, however, denied credibility of statements by A and B, and affirmed their violation of the principle of suitability as well as violation of accountability. The court wholly affirmed the amount claimed, construing that it was not reasonable to apply the rule of comparative negligence. It is a significant precedence.

After the enforcement of the Financial ADR System in October 2010, some of these types of cases have been filed with the mediation committee of the Japanese Bankers Association (JBA) or the Financial Instruments Mediation Assistance Center (FINMAC).

Banks and securities companies tend to lack flexibility in solving problems through ADR. It appears that quite a few mediation plans fell through due to disapproval by them. Under such circumstances, accumulation of court decisions in this regard is much expected.

Reference precedents

  1. Judgment by the Osaka District Court on August 26, 2010
    (Page 101 of Kinyu Houmu Jijo No.1907, Page 14 of Kinyu Syouji Hanrei No.1350)
  2. Judgment by the Tokyo District Court on August 2, 2011
    (Page 1 of Syouken Torihiki Higai Hanrei Select No.41)
  3. Judgment by the Tokyo District Court on February 28, 2011
    (Page 59 of Kinyu Houmu Hanrei No.1369)