[Exclusive] Over 1 Trillion Won Embezzlement and Breach of Trust Crimes in Listed Companies Over 3 Years... 402.5 Billion Won Last Year Alone [Small Shareholders' Tears]②

16 Companies Have Trading Suspended After Embezzlement and Breach of Trust Disclosures
From Embezzlement and Breach of Trust to Delisting... Tears of Small Shareholders
Even With Embezzlement Amounting to Hundreds of Billions, Maximum Sentencing Standard Is 30 Billion KRW
Sentencing Guidelines Have Remained Unchanged Since 2009

Editor's Note402.5 billion KRW. This is the amount of embezzlement and breach of trust disclosed by 29 listed companies last year, during which the government's value-up project was underway to enhance corporate value. Small shareholders are neither protected nor included when crimes occur within companies. Even if the management commits embezzlement and breach of trust, causing stock trading to be suspended or delisting to occur, small shareholders cannot monitor these issues in advance nor hold anyone accountable. They have no choice but to bear the losses and wait. Ahead of the regular shareholders' meeting season in March for listed companies, we focus on the tears of small shareholders excluded from the domestic stock market, which continuously calls for corporate value enhancement.

'Suspension of Stock Trading' is the announcement most feared by general investors from the Korea Exchange (KRX). When embezzlement or breach of trust is revealed through complaints, accusations, or prosecution by the management, trading of the relevant stock is immediately halted, and the KRX reviews whether to delist the company. This indicates a serious issue warranting a halt in stock trading. However, crimes within companies, such as embezzlement, continue unabated.

According to data from the Korea Exchange, received by Asia Economy through the office of Kim Nam-geun of the Democratic Party on the 1st, 29 companies disclosed embezzlement and breach of trust incidents last year in the domestic capital market, amounting to 402.5 billion KRW. Embezzlement and breach of trust occurred in the amount of 148.1 billion KRW, 230.3 billion KRW, and 24.1 billion KRW in the KOSPI, KOSDAQ, and KONEX markets, respectively. Among the 29 listed companies, 16 currently have their stock trading suspended.

Incidents of embezzlement and breach of trust in listed companies show little sign of decline. The amounts involved were 347.1 billion KRW in 2022 and 406.9 billion KRW in 2023, with a cumulative total exceeding 1.15 trillion KRW over the past three years. From January 1 to February 11 this year, the amount reached 63.7 billion KRW, suggesting that this year could see a similar or even higher level than last year. The number of disclosures related to embezzlement and breach of trust also increased from 23 cases in 2022 to 41 in 2023, and 49 last year.

Some listed companies disclosed enormous embezzlement amounts. Cellgentec, a KONEX-listed company, announced on July 4 last year that embezzlement amounting to 24.06794 billion KRW had occurred, more than double its equity capital of approximately 10.7 billion KRW. Upon this disclosure, the Korea Exchange halted trading of Cellgentec shares. About a month later, Cellgentec was delisted and proceeded with liquidation trading. KOSDAQ-listed Korea Union Pharmaceutical first disclosed embezzlement and breach of trust amounting to approximately 19.4445 billion KRW on October 11 last year and subsequently reported 13 more incidents. The total amount sums to 26.04881 billion KRW.

When grounds for a substantial review of listing eligibility arise, the Korea Exchange can suspend trading of the relevant stock. According to KOSDAQ market listing regulations, embezzlement and breach of trust amounting to 5% or more of equity capital (3% for large corporations), or 3% or 1 billion KRW or more for executives, constitute grounds for a substantial review of listing eligibility. According to the Korea Exchange, 17 stocks were suspended last year due to such grounds related to embezzlement and breach of trust. Stocks have been suspended annually due to embezzlement and breach of trust, with 12 in 2022 and 20 in 2023.

The 'end' for listed companies suspended due to embezzlement and breach of trust is often unfavorable. In severe cases, stocks involved in embezzlement and breach of trust may be delisted after a substantial review. This means small shareholders can lose their money in an instant. According to the electronic disclosure system, among 43 companies that disclosed embezzlement and breach of trust allegations in 2022-2023, 9 have been delisted. TL I, a KOSDAQ-listed company, was suspended in March 2023 due to breach of trust allegations against its founder and former CEO Kim Dal-su. Although TL I submitted an objection and was granted a grace period, it was ultimately delisted in November last year.

Even with embezzlement of billions, maximum sentence is '11 years'... In the U.S., up to 150 years imprisonment

There are criticisms that penalties for embezzlement and breach of trust are too weak, allowing related crimes to continue. The sentencing guidelines for embezzlement and breach of trust, implemented in 2009, have remained largely unchanged for over 15 years. Despite multi-billion KRW embezzlement cases occurring annually, such as the 221.5 billion KRW embezzlement at Osstem Implant and the 308.9 billion KRW embezzlement at BNK Kyongnam Bank, the maximum embezzlement amount considered for the highest sentence is 30 billion KRW.

The severity of punishment is also significantly lower compared to advanced countries overseas. In Korea, even if one commits embezzlement exceeding 30 billion KRW causing numerous victims and qualifies for aggravated punishment, the maximum sentence is 11 years. If mitigating factors apply, even embezzlement of several hundred billion KRW results in only 4 to 7 years imprisonment.

In the United States, sentencing guidelines are divided into 43 levels, with embezzlement starting at level 7. The level increases based on the amount embezzled, number of victims, methods used, and prior convictions. Certain professions, such as financial industry workers, face harsher penalties. For example, a bank employee committing embezzlement can be classified as committing a specific federal crime and sentenced to up to 30 years imprisonment. Bernard Madoff, former NASDAQ Stock Market chairman, was sentenced to 150 years in prison in 2009 for a $65 billion financial fraud and employee pension embezzlement and died in custody.

Lee Sang-ho, a research fellow at the Korea Capital Market Institute, said, "When the sentencing guidelines were created in the past, it was probably assumed that crimes involving 100 billion KRW would not occur, but the situation has changed significantly. The U.S. subdivides sentencing guidelines for embezzlement and breach of trust by amount embezzled, and Korea also needs a public discussion process."

Series on 'Tears of Small Shareholders'

"The Korean capital market killed my younger sibling"
① Trading suspension due to executive embezzlement... A family destroyed by the capital market

▶ Over 1 trillion KRW embezzlement crimes in listed companies over 3 years... 402.5 billion KRW last year alone
② Despite trading suspensions and delistings... Embezzlement and breach of trust penalties are 'lenient'

Among 78 cases of embezzlement exceeding 500 million KRW, only 7 received aggravated punishment... Despite shareholders' petitions for severe penalties, punishments remain 'lenient'
③ Comprehensive survey of first trial rulings on embezzlement under the Act on the Aggravated Punishment of Specific Economic Crimes... Difficult to punish high-value embezzlement crimes

Shareholders' meetings excluding small shareholders... Worries over 'one-way street'
④ Voices of shareholders ignored at the 'flower' of stock companies, the shareholders' meeting

Embezzlement penalty reinforcement at a standstill... "Urgent need to resolve information asymmetry issues"
⑤ Laws protecting small shareholders as told by small shareholders and experts