Why the Financial Supervisory Service Special Investigation Unit, with a Changed Stance, Is Confident in Punishing Kakao

Minimal Role Since 2019 Launch... Presence Emerges Through Kakao Investigation
Seizure Secures Recorded Conversations Between Kakao and Financial, Legal Experts
Owner's Unprecedented Public Summons and Corporate Referral to Prosecutors... Elevating Status as 'Economic Prosecutors'

On the 13th of last month, the Capital Market Special Judicial Police (Special Judicial Police) of the Financial Supervisory Service (FSS) applied for arrest warrants at the Seoul Southern District Prosecutors' Office against Bae Jae-hyun, Kakao's Chief Investment Officer, and two others on charges of violating the Capital Markets Act. On the 19th, the Seoul Southern District Court issued an arrest warrant for CEO Bae, citing concerns over evidence destruction and flight risk. Four days later, on the 23rd, Kim Beom-su, founder of Kakao and head of the Future Initiative Center, who is suspected of market manipulation involving SM Entertainment (SM), appeared at the FSS office in Yeouido, Seoul, as a suspect. This was the first time a large corporation owner was summoned to the FSS, and the first time a photo line for suspects was set up. The FSS explained that the photo line was installed considering the gravity of the case, but it clearly revealed the elevated status of the Special Judicial Police.

The Special Judicial Police, under the direction of the Seoul Southern District Prosecutors' Office, have demonstrated their presence four years after their launch, thanks to the investigative experience and expertise of Lee Bok-hyun, the FSS governor and former anti-corruption prosecutor, who is confidently leading the Kakao investigation. It is anticipated that the level of punishment for those accused of market manipulation will determine the investigative capability of the Special Judicial Police. Since it is reported that the Special Judicial Police have secured decisive evidence, there is strong confidence in the punishment of the suspects, drawing significant attention to their future actions.

Elevated Status of 'Capital Market Police' through Kakao Investigation

Launched officially in July 2019 as the 'Capital Market Police' specialized in investigating unfair trading in capital markets, the FSS Special Judicial Police are civilians but can exercise investigative authority similar to the police under direct prosecution guidance. According to the Judicial Police Duties Act, they consist of judicial police officers appointed by the chief prosecutor of the district prosecutor's office upon recommendation by the Financial Services Commission chairman from among FSS employees. They can use coercive measures such as search and seizure, communication inquiries, and travel bans only for cases urgently transferred to the prosecution by financial authorities (fast-track cases).

According to government departments, about 22,000 Special Judicial Police officers are currently active nationwide. Approximately 15,000 belong to central administrative agencies, and about 7,000 are affiliated with local governments. This accounts for about 16.5% of the total police force of 133,104 personnel. The FSS Special Judicial Police is a small organization with fewer than 20 members and has not shown a clear presence until now. Over the past four years, they have referred about 10 cases annually to the prosecution but have not attracted much attention.

Kim Beom-su, former chairman of Kakao, is appearing at the Financial Supervisory Service on October 23 to be investigated regarding allegations of stock price manipulation related to the acquisition of SM Entertainment. Photo by Kang Jin-hyung aymsdream@

The first case involved an investigation into front-running by a securities firm research center employee. As securities firm personnel were involved, the case did not attract much attention or have significant impact. Subsequently, the Special Judicial Police's distinct role remained minimal. However, since Lee Bok-hyun's appointment as FSS governor, the organization has gradually shown changes with increased strength.

The starting point was HYBE. In May, the Special Judicial Police referred HYBE employees to the prosecution on charges of gaining billions of won in unfair profits by using undisclosed information related to BTS. This demonstrated their capabilities as capital market police. In the current case of SM's market manipulation, they have emphasized expanding direct investigations and achieved results comparable to specialized investigative teams by publicly summoning Kim Beom-su. Particularly, through the investigation of Kakao's market manipulation charges, they have broken away from the previous practice of handing over major financial crime cases to the Seoul Southern District Prosecutors' Office, asserting their presence as an independent investigative agency.

