[Reporter’s Notebook] A Country Lenient Toward False Disclosures

Recently, the stock manipulation case involving actor Kyeon Miri's husband, Lee Hongheon, was overturned and remanded by the Supreme Court with a guilty verdict. Lee and others were indicted for operating the KOSDAQ-listed company Botabio and manipulating its stock price to gain a large amount of illicit profits.

In 2015, Botabio announced a large-scale paid-in capital increase and the issuance of convertible bonds (CB), stating that then-company representative Mr. A and Kyeon Miri participated as investors. They disclosed that the entire investment amount was from their “own funds,” but it was revealed that most of it was actually borrowed money.

The key issue in the case was whether falsely disclosing the source of funds for the paid-in capital increase and CB acquisition violated the Capital Markets Act. The fact that a famous actor like Kyeon and the company’s largest shareholder directly invested their own money creates the perception that the management’s financial strength is solid, which can influence the stock price. Lee was found guilty in the first trial for false disclosure, acquitted in the second trial, but the Supreme Court ruled that “disclosure of the source of acquisition funds is an important matter that can affect management and investment decisions,” and remanded the case with a guilty intent.

The problem is that at the time the false disclosure occurred, no one could have known that Kyeon’s shareholding disclosure was false. The “Report on Large Shareholding Status” must detail who acquired shares, when, how many, and by what method. Any contracts or lawsuits that could affect future shareholding changes must also be disclosed.

However, under the current system, the Financial Supervisory Service, which is responsible for disclosures, does not individually verify whether disclosures are false. Issues such as the source of funds or major contracts and lawsuits are disclosed as submitted by the shareholders themselves. Errors in these disclosures are reviewed during periodic inspections, but even then, only the timing and number of shares acquired are checked, not the source of funds or major contracts. Even if errors in shareholding disclosures are found, penalties are rarely imposed.

Due to poor monitoring and weak penalties, false shareholding disclosures continue to occur frequently. For example, the largest shareholder of bio company B, a listed company, disclosed that the entire acquisition fund was from their own money, but during an investigation, openly admitted to a reporter that the funds came from the Myeongdong private loan market. This company is currently suspended from trading.

Additionally, the largest shareholder of AI digital transformation company C, which is in a management dispute, recently failed to disclose the source of funds for stock acquisition in their shareholding disclosure. Previously, they had disclosed it as borrowed money, but despite the loan not being repaid, they changed the disclosure. Creditors, unable to recover their money, filed for a provisional injunction to prohibit stock disposal, which the court granted. Despite this being an important matter that could affect shareholding changes, the largest shareholder of C did not disclose it.

Such false disclosures become problematic long after the events occur. The Botabio stock manipulation case is still ongoing after nine years. Most stock manipulation cases take a long time to reach a verdict. Meanwhile, those who gained illicit profits live comfortably. The only ones suffering are small shareholders and other victims.

As the blind spots of false disclosures are increasingly exposed, a system is urgently needed to filter suspicious disclosures. Investors must be actively informed of risks to prevent further damage. At the very least, investors should be given confidence that “disclosures can be trusted.” This is the true “value-up” of the Korean stock market.