[Aftermath of SG Incident] "Profitable Even If Imprisoned"... Light Punishment for Stock Price Manipulation

Average Illicit Gains per Unfair Trade Case 4.6 Billion KRW
Non-Prosecution Rate 55.8%... 40.6% Released on Suspended Sentences
Legislation on Recovery of Illicit Gains Fails to Pass Judiciary Committee

On the 24th, eight stocks (Daesung Holdings, Seoul City Gas, Seongwang, Samchully, Sebang, Daidata, Harim Holdings, Daol Investment & Securities) simultaneously hit their lower price limits, triggering a crash incident originating from SG Securities. Prosecutors are conducting investigations, and financial authorities are also probing the matter. After imposing travel bans on 10 individuals identified as the masterminds behind the manipulation, the prosecution has officially launched an investigation. The Capital Market Investigation Team of the Financial Services Commission (FSC) confirmed signs of stock price manipulation and reportedly received securities account data from the Korea Exchange. On the 27th, the FSC, Financial Supervisory Service (FSS), and Seoul Southern District Prosecutors' Office raided an investment consulting firm in Gangnam involved in the stock price manipulation.

However, based on precedents, even if these individuals are prosecuted, there is a possibility of receiving lenient punishments. Although the average illicit gains per unfair trading case historically reached 4.6 billion KRW, the non-prosecution rate was as high as 55.8%, and among those prosecuted, 40.6% were released on probation.

A Unique Case of Gradually Raising Stock Prices Over a Long Period

Amid the turmoil in the stock market caused by the SG Securities crash, Daesung Holdings, Seoul City Gas, and Seongwang among the eight stocks hitting the lower limit price on the 27th failed to recover, marking four consecutive trading days at the lower limit. The market believes that the manipulators raised stock prices over about three years using difference settlement trading (CFD) accounts funded by multi-level recruited investments, then sold large volumes, triggering the crash, followed by forced sales that accelerated the decline. As of 9:15 AM on the 28th, Seoul City Gas is trading around the previous close, but Daesung Holdings and Seongwang are plunging by 23.15% and 20.67%, respectively.

A Korea Exchange official stated, "(This case) could be seen as price manipulation through collusive trading," adding, "However, unlike typical unfair trading, it is a unique case where stock prices were gradually raised over a long period, and trading volumes increased." Collusive trading refers to transactions where the buyer and seller prearrange the timing, quantity, and price to ensure the trade is executed.

Article 176 (1 and 2) of the Capital Markets Act prohibits "collusive trading," defined as acts where a person agrees in advance with another to buy or sell securities or exchange-traded derivatives at the same time and price or agreed terms.

Lenient Punishments Lead to Repeated Unfair Trading Crimes

Unfair trading in the stock market is broadly categorized into ▲insider trading ▲fraudulent trading ▲price manipulation ▲market disorder. Among the 105 unfair trading cases reported by the Korea Exchange to the FSC, 91.4% (96 cases) fall under the three major categories: insider trading, fraudulent trading, and price manipulation.

Unfair trading cases have slightly decreased from 112 in 2020 to 109 in 2021 and 105 in 2022. However, they have not been eradicated, and new methods of stock price manipulation, like in this incident, continue to emerge. The SG Securities lower limit price incident is considered a type of unfair trading not previously seen.

Unfair trading crimes tend to involve large amounts of illicit gains. The Securities and Futures Commission (SFC) under the FSC found that the average illicit gain per case was about 4.6 billion KRW. Another notable feature is the recurrence of offenses by the same individuals. Among the three major unfair trading cases handled by the SFC, the proportion of repeat offenders increased from 15.4% in 2019 to 28.5% in 2020 and 21.2% in 2021.

There are reasons why unfair trading recurs. Current laws mainly impose criminal penalties (imprisonment, fines, etc.) for the three major unfair trading types. However, punishments related to unfair trading tend to be weak.

Over the past five years (2017?2021), the SFC issued prosecution or notification actions against 93.6% (1,006 individuals) of unfair trading suspects. Only 2.0% (22 individuals) received administrative fines (penalties).

