[War on Stock Manipulation] ② System Improvement, Strengthened Post-Punishment, and Full Effort to Recover Criminal Proceeds Needed

Limitations in Prevention... Post-Punishment Must Be Strengthened
Consider Granting Financial Authorities Means to Impose Punitive Fines
Various Measures Needed to Enhance Effectiveness of Victim Compensation

[Image source=Yonhap News]

In the wake of the stock price crash triggered by Societe Generale (SG) Securities and the mass limit-down incident involving five stocks that shook the domestic stock market, public demand for fundamental measures to prevent stock price manipulation crimes is intensifying. Crimes targeting the capital market not only cause enormous financial losses to a large number of unspecified investors but also undermine the trust in the capital market itself, thereby dampening investment activities. Ultimately, this can block companies' funding channels and hinder economic development. Accordingly, experts suggest improving market surveillance systems that detect unfair trading practices and deterring criminal intent through strong post-incident punishments. Furthermore, there is a growing consensus that efforts by financial authorities, supervisory agencies, prosecutors, and police alone have limitations, and that legislative, judicial, and executive branches, as well as financial investment firms and all capital market participants, must jointly exert efforts.

Continuously Improve Surveillance Systems to Increase Crime Detection Probability

Experts have recommended improving market surveillance systems. Hwang Se-woon, Senior Research Fellow at the Korea Capital Market Institute, emphasized, "Crimes always evolve by finding blind spots and gaps in the system," adding, "It is naturally necessary to improve the system to prevent recurrence when market disruption occurs." However, he cautioned that it is excessive to disparage the current surveillance system simply because it fails to filter out crimes in advance.

Yeon Tae-hoon, Senior Research Fellow at the Korea Institute of Finance, advised that to increase the probability of crime detection, more resources should be invested in acquiring and analyzing various unstructured market information. In particular, he said that the market surveillance system should have a flexible framework that allows creative and proactive development without setting prior limits, in line with the evolution of unfair trading methods that are becoming more organized, diversified, and intelligent. For example, the scope of data used to detect abnormal signals should be expanded to include over-the-counter derivative transaction information stored in trade repositories, and the specificity of such information should be improved, employing all necessary means. He also stressed the need to strengthen human resources. Yeon said, "Capital market surveillance work by the government and related agencies requires a high degree of expertise compared to other tasks, so it needs specialized personnel management rather than rotational assignments, and incentive systems that correspond to this should be provided in terms of personnel and compensation."

The Korea Exchange plans to enhance its abnormal transaction detection system and improve the market alert system following the Ra Deok-yeon incident. It intends to reorganize the abnormal transaction detection system to detect long-term stock price manipulation attempts early and disclose the actual entities behind Contracts for Difference (CFD) transactions. The Exchange's Market Surveillance Committee has also requested additional personnel for the Management Support Headquarters. Additionally, to respond to types of stock price manipulation over extended periods, it is reviewing extending the stock price monitoring period and plans to increase the abnormal transaction detection criteria from a maximum of 100 days to up to one year.

Although the abnormal transaction detection market surveillance system is a post-incident detection mechanism, the market alert system is a preemptive system that identifies the likelihood of unfair trading and allows the Exchange to designate specific stocks for investment caution, investment warning, investment risk, or trading suspension. However, Hwang Se-woon noted that the market alert system has limitations. He explained, "Even if the Exchange takes market alert measures, it does not always lead to investigations and punishments," adding, "Many cases end after market warning measures, and it should be seen as a way to deliver warning messages to the market and alert investors."

The Financial Supervisory Service is also promoting the advancement of surveillance by utilizing artificial intelligence (AI) and big data technologies to strengthen the capital market monitoring system. It is collaborating with domestic IT companies to build an 'Integrated Information System for Securities Unfair Trading.'

Strengthen Post-Incident Punishments as Much as Possible

Experts believe that there is no perfect preventive measure to fully protect investors from planned criminals, and that increasingly sophisticated crimes beyond market surveillance systems will inevitably emerge, making strong punishments essential. Hwang Se-woon emphasized, "While preventive systems are necessary, if they cannot filter out 100%, it is reasonable to respond by strengthening post-incident punishments," adding, "Ultimately, serious crimes like stock price manipulation must lead to prosecution and punishment by prosecutors, as this is more effective in prevention, so active prosecution and punishment enhancement are important." He further added, "Since financial authorities are the only ones with expertise in financial crimes, it is necessary to at least recognize their authority to impose punitive fines."

Yeon Tae-hoon said, "Economic crimes not only infringe on the economic freedom of unspecified many but also lead to more serious damages, yet there is a widespread social perception that the current level of punishment is excessively low given the gravity," advising, "We should consider improving the principles and systems of penalties and punishments to dramatically raise the level of punishment for unfair trading acts." He added, "The Capital Markets Act assesses the severity of price manipulation based on the criminal's gains or avoided losses, but considering the nature of securities crimes, the victim's losses are likely to exceed the criminal proceeds," and stressed, "It is necessary to seriously consider whether our country's penal system sufficiently reflects public sentiment on various economic offenders and whether there is a need or possibility for improvement."

Establish Crime Proceeds Recovery and Smooth Victim Compensation System

There were also suggestions to strengthen punitive measures of a financial nature from various aspects such as confiscation of criminal proceeds, civil damages to victims, and administrative fines, and to enhance the effectiveness of victim compensation. Although there are ways for victims to receive compensation without separate civil lawsuits under the current legal system, such as compensation order systems and confiscation and recovery of corrupt assets, unfair trading acts do not fall under these.

Yeon Tae-hoon said, "Considering the seriousness of securities-related crimes, it is necessary to build a system that thoroughly recovers criminal proceeds and ensures smooth victim compensation, including considering expanding the scope of application to unfair trading acts under the Capital Markets Act."

Recently, Prosecutor General Lee Won-seok visited the Korea Exchange and said, "We will punish unfair trading offenders as severely as possible and confiscate and recover criminal proceeds," adding, "We will ensure that the perception that they can never set foot in the financial market again takes root in our society."

Yeon Tae-hoon emphasized, "In the short term, we should strengthen the penalty provisions under the Capital Markets Act as much as possible, and in the medium to long term, actively consider fundamentally changing the principles and imposition system of penalties and punishments to raise the level of punishment for serious crimes," adding, "To expand and strengthen deterrent measures and enforce them without leniency, it is necessary for the legislative, judicial, and executive branches to come together and pool wisdom." He particularly stressed the need to proactively discuss various measures such as utilizing already introduced systems like securities class actions for investor compensation and supplementing the administrative fine system. The securities class action was introduced in 2005, allowing one person to file a lawsuit and, if successful, other shareholders who suffered the same damage can receive compensation equally.