A Korean law firm has won a bellwether case (injucntion granted) for two medium- sized Korean companies with combined losses of over $21 million in KIKO contracts. Hundreds of other cases are in the pipeline.
The Seoul Central District Court issued a preliminary injunction holding that "The bank has not met its obligation to recommend additional measures to limit loses . . . and to clearly and sufficiently explain possible risks in the contracts." The preliminary injunction frees the companies from their obligations under the contract until the final ruling. The final ruling is unlikely to conflict with the injunction based on the strong language used by the court.
Knock-in Knock-out (KIKO) contracts are currency option contracts. The knock-in or knock-out events are tied to certain currency levels and are utilized by mainly exporters.
These option contracts were aggressively sold to small and medium size (SMEs) enterprises. These banks encouraged exporters to hedge against a stronger won, since it was nearly universally believed that the Korean currency would continue its appreciation against the dollar.
However, the won weakened to nearly 1,500 to the dollar from a level of less than 1,000 to a dollar. The won on January 2, 2009 was trading at 1,330 won to the dollar.
The final outcome of these cases will have great implications for the Korean banking sector, because of the amount of money in contest and the manner in which financial products are marketed.
A translation of the injunction decision can be found on this blog HERE.http://http://www.thekoreanlawblog.com/2009/01/kiko-win-by-logos-law-llc-against-sc.html