Although criminal penalties are considered heavier than administrative fines, the consensus is that punishments are close to being "lenient." An FSC official explained, "It takes an average of 2?3 years for court rulings to be finalized, during which offenders can freely operate in the capital market. Criminal prosecution requires strict proof, resulting in low prosecution rates and light punishments."

In fact, from 2016 to 2020, the non-prosecution rate for unfair trading cases reported or notified was 55.8%. According to Supreme Court rulings on unfair trading (as of 2020), the imprisonment rate was 59.4% (38 individuals), and probation was 40.6% (26 individuals).

This means that even if stock price manipulation occurs, one in two offenders does not even face trial. Among those who do, four out of ten are released on probation.

Moreover, economic sanctions are difficult to enforce. Courts often do not confiscate illicit gains or impose administrative fines on offenders. This is why a grim joke circulates in the capital market: "Even if you go to prison for 1?2 years for stock price manipulation, you still pocket 5 billion KRW."

Lack of Clear Regulations on Calculating Illicit Gains

The reason courts often issue non-prosecution rulings in unfair trading cases is the principle of responsibility. Under civil law, individuals are only responsible for acts where they bear fault.

Courts strictly assess illicit gains from unfair trading based on this principle. A representative case is the 2011 Constitutional Court ruling, which required separating illicit gains from unfair trading and gains from other factors (including avoided losses).

However, Article 443, Paragraph 1, of the Capital Markets Act does not clearly specify how to calculate illicit gains from unfair trading or market disorder acts.

A financial investment industry official pointed out, "There is no legal basis to calculate illicit gains," adding, "Courts tend to judge only 'unknown' illicit gains, making confiscation or administrative fines difficult." This is why rulings on the three major unfair trading types, which are more serious than market disorder, result in lenient punishments.

UK and Canada Impose Administrative Fines and Restrict Financial Product Trading

Like Korea, the US and UK have not codified methods for calculating illicit gains related to administrative fines. However, their administrations independently cooperate with the judiciary to flexibly impose administrative sanctions. The US, UK, Canada, Australia, and Japan impose civil penalties (administrative fines) on unfair trading offenders. In Canada, Hong Kong, Germany, and the UK, unfair trading offenders may also face restrictions on trading financial products.

In British Columbia, Canada, the financial regulator (BCSC) permanently restricted Caroline Danford from trading securities and derivatives and from serving as an officer of registered financial entities on June 14 last year. The charges included unregistered trading, distribution of securities without prospectus submission, trading securities with false or misleading information, and artificial price formation of securities.

Hong Kong's financial regulator, on August 3, 2018, restricted the former CEO of China AU Group from serving as an officer or participating in management of listed companies for four years and banned securities and futures trading for four years. This was due to the CEO using 14 securities trading accounts to buy and sell large volumes of China AU shares, creating an illusion of active trading.

Bill on Calculating Illicit Gains First Proposed in 2018... Passed Committee After 5 Years

In Korea, a bill concerning the calculation of illicit gains is pending. Democratic Party lawmaker Park Yong-jin first proposed a partial amendment to the Capital Markets Act in 2018 to legislate the method of calculating illicit gains. However, the bill failed to pass the relevant standing committee (the Political Affairs Committee) and was discarded on May 29, 2020, due to the expiration of the National Assembly term.

After being re-elected, Park Yong-jin reintroduced the bill in 2020. According to his office, the bill specifies that the calculation of illicit gains from unfair trading is the difference between total revenue from illegal transactions and total costs incurred for those transactions. The bill also allows the presidential decree to define calculation methods by type to reduce legal disputes.

The bill passed the National Assembly's Political Affairs Committee last month and moved to the Legislation and Judiciary Committee (LJC). It took five years for the amendment on calculating illicit gains related to unfair trading to pass the Political Affairs Committee. If there are no objections in the LJC plenary session, it is likely to pass during the May extraordinary session.

A National Assembly official said, "Usually, it takes about a month from bill passage to promulgation, but this bill will take effect from the day it is promulgated," adding, "Since it will apply to ongoing investigations and court cases at the time of enforcement, it is expected to clarify the grounds for punishing those who illicitly gain from unfair trading."