[Exclusive] "Unconstitutional Risk in Calculating Unjust Gains from Stock Price Manipulation" Court Administration Office Blocks Amendment

Court Administration Office to Submit Opinion to Legislation Committee on 20th... Amendment Bill on Stock Manipulation Faces Risk of Failure
Unjust Enrichment Calculation Formula 'Principle of Responsibility', Doubling of Fines May Violate 'Principle of Prohibition of Excessiveness'

The 'Unjust Profit Calculation and Imposition of Surcharge Act (Amendment to the Capital Markets Act Article 442-2)', which strengthens penalties against unfair trading offenders such as the Soci?t? G?n?rale (SG) stock crash incident, is unlikely to pass the National Assembly's Judiciary Committee. This is because the Court Administration Office has expressed concerns that the amendment may be unconstitutional. However, it stated that the provision for reducing sentences (leniency) in case of voluntary surrender does not pose legal issues.

According to the financial investment industry and the National Assembly on the 26th, the Court Administration Office submitted a review report on the 'Partial Amendment to the Capital Markets Act' at the National Assembly's Political Affairs Committee meeting held on the 20th.

The proposed bill goes through the standing committee, the Judiciary Committee, and the plenary session. During this process, the Court Administration Office reviews the legal system and wording. If it points out any constitutional issues, the bill's passage is effectively blocked.

In the report, the Court Administration Office indicated that among the key contents of the amendment?unjust profit calculation method, surcharge increase, and leniency (sentence reduction)?there are constitutional concerns regarding the unjust profit calculation method and the surcharge increase.

The core issue is the potential unconstitutionality of the unjust profit calculation method. The Court Administration Office pointed out that "it could shift the burden of proof onto the offender (defendant), deviating from the current legal framework." The burden of proof refers to the principle of criminal law that "no punishment without responsibility," known as the principle of responsibility.

Under current laws and precedents, the prosecution must prove the illegality when calculating unjust profits obtained from violations. For example, if a stock manipulation offender raised stock prices during a period of favorable factors such as a freeze on the base interest rate or a booming stock market, the prosecution must prove only the unjust profits gained solely from illegal activities.

The reason why most prosecutions of stock manipulation offenders have ended with lenient punishments so far is largely due to this background. Because the law does not specify the method for calculating unjust profits, most unjust profit amounts have been judged as 'unknown.'

Between 2016 and 2020, the average unjust profit per unfair trading case reached 4.6 billion KRW, but the non-prosecution rate was as high as 55.8%, and even when prosecuted, 40.6% were released on probation. Courts strictly assess profits gained from unfair trading based on the principle of responsibility. A representative case is the 2011 Constitutional Court precedent, which required separating unjust profits from unfair trading and profits from other factors (including avoided losses). However, the current Capital Markets Act (Article 443, Paragraph 1, proviso) does not clearly stipulate the method for calculating unjust profits from unfair trading or market disruption acts.

Like Korea, the United States and the United Kingdom have not codified the method for calculating unjust profits related to surcharges. However, their executive branches independently cooperate with the judiciary to impose administrative sanctions. The United States, United Kingdom, Canada, Australia, and Japan impose civil penalties (surcharges) on unfair trading offenders.

To address this issue, the National Assembly specified the method for calculating unjust profits in Paragraph 1 of the amendment. Paragraph 2 states, "If the unfair trading offender 'proves' price fluctuations due to third-party intervention or other external factors, such fluctuations must be reflected in the difference calculated under Paragraph 1."

Specifying that the difference should be reflected when proving third-party intervention is intended to clarify that the burden of proof does not shift to the defendant, but applies only when the defendant 'proves' such factors.

However, the Court Administration Office pointed out, "Since the amendment defines the amount of profit obtained from violations as total revenue minus total costs for transactions, if the violator does not prove the presence of third-party intervention or related price fluctuations, it is unclear whether the prosecution bears the burden of proof for third-party intervention. If the prosecution fails to prove third-party intervention or price fluctuations, it could be effectively regarded as a shift in the burden of proof."

Even if unjust profits are calculated, unless the suspect voluntarily surrenders, shifting the burden of proof for the criminal act to the suspect violates the fundamental criminal law principle of 'responsibility.' A National Assembly official pointed out, "The prosecution must prove that the stock price was raised through illegal acts, not favorable factors, so under the principle of responsibility, it is difficult to punish stock manipulation offenders."

Hwang Se-woon, Senior Research Fellow at the Korea Capital Market Institute, explained, "There is a stark difference between the prosecution and National Assembly, which want to 'set an example' by punishing stock manipulation crimes severely, and the judiciary, which values consistency in the legal system. If the law is applied mechanically, proving unfair trading offenses will become difficult." He added, "This could be misinterpreted in the market as a message of leniency toward stock manipulation."

Meanwhile, the Court Administration Office also indicated that the amendment imposing surcharges at twice the amount of unjust profits (Article 429-2) may be unconstitutional. The office conveyed the opinion that "monetary sanctions may be excessive and violate the principles of responsibility and prohibition of excess."

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