[La Deok-yeon Gate] Rapid Steps to Improve CFD System, Focused Crackdown on Similar Investment Advisory Businesses

Financial Services Commission and Financial Supervisory Service Struggle with Responsibility for SG Securities Crash
Political Circles Accelerate Legislation Including Stronger Post-Incident Punishments to Prevent Recurrence

During the month since the stock price manipulation case involving La Deok-yeon and his group broke out, the financial authorities (Financial Services Commission) and supervisory authorities (Financial Supervisory Service) have faced a barrage of criticism. As responsibility for failing to detect abnormal signs in time intensified, demands for measures to prevent recurrence surged. The measures painstakingly introduced over the past month include improvements to the Contract for Difference (CFD) system, a full investigation of CFD accounts to reform the market system, a comprehensive inspection of similar investment advisory firms, and the establishment of a crackdown team.

However, the market has raised doubts about the effectiveness of these measures, arguing that they are insufficient to fundamentally prevent stock price manipulation. There is a growing call to strengthen efforts to build a system capable of preemptively monitoring related crimes and to impose harsher penalties. In the political arena, efforts are accelerating to prepare various legislative measures to prevent recurrence, including strengthening penalties for unfair trading practices.

Financial Services Commission Chairman Kim Ju-hyun is responding to a lawmaker's question at the full meeting of the Political Affairs Committee held at the National Assembly on the 11th. Photo by Yonhap News

Financial Services Commission, Financial Supervisory Service, and Exchange Under Fire

On the 24th of last month, the stock price manipulation case involving La Deok-yeon and his group came to light when eight stocks hit their daily limit down following a crash triggered by Soci?t? G?n?rale (SG) Securities. After a media outlet that received a tip-off relayed the investigation details to the Financial Services Commission, an investigation began. The problem was that before the tip-off, the Korea Exchange Market Surveillance Committee’s monitoring system was not functioning properly. The Financial Supervisory Service, which should have performed its supervisory duties, also failed to notice anything. They defended themselves by saying the methods were too sophisticated to detect.

However, the market’s outrage was inevitable since some securities firm analysts had already sounded alarms about abnormal signs of price increases in certain stocks since last year. Particularly, the manipulation group used CFD accounts, and the warnings from the market and political circles about the need to fix problems with CFD accounts had been ignored, intensifying the criticism. As the prosecution and financial authorities formed a joint investigation team and launched a full-scale probe, the financial authorities and political circles are also speeding up their efforts to devise countermeasures.

Short Selling Suspicion and Major Shareholder Involvement Investigation

The financial authorities are examining whether former Dow Kim Group Chairman Kim Ik-rae had prior knowledge and the possibility of involvement by short selling forces. On the 20th, former Chairman Kim sold 1.4 million shares (3.65%) of Dow Data through a block deal at 43,245 KRW per share, securing 60.5 billion KRW. Kim Young-min, Chairman of Seoul City Gas, also disclosed that he sold 100,000 shares at 456,950 KRW per share through a block deal on the 17th, amounting to 45.695 billion KRW. Former Ananti Chairman Lee Jung-myung is also suspected of being involved with the stock manipulation group, suffering losses himself and allegedly drawing in other investors. A financial authority official stated, "We are examining all individuals linked to the rise and crash of stock prices."

Financial Services Commission to Improve CFD System

The Financial Services Commission has begun revising the CFD system, which has been cited as the root cause of the stock price crash. Initially, they planned to review the CFD system only after concluding the stock manipulation investigation, but as criticism grew over neglecting the CFD system, which was in a statistical and supervisory blind spot, they felt pressured to act.

CFDs allow immediate forced liquidation that can maximize market volatility, and investors’ anonymity can be exploited for various unfair trading practices. Accordingly, the Financial Services Commission is focusing on improving the system by ▲raising the minimum CFD margin ratio (currently 40%) ▲strengthening qualifications for professional investors ▲introducing CFD maturity and balance disclosure. However, there is controversy over whether these proposed improvements can effectively block the misuse of CFD accounts for crimes. An industry insider said, "Aside from maturity, forced liquidation timing, and enhanced disclosure, there is little else to adjust. Since system improvements alone cannot fundamentally prevent stock price manipulation, there is a strong call to strengthen monitoring and punishment of stock manipulation crimes."

