Insider trading

In general, Insider trading (내부자거래/內部者去來) is the trading of a corporation's stock or bonds by individuals with potential access to non-public information about the company. However, the term, insider trading, is used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the company, or otherwise in breach of a fiduciary or other relationship of trust and confidence, or where the non-public information was misappropriated from the company.

Insider trading as well as securities manipulation are strongly regulated and punished as unfair transactions in terms of investor protection.

Key words
insider trading, tippee, material non-public information

Enforcement of the Capital Markets Act
Like other countries, such insider trading is subject to harsh punishment under the Financial Investment Services and Capital Markets Act (hereinafter the “Act”, 자본시장과 금융투자업에 관한 법률; formerly the Securities and Exchange Act, 구 증권거래법). The provisions of Article 174 seem to be very complex but may be categorized into three types of trading using material information not in the public domain:
 * sale and purchase of stocks of a listed company;
 * tender offer of stocks; or
 * acquisition or disposition of stocks in bulk.

In any case, an executive or employee in a position to acquire material non-public information, or a shareholder with more than 10 percent of total shares issued, of a stock-listed corporation has to return the profit, upon request by the corporation concerned or the Financial Services Commission, which has been derived by selling or purching the shares of such corporation after purchasing or selling within six months from the initial transactions. Insider's short-swing profit is subject to return regardless of insider trading because of difficuties in proving such unfair transactions. Article 172 (Return of Insider's Short-swing Profit) of the Act (1) If an executive (including any person listed in the subparagraphs of Article 401-2 (1) of the Commercial Act; hereafter the same shall apply in this Chapter), employee (limited to the person who is in a position to acquire material nonpublic information as defined in Article 174 (1), as specified by Presidential Decree; hereafter the same shall apply in this Article), or a significant shareholder of a stock-listed corporation derives profit by purchasing (including the sale of specific securities, etc., through which he/she becomes an opposite party of a person who exercises a right, and acquires the status of a purchaser; hereafter the same shall apply in this Article) financial investment instruments falling under any of the following subparagraphs (hereinafter referred to as "specific securities, etc.") and then selling (including the purchase of specific securities, etc., in which he/she is able to exercise a right and acquire the status of a seller; hereafter the same shall apply in this Article) them within six months or by selling specific securities, etc. and then purchasing them within six months, the corporation may require the executive, employee, or significant shareholder to return the profit (hereinafter referred to as "short-swing profit") to the corporation. In this regard, matters pertaining to guidelines for the computation of such profit, the procedure for returning, etc. shall be prescribed by Presidential Decree:
 * 1. Securities issued by the corporation (excluding securities specified by Presidential Decree);
 * 2. Securities depositary receipts related to the securities under subparagraph 1;
 * 3. Exchangeable bonds issued by any person other than the corporation, which are exchangeable with the securities under subparagraph 1 or 2;
 * 4. Financial investment instruments based on an underlying asset composed only of the securities specified in subparagraphs 1 through 3.

Take an example of the CNK International scandal in which an energy envoy and other high ranking government officials were involved with regard to the press release about fraudulently over-estimated reserves of Cameroon diamond mine in Africa. In January 2012, the Board of Audit and Inspection and the Prosecutors Office investigated an alleged insider trading scheme.

Article 174 (Prohibition on Use of Material Non-public Information)

Sale and purchase of stocks of a listed company
(1) No person who falls under any of the following subparagraphs (including a person in whose case one year has not passed since he/she no longer fell under any of subparagraphs 1 through 5) shall use any material non-public information (referring to any information that may produce a significant impact on investors’ investment judgment, and that has not been disclosed yet to a multitude of unspecified individuals in a manner prescribed by Presidential Decree; hereinafter the same shall apply in this paragraph) related to the business of a listed-corporation (including a corporation which will be listed within six months) in trading or any other transaction involving specific securities, etc. or allow  another person to use it: 
 * 1) The corporation (including its affiliated companies; hereinafter the same shall apply in this subparagraph and subparagraph 2) or its executive, employee, or agent, who becomes aware of the material non-public information in the course of performance of the business;
 * 2) A significant shareholder of the corporation, who becomes aware of the material non-public information in the course of exercising his/her rights;
 * 3) A person, having authority to grant permission or authorization, give an instruction, or supervise the corporation or any other power pursuant to a relevant Act and subordinate statute, who becomes aware of the material non-public information in the course of exercising such authority or power;
 * 4) A person who has entered into a contract with the corporation or is under contract negotiation with the corporation, and who becomes aware of the material non-public information in the course of entering into, negotiating, or performing such contract;
 * 5) An agent of a person falling under any of subparagraphs 2 through 4 (including executives, employees, and agents if the principal falling hereunder is a corporation), or a servant or employee of such person (or an executive, employee, or agent of a corporation if the person falling under any of subparagraphs 2 through 4 is the corporation), who becomes aware ofthe material non-public information in connection with his/her job; and
 * 6) A person who received the material non-public information from a person falling under any of subparagraphs 1 through 5 (including a person in whose case one year has not passed since the day on which he/she no longer fell under any of subparagraphs 1 through 5).

