Will the Second Radukyeon Be Stopped... Account Freeze and Double Fines, Flood of Bills Strengthening Stock Price Manipulation Penalties

Direction for Strengthening Current Laws After the Stock Price Manipulation Incident by Ra Deok-yeon Group
Time Needed for Passage in the Plenary Session... Difficult to Apply Revised Law to Ra Deok-yeon Group and Others

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

The National Assembly is overhauling the current weak laws in response to the stock price manipulation scandal involving Ra Deok-yeon and his associates. Punishments for all types of unfair trading practices will be strengthened, and methods for calculating unjust profits will be codified into law. Furthermore, safeguards will be established to protect ordinary shareholders from suffering damages during unfair trading activities. The National Assembly’s Political Affairs Committee plans to pass the bills proposed by lawmakers within this year. However, considering the time required for passage through the plenary session, it is unlikely that the revised laws will be applied to the main perpetrators involved in the current scandal, such as Ra Deok-yeon.

Stock Manipulators Banned from New Transactions for Up to 10 Years... Prohibited from Appointment as Executives of Listed Companies

From now on, stock manipulators will be prohibited from trading all capital market products, including stocks and derivatives. Indirect investments using nominee accounts will also be restricted. The core provision of the "Partial Amendment to the Act on Capital Markets and Financial Investment Business (Capital Markets Act)" proposed by Yoon Chang-hyun, a member of the People Power Party, is to exclude unfair traders from the capital market. Stock manipulators will face restrictions on opening new accounts and conducting new transactions in all financial investment products within the capital market for up to 10 years. The Securities and Futures Commission under the Financial Services Commission will determine the restriction period on a case-by-case basis.

A distinctive feature of Yoon’s bill is the active use of administrative sanctions. Stock manipulation is classified into types such as △use of undisclosed information △fraudulent trading △price manipulation △market disorder. The three major unfair practices with significant weight (use of undisclosed information, fraudulent trading, price manipulation) have mainly relied on criminal penalties. If Yoon’s bill passes, it is expected that offenders will find it difficult to resume activities in the capital market during the criminal trial period.

In particular, those designated as subject to trading restrictions will simultaneously be barred from appointment as executives of listed and financial companies. Designation can be made regardless of the offender’s rank. Even if the offender was an employee at the time of committing stock manipulation crimes, if the degree of illegality is significant, the possibility of appointment as an executive will be preemptively blocked. If already serving as an executive, suspension from the position will also be possible. This applies to all listed companies on KOSPI, KOSDAQ, and KONEX. For financial companies, the rule applies uniformly regardless of listing status.

A senior official in the financial investment industry said, "It is meaningful that a system has been established to exclude unfair traders from the playing field by using administrative sanctions," adding, "It is expected to contribute to creating a capital market atmosphere where professional participants compete without tolerating rule breakers."

'Money for Money'... Fines Doubled, Codification of Unjust Profit Calculation Method

Among the proposed bills, the "Codification of Unjust Profit Calculation Method" by Park Yong-jin and Yoon Kwan-seok of the Democratic Party of Korea draws attention. The amendment defines unjust profits as the difference between the total revenue generated from illegal transactions such as stock manipulation and the total costs incurred for those transactions. This is significant as it is the first time the definition and calculation method of unjust profits are explicitly stated in the Capital Markets Act.

According to data compiled by the Securities and Futures Commission, between 2016 and 2020, the non-prosecution rate for unfair trading-related reports and notifications was 55.8%. Among Supreme Court rulings related to unfair trading (as of 2020), 59.4% (38 people) received prison sentences, while 40.6% (26 people) received suspended sentences.

This means half of the stock manipulators do not even face court. Even among those who do, 4 out of 10 are released on suspended sentences. There is a reason for this. Criminal penalties take at least 2 to 3 years until a verdict is reached. Moreover, there was no legal method to calculate 'unjust profits,' which form the basis for guilty verdicts, making it practically difficult to be judged by law. This explains why punishments have been lenient despite the existence of laws. If the amendment passes, stricter criminal penalties are expected for larger criminal proceeds.

The amendment also includes provisions to impose fines up to twice the amount of unjust profits on unfair traders. If it is difficult to calculate unjust profits, fines of up to 5 billion KRW will be imposed.

The above Capital Markets Act amendments consolidate four bills proposed by lawmakers (two led by Park Yong-jin, one by Yoon Kwan-seok, and one by Yoon Chang-hyun) into a single alternative bill, which was approved by the Political Affairs Committee and forwarded to the Legislation and Judiciary Committee. A People Power Party official from the Political Affairs Committee said, "Both ruling and opposition parties have reached a consensus on the bill," and predicted, "The bill will pass the plenary session within this year."

However, it seems difficult to apply the revised law to recent stock manipulators such as Ra Deok-yeon and his group. The bill is expected to pass around the end of the year, and retroactive application is difficult.

Mandatory Prior Disclosure of Insider Trading

Another bill gaining attention due to the recent stock manipulation scandal is the "Mandatory Prior Disclosure of Insider Trading." This system requires major shareholders of listed companies to disclose in advance, within a period set by presidential decree ranging from a minimum of 30 days to a maximum of 90 days, when they plan to sell a large volume of shares. Currently, shareholders holding 5% or more of a listed company’s shares must submit a "Report on Large Holdings of Stocks, etc." This bill expands the scope to include major shareholders and executives as insiders of the listed company.

The bill was triggered by the "KakaoPay exit scam" incident. It was proposed by Lee Yong-woo of the Democratic Party of Korea in April last year but remained stalled in the Political Affairs Committee for over a year because the Financial Services Commission argued that it was difficult to pass the bill solely on the opposition party leader’s proposal, causing failure in bipartisan agreement.

Renewed attention came after the bankruptcy of Silicon Valley Bank (SVB) in the United States earlier this year. Controversy arose when executives, including the CEO, sold shares before the bankruptcy, increasing the urgency for the bill’s passage. The stock manipulation scandal involving Ra Deok-yeon and his associates further accelerated the legislative process.

Hwang Se-woon, a senior researcher at the Korea Capital Market Institute, evaluated, "Insiders with privileged information can accurately assess whether the current stock price is overvalued or undervalued," adding, "Mandatory prior disclosure of insider trading is expected to reduce the information asymmetry faced by ordinary investors."

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