The Supreme Court on Friday overturned a lower court ruling regarding the legal validity of loss compensation agreements signed before a Finance Ministry ban on such deals between securities firms and their clients.
The top court said that although the agreements are valid, firms cannot seek compensation based on them as the practice is currently banned under the Securities and Exchange Law.
Furthermore, the No. 2 Petty Bench of the Supreme Court nullified a Tokyo High Court ruling that ordered Kankaku Securities Co. -- currently Mizuho Investors Securities Co. -- to pay some 2.27 billion yen to Osaka-based trading firm Hanwa Co.
The Supreme Court also ordered the high court to reopen a case involving a claim by Hanwa that it incurred damages as a result of the brokerage's illegal sales pitch, in which it offered to reimburse the firm for losses on its investments.
According to the ruling, Kankaku Securities promised in 1985 it would provide Hanwa with an 8 percent annual return on its investments. As a result, the trading firm entrusted the brokerage with 3 billion yen.
However, because the brokerage failed to pay the returns it promised up to 1993, Hanwa filed a damages suit demanding payment of some 2.3 billion yen.
The Securities Bureau of the Finance Ministry issued a notice to all brokerages that loss compensation agreements were illegal following the discovery in November 1989 that major brokerages had been reimbursing their clients for investment losses.
The Securities and Exchange Law was revised in 1991 to ban such compensation, with offenders facing fines.