Four Experts United: "Power Traders Must Be Restricted" [War Against Stock Manipulation]

⑤-⑷Asia Economy Special Roundtable
Unfair Trade Practices: Corporatization, Organization, and Advancement
'One-Strike-Out' Capital Market Act Pending in National Assembly
Fair Fund Resources Secured... Call for Improvement of Class Action Lawsuits

(Clockwise) Jaehoon Park, Director of Capital Market Investigation at the Financial Services Commission, Hyunyoung Hwang, Research Fellow at the Korea Capital Market Institute, Yuseong Kim, Professor at Yonsei University Law School, and Seungbeom Lee, Executive Director of Market Surveillance at Korea Exchange, are attending the Asia Economy 'Special Roundtable' held on the 25th in the seminar room on the first floor of Korea Exchange, discussing measures to eradicate securities crimes. Photo by Hyunmin Kim kimhyun81@

The capital market must establish fairness, reliability, and soundness. However, unfair trading practices such as stock price manipulation (market manipulation) that damage the market are becoming more corporatized, organized, and sophisticated. They recruit investors through multi-level methods and collude with insiders to more cleverly evade government and financial authorities' surveillance. The bigger problem is that only the targeted stocks change, but those with prior offenses or presumed offenders continuously attempt stock price manipulation repeatedly. This is why there are calls for at least minimal sanctions to prevent re-entry of offenders into the market. The related law, which centers on a so-called 'one-strike-out' principle applying zero tolerance to illegal acts and restricting offenders from trading for 10 years, is currently pending in the National Assembly.

On the 25th, ahead of the first anniversary of the 'Ra Deok-yeon Gate,' Asia Economy held a special expert roundtable at the seminar room on the first floor of the Korea Exchange to explore institutional solutions to eradicate unfair trading practices in the Korean capital market. Participants included Lee Seung-beom, Executive Director of the Market Surveillance Headquarters at Korea Exchange; Hwang Hyun-young, Research Fellow at the Korea Capital Market Institute; Kim Yoo-sung, Professor at Yonsei University Law School; and Park Jae-hoon, Director of the Capital Market Investigation Division at the Financial Services Commission.

▶Moderator = Lee Seon-ae, Head of Securities and Capital Market Department

Last April, the Ra Deok-yeon group systematically evaded government surveillance by using new methods such as 'mobile trading,' which involves using investors' mobile phones under their names. How far have unfair trading methods evolved in 2024?

Unfair trading involves multiple accounts, and the most difficult part is linking these accounts to prove they are related. We call this 'establishing connectivity,' but the methods to evade this have greatly advanced. Like last year, they use numerous mobile phone accounts or have IP addresses scattered nationwide. There are also many cases of collusion with company insiders. Particularly, violations of Article 178 of the law, known as fraudulent unfair trading, are increasing overall. Cases involving insiders connected to entities like investment associations are also on the rise.

It seems that incidents involving large-scale mobilization of individuals are increasing. For example, market manipulation using leading chat rooms, known as 'Pump and Dump,' appears to be on the rise. In December 2022, the U.S. Securities and Exchange Commission (SEC) indicted eight influencers for securities fraud, and our situation seems not much different. I also think issues related to high-frequency trading (HFT) market manipulation need to be reviewed. It is necessary to evaluate whether high-frequency trading mitigates or amplifies volatility.

Since COVID-19, the general public's participation in the stock market has increased tremendously. Unfair practices have increased accordingly, and criminal acts often operate like groups. Complex and difficult cases and serious situations continue.

There are criticisms that domestic unfair trading investigation organizations and personnel are insufficient compared to advanced countries like the U.S. and Japan. What are your thoughts on the need for personnel reinforcement?

Personnel reinforcement is obviously necessary. Statistically, there are only about 70 investigators, but the number of unfair trading cases accepted is increasing. As of 2022, it increased by about 20% compared to the previous year. The difficulty of investigations is also rising. However, considering the total staff of the Financial Supervisory Service, a comprehensive persuasion is needed regarding the need to increase investigators.

It is not easy to increase personnel indiscriminately. Considering this, the Korea Exchange is focusing its capabilities on building systems to detect and analyze unfair trading using trading data.

It is necessary to consider how efficiently the current personnel are being operated. In the U.S. and Japan, it is quite rare for multiple agencies to jointly investigate unfair trading. Joint investigations by the Financial Services Commission and the Financial Supervisory Service beyond the exchange level currently exist only in Korea. Above all, the authorities of the two agencies are very different, which causes inefficiencies.

