[Invest&Law] Full Enforcement of Capital Markets Act This Year, Increased Use of Leniency

First Implementation This Year Under Capital Markets Act Amendment
Also Used in Investigation of Kakao's SM Acquisition
Insider Cooperation Essential for Swift Investigation
Reduced Penalties for Voluntary Reporting and Testimony

Since the full implementation of leniency under the Capital Markets Act on January 19 this year, cases of cooperation in investigations and trials using this system have been emerging one after another. Leniency, which was mainly used in cartel cases under the Fair Trade Act, is now being actively applied to violations of the Capital Markets Act such as insider trading and stock price manipulation, and it is expected to have a significant impact on related investigations and trials.

Leniency is a system that allows perpetrators of unfair trade practices to receive reduced criminal penalties if they voluntarily report violations or testify about others' crimes. With the amendment of the Capital Markets Act last year, Article 448-2 (Reduction of Punishment, etc.) was newly established, making it applicable to unfair practices such as insider trading and market manipulation.

According to a comprehensive report by Law Times on the 24th, it has been confirmed that Junho Lee, Head of Investment Strategy at Kakao Entertainment, applied for leniency with the prosecution in connection with the investigation of the stock price manipulation case involving SM Entertainment by Kakao. During the prosecution’s investigation of Kim Beom-su, founder of Kakao (Chairman of the Management Innovation Committee, currently detained), Lee also made statements related to Kim’s charges, and the prosecution reportedly requested an arrest warrant based on this. If the applicant cooperates with the investigative authorities throughout the investigation and trial process and provides consistent testimony, the prosecution evaluates the contribution to crime clarification and decides whether to apply leniency. If leniency is applied, prosecutors can reduce the sentence requested by up to half. If the applicant returns all illicit gains obtained, non-prosecution measures such as suspension of indictment are also possible.

Since the implementation of leniency this year, there have been several other cases of leniency applications to the prosecution, and it is known that many defense lawyers representing suspects have recently inquired about leniency. A prosecution official stated, “It is true that there are cases of leniency applications, but we cannot disclose which cases they are for the protection of the suspects’ privacy.”

For whistleblowers who apply for leniency with the prosecution to ultimately receive sentence reductions, strict conditions must be met. This is because there could be disputes over credibility, with concerns that leniency might be abused to reduce sentences.

In the legal community, leniency is expected to enable swift investigations and punishments in insider trading and stock price manipulation cases, which are conducted secretly. Capital market crimes have been growing in scale and becoming more organized over time, but since they are carried out covertly among the parties involved, it has often been difficult to uncover the truth and impose penalties. Utilizing leniency can facilitate rapid investigations through insiders.

The full introduction of leniency was also triggered by the ‘SG Securities Stock Price Crash Incident.’ Last year’s amendment to the Capital Markets Act expanded criminal leniency, previously used in cartel cases under the Fair Trade Act, to unfair practices in the capital market. This aims to strictly punish capital market crimes such as market manipulation and insider trading, which are conducted secretly and are difficult to investigate without insider cooperation.

However, there are criticisms that the conditions for sentence reduction are too strict to serve as an incentive for leniency applicants to cooperate during investigations and trials. A former prosecutor turned lawyer said, “From the leniency applicant’s perspective, non-prosecution measures such as suspension of indictment would be the biggest incentive to cooperate with investigations, but the requirements for suspension of indictment are stringent,” adding, “Detailed operational measures should be considered within the bounds of legal sentiment.”

Another former prosecutor turned lawyer said, “Since the system was introduced recently, there are few practical cases of its use so far,” and added, “The investigation and trial results of the Kakao case could serve as an opportunity for the system to become established.”

Hyunkyung Lim, Law Times Reporter