Shamelessly Saying "I Don't Want to Give My Phone"... Helpless Against Telegram Bombing [War on Stock Manipulation]

③-⑷ Strengthening Defense Rights for Stock Manipulation Investigation Subjects
Advance Notice and Right to Attorney Presence Secured
Financial Supervisory Service Authority Remains Unchanged as Investigator
Cannot Verify Collusive Trading and Price Manipulation Conversations on Mobile Phones
On-site Stock Manipulation Investigations Also Not Allowed
Authority Exists with Financial Services Commission but Is Limited

"That's outrageous. How can you forcibly check a cellphone during a stock manipulation investigation? The Financial Supervisory Service (FSS) does not have that authority. The investigation subject must voluntarily show it first."

As stock manipulation tactics have evolved recently, the need to quickly secure evidence from the investigation stage has increased. Since 2015, the defense rights of unfair trade investigation subjects have been strengthened, but the Financial Supervisory Service (FSS), which conducts the investigations, cannot go to the scene of stock manipulation nor demand that the investigation subjects show their cellphones. Accordingly, voices are growing to expand the Financial Services Commission's (FSC) seizure authority, which investigates the three major unfair trades?fraudulent trading, market manipulation, and insider trading?and to delegate authority (seizure rights and on-site investigation rights) to the FSS as well.

FSS's 'investigation' authority on stock manipulation is minimal... Difficult to secure evidence, hindering prosecution

The unfair trade monitoring system consists of the stages 'review (Korea Exchange) → investigation (FSS/FSC) → prosecution (prosecutors/special investigators)'. The 'investigation' of unfair trades plays a significant role as it is the stage before prosecution. Sometimes, the investigation content by the FSS is used as evidence in prosecution. The problem is that the FSS's authority to investigate unfair trades is limited.

Regarding unfair trade investigations, the FSS only has the rights to ▲request attendance ▲request transaction information ▲request submission of statements ▲request submission of ledgers, documents, and other items. For example, if the FSS receives a tip that an executive of Company A is involved in stock manipulation, all they can do is request attendance and ask related questions. Related materials can only be obtained by 'request'. Since it is a voluntary investigation (administrative investigation), if the investigation subject refuses to submit materials, the investigation ends.

Even if the investigation subject appears before the FSS and is questioned, there are limitations. This is because the Q&A documents prepared by the FSS are not guaranteed to be recognized as evidence during the prosecution stage. Although in February 2015, the Supreme Court recognized the lower court ruling that admitted the Q&A documents prepared by an FSS inspector as evidence of guilt, in August 2021, the Seoul High Court did not recognize the evidentiary value of such documents.

Hwang Hyun-young, a research fellow at the Korea Capital Market Institute, said, "According to Article 312, Paragraph 3 of the Criminal Procedure Act, interrogation records prepared by investigative agencies other than prosecutors must be prepared through lawful procedures and methods to be recognized as evidence," adding "As a result, it is uncertain whether the FSS's Q&A documents can be recognized as evidence during the prosecution stage."

He further stated, "When the investigation moves from the FSS to the prosecution, prosecutors re-interrogate the suspect on the same content as the FSS's Q&A documents from the beginning," adding, "During this process, the suspect can destroy evidence or fabricate testimony to deny charges with accomplices regarding the core allegations questioned by the FSS investigators."

Need to delegate seizure and on-site investigation rights to FSS... Also expand FSC's authority which cannot conduct communication inquiries

Because of this, whenever a large-scale stock manipulation case occurs, the issue of delegating 'seizure rights' and 'on-site investigation rights' to the FSS arises repeatedly. Seizure rights refer to the authority to retain materials submitted by the investigation subject. The authority to request cellphone submission also falls under this. This means that evidence such as text messages exchanged in anonymous group chats and communication records can be promptly preserved. On-site investigation rights literally mean the right to directly visit and investigate the suspected stock manipulation site.