Compared to overseas, our organization and personnel size are not very large. Since it is necessary to investigate and process all allegations individually, more personnel are needed. The prosecution has formalized the Southern Financial Crime Investigation Division, and the Financial Supervisory Service has also increased investigation and investigation personnel. The Korea Exchange has also increased personnel, and such efforts are ongoing. Overall, all agencies related to the unfair trading response system are working together.

(From left) Seungbeom Lee, Executive Director of Market Surveillance Headquarters at Korea Exchange; Jaehun Park, Director General of Capital Market Investigation at Financial Services Commission; Hyunyoung Hwang, Research Fellow at Capital Market Institute; and Yuseong Kim, Professor at Yonsei University Law School, are attending the Asia Economy "Special Roundtable" held on the 25th in the seminar room on the first floor of Korea Exchange, discussing measures to eradicate securities crimes. Photo by Hyunmin Kim kimhyun81@

There are also calls to strengthen the financial authorities' investigation powers over unfair trading. Neither the Financial Supervisory Service nor the Financial Services Commission currently have the authority to request travel bans, access communication records, or apply for evidence preservation (asset freezing).

The Financial Services Commission and Financial Supervisory Service cannot access communication records, but it is possible for important cases. Ideally, we would like to exercise all powers, but it is not realistic to expect everything at once. Recently, an important system called the administrative fine system was introduced, and efforts are needed to stabilize it. Also, continuous collaboration among the Financial Services Commission, Financial Supervisory Service, prosecution, and Korea Exchange is important.

For efficient investigation and sanction of unfair trading, harmonious operation of administrative and criminal procedures should be pursued. For example, legislative review could consider amending the Immigration Control Act to allow travel bans on those under administrative investigation, freezing suspects' accounts and assets, etc. However, seizure, communication access, and confiscation should proceed through criminal procedures respecting the warrant system and constitutional rights.

Since there are elements that legally infringe on individual rights, strict requirements will be necessary. There are fundamental principles in criminal law that cannot be ignored. The special judicial police (special investigation police) system was introduced to allow the Financial Services Commission and Financial Supervisory Service to exercise criminal law powers, and this should be utilized.

The administrative fine system was introduced in January this year. It is expected that administrative fines on the three major unfair acts will enable faster and more effective sanctions. How do you evaluate this?

I think it is positive in that administrative penalties such as fines enable swift sanctions. Above all, to prevent repeated stock price manipulation, it is necessary to strongly recover unjust profits. The method of calculating unjust profits has been legalized through law amendments, and I believe it should be enforced more strongly.

Among the 218 current laws in Korea, only two?unfair trading under the Capital Markets Act and unfair trading under the Virtual Asset User Protection Act modeled after it?require consultation with the prosecution before imposing administrative fines. This is inconsistent with the purpose of the administrative fine system, which is rapid sanctions. Considering the legal nature of administrative fines and consistency with other laws, it is appropriate for administrative agencies to impose fines separately from criminal penalties without prosecution consultation.

The biggest task now is to properly operate the administrative fine system and establish effective sanctions. For example, for cases with few suspects or small crime scales, we will consult with the prosecution to quickly impose fines first. Investigations can proceed if necessary. Various collaboration tools have been created.

It seems that the administrative fine system has laid the foundation for the 'Fair Fund.' Could discussions on its introduction be reignited?

Like in the U.S., funds should be created from administrative fines, and these funds should be used for investor protection or reward payments. To this end, we can consider amending current Korean law to allocate administrative fines to a special account or fund with designated uses. Currently, administrative fines collected from the three major unfair trades go to the general account.

To justify the punitive nature of administrative fines, the introduction of a Fair Fund should be considered. However, in the U.S., the Fair Fund was introduced legislatively and efficiently distributed through organizations like the SEC's Office of Collections and Distributions. A process to accurately identify victims and efficiently distribute collected fines should be established.

If the administrative fine system is well established and fines are efficiently collected, such discussions will likely become more active. Continuous discussion on the direction of introducing funds like the Fair Fund is meaningful. Although not exactly like the SEC, last year the Anti-Corruption and Civil Rights Commission created a reward system. It rewards whistleblowers who contribute to national revenue. Such systems are being discussed across all fields beyond unfair trading. Immediate introduction of the Fair Fund may be difficult, but long-term discussion and review are desirable.