Tender offer of stocks
(2) No person falling under any of the following subparagraphs (including a person in whose case one year has not passed since the day on which he/she no longer fell under any of subparagraphs 1 through 5) shall use material non-public information (referring to information not yet disclosed to a multitude of unspecified individuals in a manner prescribed by Presidential Decree; hereinafter the same shall apply in this paragraph) regarding the initiation or discontinuance of a tender offer (referring to the tender offer under Article 133 (1); hereinafter the same shall apply in this paragraph) for stocks, etc. in trading or any other transaction involving specific securities, etc. related to the stocks, etc. or allow another person to use such information; Provided, however, that the same shall not apply to cases where a tender offer or makes transactions for the purpose of public tender offer: 
 * 1) A tender offeror (including its affiliated companies; hereinafter the same shall apply in this subparagraph and subparagraph 2) or an executive, employee, or agent of the tender offeror, who becomes aware of the material non-public information regarding the initiation or discontinuance of the tender offer in connection with his/her job;
 * 2) A significant shareholder of the tender offeror, who becomes aware of the material non-public information regarding the initiation or discontinuance of the tender offer in the course of exercising his/her rights;
 * 3) A person, having authority to grant permission or authorization, give an instruction, or supervise the tender offeror or any other power pursuant to a relevant Act and  subordinate statute, who becomes aware of the material non-public information regarding the initiation or discontinuance of the tender offer in the course of exercising such authority or power;
 * 4) A person who has entered into a contract with the tender offeror or is under contract negotiation with the tender offeror, and who becomes aware of the material non-public information regarding the initiation or discontinuance of the tender offer in the course of entering into, negotiating, or performing such contract;
 * 5) An agent of a person falling under any of subparagraphs 2 through 4 (including executives, employees, and agents if the principal falling hereunder is a corporation), or a servant or employee of such person (or an executive, employee, or agent of a corporation if the person falling under any ofsubparagraphs 2 through 4 is a corporation), who becomes aware of the material non-public information regarding the initiation or discontinuance of the tender offer in connection with his/her job; and
 * 6) A person who acquired the material non-public information regarding the initiation or discontinuance of the tender offer from the tender offeror or a person falling under any of subparagraphs 1 through 5 (including a person in whose case one year has not passed since the day on which he/she no longer fell under any of subparagraphs 1 through 5).

Acquisition or disposition of stocks in bulk
(3) A person who falls under any of the following subparagraphs (including a person in whose case one year has not passed since the day on which he/she no longer fell under any of subparagraphs 1 through 5) shall use material non-public information (referring to information not yet disclosed to a multitude of unspecified individuals in a manner prescribed by Presidential Decree; hereinafter the same shall apply in this paragraph) regarding acquisition or disposition of stocks, etc. in bulk (referring to an acquisition or disposition that may produce an impact on business control, as prescribed by Presidential Decree; hereinafter the same shall apply in this paragraph) for stocks, etc. in trading or any other transaction of specific securities, etc. related to the stocks, etc. or allow another person to use such information; Provided, however, that the same shall not apply to the cases where a person acquiring or disposing of the stocks, etc. in bulk makes transactions for the purpose of acquiring or disposing of stocks, etc. in bulk: 
 * 1) An affiliated company of the person acquiring or disposing of the stocks, etc. in bulk, or an executive, employee, or agent of the person acquiring or disposing of the stocks, etc. in bulk (including its affiliated companies; hereinafter the same shall apply in this subparagraph and subparagraph 2), who becomes aware of the material non-public information regarding the initiation or discontinuance of an acquisition or disposition in bulk in connection with his/her job;
 * 2) A significant shareholder of the person acquiring or disposing of the stocks, etc. in bulk, who becomes aware of the material non-public information regarding the initiation or discontinuance of an acquisition or disposition in bulk in the course of exercising his/her rights;
 * 3) A person, having authority to grant permission or authorization, give an instruction, or supervise the person acquiring or disposing of the stocks, etc. in bulk, or any other power pursuant to a relevant Act and subordinate statute, who becomes aware of the material non-public information regarding the initiation or discontinuance of an acquisition or disposition in bulk in the course of exercising such authority or power;
 * 4) A person who has entered into a contract with the person acquiring or disposing of the stocks, etc. in bulk or is under contract negotiation with the person acquiring or disposing of the stocks, etc. in bulk, and who becomes aware of the material non-public information regarding the initiation or discontinuance of an acquisition or disposition in bulk in the course of entering into, negotiating, or performing such contract;
 * 5) An agent of a person falling under any of subparagraphs 2 through 4 (including executives, employees, and agents if the principal falling hereunder is a corporation), or a servant or employee of such person (or an executive, employee, or agent of a corporation if the person falling under any of subparagraphs 2 through 4 is a corporation), who becomes aware of the material non-public information regarding the initiation or discontinuance of an acquisition or disposition in bulk in connection with his/her job; and
 * 6) A person who acquired the material non-public information regarding the initiation or discontinuance of an acquisition or disposition in bulk from the person acquiring ordisposing of the stocks, etc. in bulk, or a person falling under any of subparagraphs 1 through 5 (including a person in whose case one year has not passed since the day on which he/she no longer fell under any of subparagraphs 1 through 5).

