[비즈한국] Lawsuits for damages related to the 'Fadu440110 incident' continue to emerge. Fadu, a KOSDAQ-listed company, is suspected of inflating its corporate value by reporting false revenue during its initial public offering (IPO). While two securities class action lawsuits are currently underway against Fadu and NH Investment & Securities005940, the lead underwriter for the IPO, by investors who suffered losses due to the subsequent stock price decline, it has been confirmed that some investors have also filed a general civil lawsuit.
The general civil lawsuit against Fadu and NH Investment & Securities was filed by investors who bought and sold Fadu stock in the secondary market. The plaintiffs are those who acquired shares between Fadu’s listing and the disclosure of its 2023 third-quarter report, and the case is being handled by Hannuri Law Firm, which is also representing the securities class action. While the filing date for this lawsuit is the same as the date the securities class action was filed (November 4), the participating investors are different.
The reason Fadu investors have initiated a separate civil lawsuit is to resolve the compensation issue more quickly. A securities class action refers to a claim filed by some victims as representatives when multiple parties suffer damages during securities transactions. It differs from a general civil lawsuit in that the judgment applies to all victims. Securities class actions require court permission before the merits of the case can be heard, and due to the significant ripple effect of the results, it can take 4 to 5 years just to obtain that permission. Therefore, it is highly likely that the outcome of a general civil lawsuit will emerge first.
The scale of the damages claimed in the general lawsuit is 670 million KRW, which is larger than the 100 million KRW claim in the corresponding securities class action. Attorney Kim Dong-wook of Hannuri Law Firm, who is handling the litigation, explained, "The claim amount in the general lawsuit was calculated based on the difference between the normal stock price that would have formed without the false disclosure and the price at which investors acquired the shares," adding, "We viewed the point when the bubble burst after the stock price pump and subsequently rebounded as a tentative normal price."
The Fadu incident refers to an event where semiconductor design (fabless) company Fadu boosted its stock price by inflating revenue estimates during the IPO process. In February 2023, during its pre-IPO funding, Fadu was valued at 1 trillion KRW and dubbed the 'first domestic fabless unicorn.' Riding this momentum, Fadu pursued a KOSDAQ listing and specified in its securities registration statement that its 2023 revenue estimate was 120.3 billion KRW, along with a description that "profitability will improve significantly starting in 2023."
Having gathered market expectations, Fadu went public on August 7, 2023, at an offering price of 31,000 KRW, the top end of the desired band. However, the revenue Fadu reported for the third quarter of that year was a mere 320 million KRW. The operating loss also amounted to 14.8 billion KRW. It was only through a corrected disclosure on November 13, 2023, that Fadu revealed, "Due to a market downturn that exceeded expectations combined with internal circumstances at data centers, there was no controller revenue from major clients in the third quarter of 2023."
As cumulative revenue up to the third quarter of 2023 reached only 18 billion KRW, far below the annual estimate, Fadu's stock price plummeted on November 9, 2023, the day after the earnings announcement. In the following week, the price dropped to 16,250 KRW, causing massive losses for investors. As of November 10, Fadu's stock price has not recovered to its IPO price.
As the controversy erupted, financial authorities launched investigations into Fadu, NH Investment & Securities, and Korea Investment & Securities, the underwriters for the listing. In December 2024, the Financial Supervisory Service's Special Judicial Police for Capital Markets referred Fadu and NH Investment & Securities employees to the prosecution on charges of violating the Capital Markets Act. According to the investigation, Fadu proceeded with the IPO while hiding the fact that a sharp decline in revenue was expected due to a decrease and cancellation of orders from major clients starting at the end of 2022. Investigators concluded that an NH Investment & Securities employee colluded with Fadu in the process of calculating the stock price using the inflated revenue figures in the securities registration statement. Korea Investment & Securities, a co-underwriter, was cleared of the charges.
Currently, two securities class actions against Fadu and NH Investment & Securities are underway. The class action filed in March 2024 was initiated by shareholders who participated in Fadu's public offering subscription, marking the first securities class action related to an IPO in Korea. The other case was filed on November 4 by investors who bought shares on the open market. Due to the securities class action against Fadu, NH Investment & Securities saw its own shares suspended from trading on the KOSPI market from 7:58 AM to 9:30 AM on November 7.
Attorney Kim Dong-wook stated, "The content of the cases is the same, but they are proceeding separately because the legal grounds for the claims are different," adding, "Shareholders who subscribed to the public offering are covered by Article 125 (Liability for Damages due to False Statements, etc.) of the Capital Markets and Financial Investment Business Act, while those who traded in the secondary market rely on Article 178 (Prohibition of Unfair Trading, etc.)."
Regarding the lawsuits, NH Investment & Securities stated, "We recorded information faithfully according to guidelines during the Fadu corporate due diligence process, and there were no illegal acts during that time."
Fadu responded, "A lawsuit can only be established after a legal judgment on the case is made, and no results have been released yet," and added, "We have recently recovered our performance as orders and revenue have increased."
Meanwhile, NH Investment & Securities is facing threats to its credibility due to a series of incidents. Previously, on October 28, a joint task force from financial authorities rooting out stock manipulation raided NH Investment & Securities over allegations that a high-ranking executive used undisclosed information related to a public tender offer. The executive is accused of leaking critical information regarding 11 listed companies for which NH Investment & Securities managed tender offers to acquaintances, who then used it to gain over 2 billion KRW in unfair profits. The executive in question has since resigned.