Korea does not disclose unfair trading sanction records citing personal information protection.

There is a way to disclose detailed minutes of the Financial Services Commission. In Korea, personality rights are highly valued, so personal information disclosure is done by courts simultaneously with criminal punishment. If criminal punishment is imposed, disclosing identities can prevent recidivism. Investors would also be more cautious about offenders if real names are known.

When we announced the plan last September, we also discussed communication record access and disclosure of confirmed sanctions. This can significantly affect public rights and interests. For this reason, although these parts were included in the September announcement, they were not finalized. We plan to calmly review these issues and build public consensus.

The class action system, a victim protection measure, has not been activated. Are there improvement measures?

Class action cases in Korea take too long and evidence collection is difficult. It would be good if the Exchange's Litigation Support Center could provide first-instance rulings or necessary materials.

The securities class action system was introduced about 15 years ago but is still not active. The first reason is identifying who the victims are. For example, in stock price manipulation, who is the victim? Those who invested during that period? Some are victims, some are not, and whether they knew about it or not makes it difficult to accurately identify victims. Another issue is how to calculate individual investors' damage. For example, if the stock price rose 100% over a period, only 20% or 30% of that increase caused by manipulators is recognized as manipulation. It is realistically difficult to clearly distinguish and prove the causal relationship between stock price movements and acts.

Securities-related class actions proceed through six levels of litigation, making it difficult. After permission for litigation, immediate appeals and re-appeals go through the Supreme Court, taking 5-6 years until class action commencement. Institutional improvement is needed.

What additional measures are needed to suppress unfair trading and prevent recidivism?

The introduction of trading restrictions on offenders is urgent. Reviewing Korea Exchange disciplinary results, offenders presumed to be the same person repeatedly commit unfair trading in different stocks. To stop this, the only way is to block market participation. I hope the Capital Markets Act amendment passes quickly. Also, unjust profits must be thoroughly recovered alongside criminal sanctions.

Asset freezing and trading restriction systems for offenders should be introduced. However, constitutional issues such as property rights restrictions may arise. Delicate institutional design is necessary.

The Financial Services Commission announced plans for the trading restriction system for offenders, and related bills have been proposed. We expect discussions in the National Assembly's bill subcommittee according to priority once the assembly convenes.

Trading restrictions on unfair trading offenders limit their opportunities to earn capital income in the capital market, increasing the cost of unfair trading and reducing incentives for such acts. Considering the high recidivism rate of 21.2% as of 2021, the trading restriction system can be an effective means to prevent repeat offenses.

From the left, Jaehoon Park, Head of Capital Market Investigation Division at the Financial Services Commission; Yuseong Kim, Professor at Yonsei University Law School; Hyunyoung Hwang, Research Fellow at the Korea Capital Market Institute; Seungbeom Lee, Executive Director of Market Surveillance Headquarters at Korea Exchange. Photo by Hyunmin Kim kimhyun81@

Any requests to market participants or investors?

You can unknowingly become involved in unfair acts through Telegram rooms or messages. It is necessary to avoid being misled by false information and to improve the investment culture itself.

The willingness of market participants not to engage in unfair trading is important. Especially, managers have the responsibility to prevent their company's stock from being misused in unfair trading. There is a service called K-ITAS (Listed Company Insider Trading Alert Service). When insiders of listed companies trade their own stocks, the details are notified to the company via text message for free. Comparing unfair trading disciplinary pass rates between companies subscribed and unsubscribed to this service, subscribed companies had significantly higher pass rates.

Editor's NoteThe 'Ra Deok-yeon Gate,' the largest stock price manipulation crime in history (total unjust profits of 730.5 billion KRW), is approaching its first anniversary (April 24, 2023), yet victims' nightmares have not ended. There are no effective victim remedies in the Korean capital market. Litigation is the only option, but cost burdens and difficulty proving damages deter attempts. The Capital Markets Act amendment, which supplements the limits of criminal punishment and introduces effective monetary sanctions following the 'Ra Deok-yeon Gate,' is significant. However, to eradicate increasingly diverse securities crimes, it is necessary to build systems for efficient detection and investigation and to improve institutions for swift and strict sanctions. Asia Economy's Securities and Capital Market Department special coverage team examines advanced overseas capital market systems and reviews challenges and directions for our market to suppress securities crimes. Also, as intelligent and organized crimes occur, we seek effective remedies for investor damages.

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

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