Some questions in the Interpretation of Article 174
The above provisions seem to be complicated, but may be categorized into three cases, e.g., insider trading of securities of the listed companies under Article 174 (1), on the occasion of public tender offer under Article 174 (2), and during the acquisition or disposition of securities in bulk under Article 174 (3).

As Article 174 of the Capital Markets Act is supposed to prohibit insider trading, there occurs some questions in its interpretation as follows:
 * 1) What are the implications of the newly inserted term, "a member firm of big business groups" in the enumerated categories of corporation-related parties in Article 174(1)?
 * 2) What is the meaning of the provisos of Article 174(2) and (3)?
 * 3) Whether the regulated securities in Article 174(1) and those in Article 174(2) and (3) are different from each other?
 * 4) Whether Article 178 (Prohibition on Unfair Trading, etc) can play an additional role in combating insider trading practies?

Answers to the above questions have been made in Prof. Cho's article. However, some explanations must be added. (To be completed with sufficient citations)

Punishment
Illegal insider trading is believed to undermine the trust in capital markets and raise the cost of capital for securities issuers. Accordingly, insider traders are subject a harsh punishment.

Under Article 443, the violator shall be punished by imprisonment not more that 10 years or by a fine not exceeding 500 million won.

Insider trading came to the spotlight in October 2011 when a Sri Lanka-born hedge fund founder was convicted of insider trading charges and sentenced by U.S. District Court up to 11 year imprisonment with a large amount of fine. The judge said his crimes reflect a virus in the country's business culture.

On the contrary, in Korea a handful of Korean businessmen were lately convicted "guilty" of insider trading by the court, but most of them were set free sooner or later because of 3 or 4-year probation. Though insider trading is typical white collar crime, it is allegedly regarded as not so vicious crime deserving to be criticised. The accused are wealthy enough to retain competent counselors and induce the leniency of judges while the prosecutors have difficulties to prove the illegality of ostensible inside trading.

In this connection, it is noteworthy that the Supreme Court said "No guilty" to the second tippee who had made money from the non-public information heard from the violator of insider trading. The Supreme Court held in 2000Do90 delivered on January 25, 2002:


 * Because Article 188-2(1) of the Securities and Exchange Act [almost same as the current Article 174(1) of the Capital Markets Act] does not prohibit a person who received non-public information subsequent to the receipt of the same information by the second information recipient [so-called the "tippee"] from using such information or have another person to use the information in connection with a sale or purchase of securities, but solely prohibits the first tippee who received non-public information from using such information or have another person use the same information in connection with a sale or purchase of securities. Article188-2(1) and Article 207-2 Item 1 only penalizes the act of using the same information in connection with the sale and purchase of securities or having another person use the same information by the tipper who received non-public information from an insider. In addition, this court is in the opinion that the act of using non-public information or having another person use the same information in connection with the sale and purchase of securities by the tippee, to whom such information was relayed by the first tippee on a different occasion from that of the first tippee in which he received the same information originally, is not punishable acts by the pertinent Act and does not fall within the purpose of the Act.