[SG Incident, 19 Months of Records]③ Prosecution "Market Manipulation" VS Ra Deok-yeon "Value Investing"... Court's Judgment

Editor's NoteIt has been about 1 year and 7 months since the ‘Soci?t? G?n?rale (SG) Securities Stock Price Crash Incident’ that shook the domestic capital market in April 2023. A total of 58 people, including former Hoan Investment Advisory CEO Ra Deok-yeon, who was identified as the ‘mastermind,’ have been brought to trial. The prosecution has demanded a 40-year prison sentence for Mr. Ra. The court’s first ruling will be announced in January next year. Asia Economy reviewed the key issues, newly revealed truths and misunderstandings, and unresolved questions based on the investigation and court records over the past 19 months since the SG incident.

The first trial of the ‘Soci?t? G?n?rale (SG) Incident’ is approaching its conclusion after a year and a half of courtroom battles. The charges against former Hoan Investment Advisory CEO Ra Deok-yeon include violations of the Capital Markets Act (price manipulation and unregistered investment discretionary business), violation of the Act on the Aggravated Punishment of Specific Crimes (tax evasion), and violation of the Act on the Prohibition of Concealment of Criminal Proceeds. Among these, he admits only to the unregistered investment discretionary business charge and denies the rest. Ultimately, the core issue is whether price manipulation occurred. The prosecution and defense counsel are engaged in relentless disputes over this until the very end.

Prosecution Points to Ra Deok-yeon as Cause of ‘Largest Ever Stock Price Manipulation’... Key to Proving Charges

On the 14th, during the sentencing hearing held at the Seoul Southern District Court Criminal Division 11 (Presiding Judge Jeong Doseong), the prosecution devoted considerable time to explaining the price manipulation charges against Mr. Ra. The prosecution stated, “The Ra Deok-yeon organization received large investments and operated in a coordinated manner, submitting price manipulation orders such as high-priced purchases and volume depletion,” adding, “When investors requested settlements, they engaged in collusive trading by shouting ‘one, two, three’ to prevent stock price declines.” They further emphasized, “All eight stocks saw upward price trends as the Ra Deok-yeon organization entered (buying), and then simultaneously plummeted during the crash incident,” and “The distorted prices formed by the defendants are confirmed by charts.” They pointed out, “Many investors and accomplices suffered damages, and the biggest cause of this incident is Ra Deok-yeon.”

On the other hand, Mr. Ra’s side has consistently maintained throughout the trial that there was no intent to manipulate stock prices, and although they chose the incorrect method of unregistered investment discretionary business, their purpose was ‘value investing.’ Mr. Ra’s defense counsel argued, “This case is completely different from previously handled stock manipulation cases,” and questioned, “The defendants invested in undervalued value stocks where major shareholders hold high equity stakes and the free float is low, with major shareholders deliberately suppressing stock price rises. Can this really be considered stock price manipulation?”

In fact, the eight stocks traded by Mr. Ra’s organization share the common characteristics of high major shareholder equity and significantly low price-to-book ratios (PBR). PBR is an indicator obtained by dividing market capitalization by a company’s net assets. Generally, a PBR below 1 is considered undervaluation relative to corporate value. At the time Mr. Ra’s organization began purchasing these eight stocks, their PBR ranged from 0.27 to 0.71 (based on closing prices on December 13, 2019). Currently, it has fallen further to 0.19 to 0.35 (based on closing prices on November 21, 2024). The average PBR for all listed companies is 1.91.

Mr. Ra, the key figure in the case, appealed in his final statement, “It is natural that a company’s stock price should be at least higher than its liquidation value, but for unknown reasons, the Korean stock market is trading at low prices,” adding, “As a result, many investors have suffered losses, and I hoped that the rightful stock price would be reflected to counter this injustice.”

Last-Minute Variable ‘Over-the-Counter Derivative CFD’... Defense Resumes Ahead of Sentencing

The prosecution stated in the indictment that Mr. Ra’s organization mainly attempted stock price manipulation through ‘Contract for Difference (CFD)’ accounts. However, this point suddenly became a major issue near the end of the first trial. Article 176 of the current Capital Markets Act prohibits price manipulation of ‘listed securities or exchange-traded derivatives.’ CFDs are ‘over-the-counter’ derivatives. The defense argues that CFDs fall outside the scope of this legal provision.

Moreover, due to the nature of CFD trading, unlike physical securities, buy and sell orders are not directly transmitted to the stock market. When securities firms receive buy or sell orders through CFDs, they offset the quantities of each order and submit only the remaining quantity to the exchange. This principle is similar to hedging, commonly used for risk management. This is important because there could be a significant difference between the number of trading orders submitted by Mr. Ra’s organization to securities firms through CFD accounts and the actual number of physical securities trades submitted to the exchange via securities firms. Mr. Ra’s side argued that CFD trading does not directly affect market prices, so fundamentally, price manipulation through CFDs cannot be established.

The prosecution maintains that “Although CFDs are over-the-counter derivatives, they are ultimately connected to the prices of listed securities on the exchange,” asserting there is no problem. However, the court sees room for dispute on this point and plans to resume first trial arguments next month for Mr. Ra and two other key defendants to conduct additional hearings.

'Yeouido Grim Reaper' Seoul Southern District Prosecutors vs. ‘Finance and Tax Specialists’ Defense Team... Court Ruling in January Next Year in Focus

The prosecution’s demand for a 40-year prison sentence for Mr. Ra is equivalent to the heaviest sentence ever imposed on an economic offender. They also demanded an astronomical fine of 2.359 trillion KRW. This amount combines three times the illicit gains from price manipulation (737.7 billion KRW) and twice the amount of tax evasion, in accordance with relevant laws.

The prosecution and defense continue to dispute the scale of illicit gains from the SG incident. Mr. Ra’s side argues that gains attributable to external factors and profits belonging to investors other than the defendant should be excluded. However, the prosecution counters that even considering these claims partially, the defendants’ illicit gains amount to at least 490 billion KRW. The Capital Markets Act’s threshold for aggravated punishment is ‘5 billion KRW.’

The SG incident is a record-breaking case that shocked the domestic capital market in every aspect, including the scale and duration of the crime and the number of defendants indicted. The defense team is also impressive. Nearly 30 lawyers from five law firms are listed on Mr. Ra’s side alone. Attorney Lee Won-gon (Judicial Research and Training Institute Class 24, Law Firm Pyeongsan), a former prosecutor specializing in finance, has experience as head of the special investigation team for Hanwha and Taekwang Group slush funds and was dispatched to the Samsung slush fund special prosecutor’s office. Others include Attorney Lee Gyu-cheol (Class 22, Law Firm Daeryuk Aju), who served as a judge at the Seoul High Court and a Supreme Court judicial researcher (taxation); Attorney Kwon Ki-dae (Class 30, Law Firm Gaon), former chief prosecutor of the Seoul Central District Prosecutors’ Office’s Crime Proceeds Recovery Division; Attorney Go Jin-won (Class 33, Law Firm Bareun), former chief prosecutor of the Fair Trade Division at Seoul Central District Prosecutors’ Office; and Attorney Kim Tae-hee (Class 39, Law Firm Pyeongsan), former judge of the Seoul Administrative Court’s tax division?all experts in finance and taxation. This is a true battle of ‘spear and shield’ against the Seoul Southern District Prosecutors’ Office Financial and Securities Crime Joint Investigation Unit, nicknamed the ‘Yeouido Grim Reaper’ for its focus on financial crimes. The court’s first trial sentencing is scheduled for January 23 next year.

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