In the financial investment and legal sectors, the fact that the 'business magnate' Kim Beom-su was publicly placed at the photo line for the first time is interpreted as the Special Judicial Police having strong confidence in this investigation. Indeed, FSS Governor Lee Bok-hyun stated, "We have a certain level of confidence in uncovering the facts." Furthermore, targeting a large general corporation rather than a financial company for a major investigation is also presumed to stem from this confidence in uncovering the facts.

The FSS Special Judicial Police are currently led by Director Kwon Young-bal. He was appointed as a department head in his 40s in August last year during Lee Bok-hyun's first executive-level personnel reshuffle. Born in 1973, he joined the FSS in 2000 as part of the first public recruitment and mainly handled investigations related to unfair trading such as manipulation while serving as team leader of the Investigation Planning Bureau just before becoming director of the Special Judicial Police. At the time of the Special Judicial Police's launch, Hwang Jin-ha, a full-time auditor at KB Asset Management, served as director for two and a half years. Before Director Kwon, Kim Choong-woo, a former chief prosecutor at the Seoul Eastern District Prosecutors' Office, led the unit.

Secured 'Decisive Evidence' of Obstruction of Tender Offer?

CEO Bae Jae-hyun, Kakao's Head of Investment Strategy Kang Ho-jung, and Kakao Entertainment's Head of Investment Strategy Lee Junho are accused of deliberately investing about 240 billion won to raise SM's stock price above HYBE's tender offer price in February this year, during the battle for SM's management rights, to obstruct HYBE's tender offer. The FSS judged that they intentionally concealed the buyer by accumulating shares through other corporations at the time, and the court accepted this, issuing an arrest warrant for CEO Bae. The FSS also holds that their failure to report large shareholdings (5% reporting) on SM shares was intentional. The Special Judicial Police pointed out that their actions undermine core systems of the Capital Markets Act, such as unfair trading regulations, tender offer systems, and large shareholding reporting obligations (5% rule), which are essential for fair securities trading and corporate control competition.

During the forced investigation of Kakao and Kakao Entertainment, the Special Judicial Police and prosecution reportedly secured material evidence, including recorded conversations, proving Kim Beom-su's involvement in market manipulation. A source familiar with financial authorities hinted, "During searches of Kakao and Kakao Entertainment headquarters, the law firm Yulchon advising Kakao, and Kim Beom-su's office, decisive evidence proving Kim's 'HYBE tender offer obstruction operation' was obtained." This included recorded conversations between Kakao executives and groups of financial and legal experts.

If the Special Judicial Police apply for a pre-arrest warrant for Kim Beom-su, the judgment by the prosecution and court will likely further change the status of the Special Judicial Police. A financial investment industry insider said, "When Lone Star was fined 25 billion won in 2011 for foreign exchange card stock manipulation, the FSS and prosecution secured Lone Star's board meeting recordings and tapes to prove guilt," adding, "The Special Judicial Police's unprecedented public summons and photo line placement of Kim Beom-su, despite various criticisms, indicate they believe they can prove the charges with similar evidence in the Kakao case." When Kim Beom-su appeared at the FSS, the Ministry of Justice maintained a 'no photo line' rule to protect suspects' human rights, leading to criticism that the FSS's actions were excessive.

When the Special Judicial Police referred CEO Bae and Kakao and Kakao Entertainment corporations to the prosecution on the 26th of last month, it is reported that they had sufficient prior consultation with the prosecution and submitted an indictment opinion. A financial investment industry source noted, "The court's reason for CEO Bae's detention was that the secured evidence objectively clarified a significant part of the facts, which is a more favorable situation for investigators compared to the Lone Star case, where arrest warrants for key figures were repeatedly dismissed."

The Special Judicial Police criticized the SM market manipulation related to Kakao, stating, "The rapid stock price fluctuations hindered rational investment decisions by general investors, causing losses, and set a wrong precedent that 'illegal and unfair practices' win in acquisition competitions. This is a serious crime that undermines the foundation of the capital market, involving organized participation by financial and legal expert groups." They are currently proceeding with additional referrals for Kim Beom-su and other suspects.