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KIKO Case Reopens in US
Financial Derivative Case
KIKO Case Reopens in US
  • By Michael Herh
  • February 26, 2016, 07:00
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KIKO contractors demonstrated after the outbreak of the global financial crisis in 2008, arguing that KIKO contract was a fraud.
KIKO contractors demonstrated after the outbreak of the global financial crisis in 2008, arguing that KIKO contract was a fraud.

 

Small and mid-sized Korean companies suffered losses due to the incident of a financial derivative “Knock In Knock Out” (KIKO) after the outbreak of the global financial crisis in 2008. They waged a legal battle for years. But in 2013, the Supreme Court of Korea ruled in favor of banks, saying that the contracts were fair. As a consequence, the ruling compelled the companies to stomach the losses.  

At the time, during the litigation process, what puzzled the companies was the fact that the banks did not properly disclose data and materials vis-à-vis the KIKO program. In particular, nearly nothing was made public about what happened between the headquarters of some foreign banks and their Korean branches. 

 Now that the contracts were about exchanges between U.S. dollars and Korean won, the headquarters outside Korea took control of the contracts. But the Korean companies were unable to get their hands on related materials. Thus, some of the companies file a lawsuit against the headquarters in New York.

 Finally, nearly 20 years later, they found a breakthrough to receive compensations for their damages from the KIKO Incident.   

In 2013, Simmtech, which recorded huge losses due to a KIKO contract with Citi Bank Korea between 2006 and 2008, filed a lawsuit against the headquarters and six affiliates of Citigroup via Law Firm Kim and Bae, but the judge at the first instance court said that his court did not have any jurisdiction over the case.

 On February 23, 2016, the New York federal appellate court, however, quashed the original judgment and sent back the case to New York’s South Court, a court of first instance, saying that Simmtech will be able to continue the lawsuit.

The Korean supplier of semiconductor circuit boards, a popular export item, signed KIKO contracts amounting to US$600 million for two to three years with Citi Bank Korea since the bank told the company that the KIKO contact is a kind of derivates for foreign exchange hedge that can prepare the company against foreign exchange change risk.        

But a sharp rise in won-dollar exchange rates after the start of the financial crisis brought Simmtech US$73 million in losses. In July 2013, Simmtech filed a suit in the court for compensatory damages against six affiliates of Citigroup. But the court of first instance dismissed the lawsuit on February 17, 2015. On February 23, 2016, the appeal court ruled in favor of the plaintiff, overturning the original ruling.     

“Even though most of the contracts were made in Korea, many circumstances back up Simmtech’s claim that the headquarters of City Group in the US were involved in the case,” the appeal court said.      

Simmtech claimed in its petition that Citigroup was virtually behind the contracts based on three points. The three points are (1) Citigroup were clearly written in most of Citi Bank Korea’s advertisements and marketing materials, (2) an exchange rate outlook report drawn up by Citigroup and its affiliates in New York were used as a material and (3) nearly all of emails between Citi Bank Korea and Simmtech had domains such as “citigroup.com” or “citi.com”.

That is to say, Simmtech held Citigroup including its headquarters responsible as they became deeply involved in the fraud during the sale of KIKO products by Citi Bank Korea and conspired with Citi Bank Korea for the fraud, instigated Citi Bank Korea to commit or neglected it.           

This judgment by the appeal court is expected to provoke a rush of lawsuits by about 350 small and mid-sized companies which suffered similar damages.

“Exchange rate manipulation corruptions by big banks have been exposed since 2013 we filed the first lawsuit,” said attorney Bae Mun-kyung of Law Firm Kim and Bae which represents Simmtech in the lawsuit.   

In November 2014, the UK Financial Conduct Authority (FCA), the Swiss Financial Market Supervisory Authority (FINMA) and the US Commodity Futures Trading Commission (CFTC) fined Citigroup, JP Morgan Chase, British HSBC, the Royal Bank of Scotland (RBS) and UBS of Switzerland US3.4 billion.

This is because these banks’ became involved in foreign exchange rate manipulation in which they traded in a way advantageous to them by sharing information about customers’ orders from January 2008 to October 15, 2013 and the fact came to light.    

Besides, in May last year, the US Department of Justice gave fines of a total of US$5.6 billion to Citigroup, JP Morgan Chase, Bank of America, Barclays, the RBS and UBS for charges of foreign exchange rate manipulation among others in May of last year. At that time, Citigroup admitted to the charges.