The Supreme Court ruled that a securities analyst who directed third parties to purchase specific stocks before publishing buy recommendations may be guilty of fraudulent trading under the Capital Markets Act.
According to legal sources on Tuesday, the Supreme Court's Third Division (Presiding Justice Noh Kyung-pil) overturned the lower court's suspended sentence of one year in prison with two years' probation for analyst A, remanding the case to Seoul High Court. A faces charges of enabling his brokerage firm's CEO and his mother-in-law to profit by exploiting the likelihood that stock prices would rise following publication of his corporate analysis reports.
Investigators found that A instructed a secretary managing the CEO's accounts and a securities firm employee to purchase specific stocks, then sell after prices rose following his report releases. The scheme allegedly generated 139.6 million won ($102,000) 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 acquitted A of fraudulent trading violations but convicted him of misusing job-related information in corporate analysis reports, sentencing him to one year in prison, suspended for two years.
The appeals court held that analysts have no legal obligation to disclose when recommending securities to third parties or revealing third-party holdings, unlike requirements for spouses. It also noted concerns that broadly interpreting fraud provisions could excessively expand criminal liability, and found no profit-sharing arrangement between A and the CEO or mother-in-law.
The Supreme Court disagreed. "Whether conduct constitutes fraud must be determined by considering whether it risks harming the fairness, reliability, and efficiency of capital markets," the court stated. Even recommendations involving third-party holdings require consideration of whether they could mislead investors or undermine fair competition.
The Supreme Court found A's publications damaged trust in financial market fairness. Investors likely relied on report disclaimers stating "no prior provision to third parties" and "the analyst does not hold shares in this company"—expectations that were violated.
The court noted A effectively acted as the investment principal by issuing specific instructions on trading volumes and amounts. His advance notification of recommended stocks constituted de facto prior distribution of research materials.
"Unfair trading does not require actual profits gained or losses avoided," the court emphasized. "The absence of financial benefit to A alone does not exclude the use of fraudulent means, schemes, or techniques."
Meanwhile, former Hana Securities CEO Lee Jin-kuk, who stood trial alongside A, was acquitted at all levels. Lee faced charges of instructing or requesting A to engage in front-running, but the trial court found insufficient evidence.