[Viewpoint]Desirable Regulation of Unfair Securities Trading

The book "Black Edge" by New Yorker journalist Sheelah Kolhatkar is a nonfiction account of Steven Cohen, the hedge fund king who achieved an annual average return of 30% over 20 years, and the federal investigators pursuing him. Regarding Cohen's extraordinary returns, the federal prosecutors, FBI, and Securities and Exchange Commission formed a 'one team' and pursued him for an unprecedented seven years on extensive insider trading allegations but ultimately failed to obtain decisive evidence, resulting in no criminal charges against Cohen. However, through administrative and criminal settlements with Cohen's personal fund management company, SAC Capital Advisors, the largest-ever recovery of $1.8 billion in illicit gains was achieved, realizing at least a minimal measure of justice.

Unfortunately, in our capital markets, recovering illicit gains from unfair trading is very difficult. Recently, Yoon Kwan-seok, Chairman of the Political Affairs Committee, proposed an amendment to the Capital Markets Act allowing the Financial Services Commission to impose administrative fines for unfair trading, enabling substantial recovery of illicit gains. This amendment, initiated by the relevant standing committee chairman after consultations between the prosecution and the Financial Services Commission and government-party discussions, is expected to pass in the current regular session of the National Assembly, signaling a major change in unfair trading regulation. The essence of the amendment is that the Financial Services Commission can impose administrative fines under certain conditions even for unfair trading as a criminal offense. The market disorder regulation introduced in 2015 allowed fines only for non-criminal unfair acts, but this amendment expands it to criminal acts, significantly strengthening the financial authorities' role. While agreeing with the amendment's intent, I would like to highlight several issues for more desirable unfair trading regulation.

First, the issue of calculating illicit gains. Currently, imprisonment and fines are imposed based on 'profits obtained from the violation,' requiring courts to strictly prove a causal relationship between the violation and illicit gains. However, among hundreds of factors affecting securities prices, isolating the impact of the violation on the price is nearly impossible, leading to many cases where illicit gains cannot be calculated and some acquittals are issued. The amendment somewhat relaxes this by expressing it as 'profits obtained from transactions related to the violation,' similar to administrative fines for market disorder acts. However, since this is a full-fledged administrative fine for criminal acts, it is preferable to specify a concrete calculation method in the law and grant a legal presumption effect to this method to enhance the validity of fine calculations rather than using such uncertain wording.

Second, the ambiguity of the term 'consultation.' The amendment allows the Financial Services Commission to impose fines independently before investigation results are out if it notifies the prosecution and consultation occurs. However, the term consultation can easily cause confusion, lying somewhere between 'notification' and 'agreement.' While this requires careful handling between the two agencies, it is also necessary to consider defining the level of consultation concretely to prevent unnecessary conflicts in advance.

Third, the enhancement of financial authorities' expertise and due process. Until now, authorities could only report or notify the prosecution after investigating unfair trading, so alternative punishments to criminal penalties were unfamiliar. Unfair trading is far more complex than disclosure violations or market disruption acts, and given the enormous scale of illicit gains, thorough preparation by authorities is required. Procedurally, strict judgment procedures equivalent to trials should be established, and expertise should be strengthened to improve the substantive validity of dispositions through scientific investigation and proof.

Fourth, the revival of the Joint Securities Crime Investigation Unit within the Seoul Southern District Prosecutors' Office. The amendment's purpose is not about who gets a bigger slice in a zero-sum game but about how to effectively regulate unfair trading in the capital market. Now that many unfair trading cases are sanctioned by the Financial Services Commission's fines, the prosecution should focus on eradicating major crimes. To this end, it is necessary to revive the Joint Investigation Unit as a platform where financial experts within the prosecution can maximize their capabilities. It is desirable to concentrate the expertise of the Korea Exchange, Financial Supervisory Service, and others around the Joint Investigation Unit and establish an organic cooperative system with the Financial Services Commission. We want to see an investigative dream team as a 'one team' like in the United States.

Seong Hee-hwal, Professor, Inha University School of Law

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