Former Analyst Leaked Stock Picks Before Report Release
First Two Trials: "Not Fraudulent Unfair Trading," Found Not Guilty
Supreme Court: "Risk of Undermining Capital Market Fairness," Case Remanded
The Supreme Court has ruled that 'front-running'-the act of securities firm analysts disclosing buy recommendations to their company’s CEO and family members before releasing corporate analysis reports, thereby allowing them to gain unfair profits-should be regarded as a 'fraudulent unfair trading practice' under the Capital Markets Act.
According to the legal community on March 3, the Supreme Court (with Justice Noh Kyung-pil presiding) overturned the appellate court's decision that acquitted former Hana Financial Investment CEO Lee Jinguk and former analyst Mr. Lee of fraudulent unfair trading charges under the Act on the Capital Market and Financial Investment Business, and remanded the case to a lower court for retrial.
Mr. Lee was ranked as the number one 'Best Analyst' for seven consecutive years starting in 2014. He exploited the fact that the stock price would rise after he or his team released a report. Before the report was published, he tipped off the CEO’s secretary and an employee at another securities firm managing his mother-in-law’s account about the recommended stocks, allowing them to buy shares in advance.
They used a method of immediately selling off the stocks once the analysis was released and the price rose. Through this, the former CEO earned profit from 47 stocks amounting to 13.9 million won between 2017 and 2019, while Mr. Lee’s mother-in-law gained 1.3 million won from nine stocks between 2018 and 2020. The former CEO was indicted for instructing these front-running trades.
The key issue in the trial was whether having a third party buy stocks using their accounts before an analyst’s buy recommendation report is released constitutes a 'fraudulent unfair trading practice' (use of unfair methods, schemes, or artifice) under the Capital Markets Act.
The first and second trials recognized Mr. Lee as guilty only for some charges related to the use of information obtained through his work in reports he directly authored, but ruled that their actions did not constitute 'fraudulent unfair trading practices' prohibited by the Capital Markets Act, and found them not guilty on those charges.
However, the Supreme Court overturned this decision. The court pointed out, "Just as recommending the purchase of securities without disclosing prior purchases poses a risk of undermining the fairness, reliability, and efficiency of the capital market, so do these actions."
The court further explained the reason for overturning the previous ruling, stating, "The appellate court must carefully re-examine whether their actions constitute 'the use of unfair methods, schemes, or artifice' under the Capital Markets Act."
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