During the Ra Deok-yeon case, the option to delegate seizure and on-site investigation rights to the FSS was also discussed but failed. This is because FSC investigation officers can exercise seizure and on-site investigation rights. This has been widely regarded as contradictory since the FSS has more investigators and superior investigative capabilities. The National Assembly's Political Affairs Committee and academia argue that to improve the efficiency of unfair trade investigations, the FSC, which holds seizure and on-site investigation rights, should take charge of investigations or delegate authority to the FSS.

Separately, there are also calls to expand the FSC's authority. The FSC's seizure rights are limited. Forensic analysis can only be conducted on stock transactions related to market manipulation. This means that conversations with suspected masterminds or collusive traders cannot be checked. To verify these, authorities such as communication inquiries and location tracking are also necessary.

Researcher Hwang said, "The system that does not recognize the essential communication inquiry rights for proving charges must be improved," adding, "The most efficient investigation is to secure solid evidence from the initial stage, but under current law, communication record inquiries are only possible within one year, so if the case is transferred to prosecution after investigation, more than a year may have passed."

Increase in insider trading... Need to secure evidence early

Number of Monthly Actions by the Financial Supervisory Service in 2023 by Type of Unfair Trade Allegation (Source: Office of Hong Seong-guk, Democratic Party of Korea)

There is a reason why discussions about seizure and on-site investigation rights have resurfaced. Recently, insider trading tactics have increased. However, at the investigation stage, evidence is not secured in a timely manner, resulting in low levels of action and prosecution.

According to data exclusively obtained by Asia Economy through the office of Hong Seong-guk, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea, titled 'FSS 2023 (monthly) number of actions by unfair trade allegations,' there were 39 cases of fraudulent trading, 13 cases of market manipulation, and 13 cases of insider trading. Actions on insider trading and market manipulation cases were notably low.

According to the '2023 Unfair Trade Review Performance and Key Features' data announced by the Korea Exchange on the 13th, among the three major unfair trades, insider trading cases accounted for the highest proportion with 43 cases (43.5%). This was followed by fraudulent trading with 31 cases (31.3%) and market manipulation with 23 cases (23.2%).

An official from the lawmaker's office explained, "The data shows that among types of unfair trades, the proportion of insider trading cases is high, but the proportion of actions taken by the FSS is the lowest," adding, "Insider trading cases mainly involve evidence that can be confirmed through cellphones, but since the FSS, the investigation body, has limited authority, the number of actions reported is low."

Editor's NoteThe 'Ra Deok-yeon Gate,' the largest stock manipulation crime in history (with a total illicit gain of 730.5 billion KRW), is approaching its one-year anniversary (April 24, 2023), yet the victims' nightmares have not ended. There is no effective remedy for victims in the Korean capital market. Litigation is the only option, but due to cost burdens and difficulties in proving damages, many cannot even attempt it. The amendment to the Capital Markets Act, which supplements the limitations of criminal punishment and introduces effective monetary sanctions due to the 'Ra Deok-yeon Gate,' is significant. However, to eradicate the continuously increasing securities crimes in various forms, it is necessary to establish a system that can efficiently detect and investigate these crimes and to improve additional systems for swift and strict sanctions. Asia Economy's Securities Capital Market Department Special Coverage Team examines advanced systems in overseas capital markets and reviews the challenges and directions for our market to suppress securities crimes. Since intelligent and organized criminal acts occur, we also seek effective measures to compensate investors for damages.

We plan to intensively report from various perspectives on all kinds of unfair trades such as insider trading, fraudulent trading, market manipulation, and reporting obligation violations. We will strive to prepare comprehensive countermeasures to eradicate capital market crimes. Please send tips to lsa@asiae.co.kr. We will investigate thoroughly and report.

▲Team Leader Seon-ae Lee, Manager △Min-young Kim, Yun-joo Hwang, Min-young Cha, Dae-hyun Kim, Reporters