[Inside Chodong] Preventing Stock Price Manipulation... All Deterrent Measures Must Be Mobilized

Supplementary Measures May Be Needed for the Amended Capital Markets Act
Brokerages Must Adopt the Latest IT Technologies

"Even if you go to jail, it's still a 'profitable business'." This year alone, there have been three incidents of stock price manipulation crimes related to limit-down events. These include the 'Ra Deok-yeon incident' in April, the 'simultaneous limit-down of five stocks' in June, and the recent Yeongpung Paper price manipulation case. Despite authorities keeping a sharp watch, why do these crimes never cease? A senior official with over 20 years of experience in the financial investment industry pointed out, "Because the punishments are so lenient that even going to jail is still profitable, securities crimes never stop," adding, "Like the movie title, stock price manipulation is always carried out 'secretly and magnificently,' shaking the foundation of the capital market."

Yoon Mo and Lee Mo, who are suspected of market manipulation in connection with allegations of unfair trading involving Youngpoong Paper, are appearing at the Seoul Southern District Court in Yangcheon-gu on the morning of October 20 to undergo a pre-arrest detention hearing (warrant review).
[Image source=Yonhap News]

The key keywords that stand out are lenient punishment and profitable business. Experts unanimously agree that weak punishments can never suppress securities crimes. It means that various crimes have been repeated due to the mistaken perception that even if one goes to jail, it is still profitable because sentencing or confiscation of unjust gains related to stock price manipulation crimes is not easy.

The fortunate thing is that the amended Capital Markets Act, which allows for strong economic penalties for unfair trading, passed the National Assembly in June and will be enforced on January 19 next year. The amended Capital Markets Act legalizes the method of calculating unjust gains and introduces a surcharge penalty, enabling swift and effective economic administrative sanctions. It allows imposing surcharges up to twice the amount of unjust gains related to unfair trading.

However, concerns remain whether the chronic problems related to securities crime punishments, such as 'lenient punishment,' can be resolved. Since sentencing depends on how much unjust gain was obtained, there is a view that the standards are ambiguous and it will be difficult to punish. This is because it is hard to prove how much unjust gain was obtained solely through stock price manipulation, excluding various factors affecting stock prices. Market conditions, company performance and growth factors, exchange rates, and participation of other investors must be considered. Although it is fortunate that the amendment allows imposing surcharges up to 4 billion KRW even when the scale of unjust gains is unclear or difficult to calculate, there are many worried views about whether the level of punishment is sufficient to effectively suppress securities crimes.

Among stock price manipulation cases reported or notified to the prosecution by the Financial Services Commission's Securities and Futures Commission over five years until 2020, more than half?56%?were not even prosecuted. Even when prosecuted, only 59% received prison sentences up to the Supreme Court. This means that half of stock manipulators never even faced court, and among those who did, more than 40% were released on probation. This is why attention is focused on the level of punishment for stock price manipulators who have heated up the capital market this year.

Securities crimes cause harm to many innocent victims and disrupt market order, constituting serious illegal acts. All deterrent measures must be used to prevent securities crimes. These crimes continuously evolve and evade even the sharpest surveillance networks. Despite strengthened monitoring by financial authorities and related agencies this year, the Yeongpung Paper incident occurred.

The Korea Exchange recently announced that it will introduce a new type of investment warning stock called 'ultra-long-term unhealthy' to respond to new types of unfair trading that evade market surveillance through gradual long-term stock price increases. This is to efficiently respond to stock price manipulation cases that occurred this year.

As securities crimes evolve, more advanced deterrent measures are needed. If the amended Capital Markets Act is insufficient, it should be supplemented and strengthened. Efforts by securities firms are also necessary. Overseas, AI-based stock price manipulation detection technologies are actively used. The reality of domestic securities firms is quite different. Due to cost issues and others, they are still using computer systems built 10 to 15 years ago.