South Korea's Supreme Court has ruled that a securities analyst who directed third parties to purchase specific stocks before publishing buy recommendations on those shares engaged in market-distorting conduct, even without direct financial benefit.
The Supreme Court's Third Division, presided over by Justice Noh Kyung-pil, on Monday overturned a lower court's ruling on former Hana Financial Investment analyst identified only as "A" and remanded the case to the Seoul High Court. The appeals court had sentenced A to one year in prison, suspended for two years, on charges of violating the Capital Markets Act.
A was accused of exploiting the likelihood that stock prices would rise following publication of corporate analysis reports, enabling profits for his brokerage firm's chief executive and his own mother-in-law through so-called "front-running."
According to investigators, A instructed account managers for both parties to purchase specific stocks before publishing his research, then had them sell after prices rose. The scheme generated 139.6 million won ($101,000) in profits for the CEO between February 2017 and September 2019, and 13.9 million won for his mother-in-law between January 2018 and April 2020.
The appeals court had acknowledged that A improperly used non-public information obtained through his position but rejected the fraudulent trading charges. It found no legal obligation for analysts to disclose stock recommendations made to third parties or third-party holdings, noting that disclosure requirements apply only to the analyst, spouse, and immediate family members.
The Supreme Court disagreed, stating that "whether conduct is fraudulent must be determined by considering whether it risks undermining the fairness, reliability, and efficiency of capital markets."
The court found that A's actions damaged trust in financial product trading. Investors relied on disclaimers in his reports stating that information had not been provided to third parties in advance and that the analyst did not hold shares in the covered companies.
"A functioned as the de facto investment principal, issuing specific instructions on trading volumes and amounts," the court stated. "Publishing reports without disclosing these interests created the false impression that securities were being recommended based on objective analysis."
The court ruled that absence of direct financial gain does not preclude a finding of fraudulent trading, noting that A could have obtained or anticipated personal benefits.
The Supreme Court also established specific criteria for assessing risks to market integrity, including: the relationship between investment advisors and third parties; circumstances under which third parties acquired securities; whether advisors intended to benefit third parties; identification of the substantive investment principal; and whether benefits were obtained or anticipated.
Former Hana Securities CEO Lee Jin-kook, who was tried alongside A, was acquitted. The Supreme Court upheld the lower court's not-guilty verdict, finding no evidence that Lee directed or conspired in the front-running scheme.