Korea Exchange to Reform and Strengthen Market System

The Korea Exchange plans to reform the market system to prevent unfair trading practices such as sophisticated price manipulation. Criticism has grown that the Exchange’s focus on short-term inspections left gaps in detecting new types of stock manipulation conducted over longer periods. To address this, the Exchange is conducting a full investigation of CFD accounts together with the financial authorities. The investigation covers a total of 3,400 accounts from January 2020 to the end of April 2023. Depending on the results, the review period may be extended back to 2016, when CFD account openings became widespread. The financial authorities and the Exchange plan to analyze trading patterns in this full investigation to identify the tactics of manipulation groups and to systemically prevent such cases from recurring. Sohn Byung-doo, Chairman of the Korea Exchange, emphasized, "We will do our best to analyze trading patterns by receiving all CFD accounts from the authorities and improve the monitoring system to prevent such incidents from happening again."

The direction for market system improvement centers on enhancing the ability to detect price manipulation allegations by extending the detection period and improving classification criteria for suspected groups. Currently, the Exchange mostly targets stocks that have surged sharply over a short period when selecting suspicious stocks for unfair trading allegations. When identifying abnormal trading stocks, the focus is on price increases and involvement rates (bids, quotes, executions) within 100 days. Stocks with modest short-term gains but long-term price increases due to improved performance or classification as theme stocks have not been properly detected. Going forward, the Exchange will expand the criteria for selecting suspicious stocks from short-term (under 100 days) to half-year or annual periods to promptly respond to new types of long-term price manipulation.

The classification criteria for suspected price manipulation groups will also be improved. For example, in the SG Securities-triggered stock crash, suspects traded from different locations such as the homes or workplaces of nominal holders to avoid IP tracking, causing the Exchange to mistake these for normal trades and making it difficult to confirm links between accounts. The Exchange plans to establish new criteria to classify groups as the same suspected group not only based on regional similarity but also when different accounts show overlapping traded stocks or similar trading patterns.

Financial Supervisory Service to Crack Down on Illegal Activities by Similar Investment Advisory Firms

The Financial Supervisory Service will establish a 'Task Force for Cracking Down on Illegal Activities by Similar Investment Advisory Firms (tentative name)' and operate a focused reporting period. This task force will actively collect clues of illegal activities by encouraging reports and tips and will conduct undercover and comprehensive inspections. When illegal firms are detected, the Financial Supervisory Service will notify investigative agencies and immediately launch investigations if unfair trading suspicions are confirmed.

The reason the Financial Supervisory Service is cracking down on illegal activities by similar investment advisory firms is that La Deok-yeon used investment advisory firms as channels to gather funds from investors. La established Money Science Invest, a similar investment advisory firm, in July 2014 and subsequently founded and repeatedly closed several firms including Everest Partners, Hoan, and R&K Investment Advisory. Among these, Everest Partners and Hoan are unregistered firms not registered with the financial authorities.

According to the Financial Supervisory Service’s financial consumer portal 'Fine,' the number of similar investment advisory firms reached 2,139 as of May. Compared to 1,254 at the end of 2020, this represents an increase of about 70% in two and a half years. The Financial Supervisory Service plans to strengthen offline market information collection and analysis functions and expand related personnel. It will also reconsider the organization and functions related to unfair trading investigations from scratch and cooperate organically with the Financial Services Commission and investigative agencies to swiftly crack down on and punish unfair trading.

Discussions Accelerate on Laws to Prevent a Second La Deok-yeon Incident

The ruling party and government are accelerating discussions on bills related to securities crimes such as stock price manipulation. The key point of the Capital Markets Act amendment is strengthening fines for unfair capital market transactions. There is a growing call to strengthen post-incident penalties. The amendment includes imposing fines twice the amount of unfair profits for the three major unfair trading acts (insider trading, price manipulation, and fraudulent trading). Measures to prevent owners from dumping stocks and diversifying sanctions for securities crimes, such as restricting stock trading for up to 10 years for anyone involved in stock manipulation even once, are also being prepared. Additionally, the temporary organization of the Southern District Prosecutor’s Office Financial Crime Joint Investigation Team will be formalized as a permanent unit. The maximum reward for reporting stock manipulation will be raised from the current 2 billion KRW to 4 billion KRW. The National Assembly’s Political Affairs Committee held the first subcommittee meeting on the 16th to discuss these bills and plans to consolidate related bills for discussion in the June subcommittee.

※ The recent SG Securities-triggered stock price crash has sounded an alarm for the capital market order. Readers’ tips will be a great help in uncovering the truth. We welcome any tips regarding investment damage cases, suspicions of stock manipulation and asset concealment by La Deok-yeon’s group, details about the large-scale sales by major shareholders of Dow Data and Seoul Gas, or any other relevant information (jebo1@asiae.co.kr). Asia Economy will do its best to establish a transparent capital market order.

This content was produced with the assistance of AI translation services.