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Photo courtesy of Yonhap News |
[Alpha Biz= Paul Lee] South Korea’s Supreme Court has ruled that recommending stocks without disclosing that a third party had acquired shares in advance of the publication of an analyst report could constitute fraudulent unfair trading under the Capital Markets Act.
According to the legal community on March 3, the Supreme Court’s Third Division overturned a second-instance ruling that had acquitted a Hana Securities analyst, identified by surname Lee, of charges related to fraudulent unfair trading. The case was remanded to the Seoul High Court for further proceedings.
The Court said the appellate court had misunderstood legal principles governing fraudulent unfair trading.
Prosecutors alleged that Lee arranged for specific stocks to be purchased through accounts linked to former Hana Securities CEO Lee Jin-guk or the analyst’s mother-in-law before the publication of corporate analysis reports prepared by Lee’s team. The shares were allegedly sold after the reports were released, capitalizing on potential price increases following publication.
Prosecutors estimated that the former CEO earned approximately KRW 139.6 million from 47 stocks between February 2017 and September 2019, while the analyst’s mother-in-law earned about KRW 13.9 million from nine stocks between January 2018 and April 2020.
The first trial court had found part of the conduct to constitute fraudulent unfair trading and sentenced the analyst to a one-year prison term, suspended for two years. However, the appellate court acquitted Lee of that charge, ruling that analysts were not legally obligated to disclose third-party holdings or potential conflicts of interest in research reports. It did, however, find the analyst guilty on certain counts related to the use of job-related information.
The Supreme Court’s decision leaves open the possibility that failure to disclose pre-publication holdings by related parties may fall under fraudulent trading provisions, depending on how lower courts interpret the law on retrial.
Alphabiz Reporter Paul Lee(hoondork1977@alphabiz.co.kr)
