The sanctions imposed by financial authorities on STX for accounting fraud have been halted by the court. The Seoul Administrative Court recently issued a suspension of the Securities and Futures Commission's sanctions against STX.
Recently, as financial authorities expressed their intention to severely punish accounting fraud by corporations, the court's halt of the Securities and Futures Commission's decision drew the industry's attention.
STX has been in a state of suspended trading since accounting fraud was detected. STX has filed a lawsuit challenging the Securities and Futures Commission's decision while also pursuing a separate objection process.
The Securities and Futures Commission decided in its regular meeting in July to notify the prosecution regarding STX's accounting fraud. According to authorities' investigations, STX and its subsidiary STX Marine Services, which was part of STX until 2023, did not reflect the risks of overseas litigation in their financial statements for 2022. The company should account for the risks of ongoing litigation as provisions, but neither STX Marine Services, which is the litigating party in the overseas case, nor STX, which prepares the consolidated financial statements of its subsidiaries, informed investors about this.
The Securities and Futures Commission viewed that STX Marine Services and STX intentionally concealed this information. The commission imposed a recommendation for dismissal of CEO Park Sang-jun and a six-month suspension of duties, and ordered that the indicated issues be reflected in the accounting books and financial statements.
STX immediately applied for a suspension of the decision to the administrative court, which granted it. However, the court stated that the part regarding the Securities and Futures Commission's notification to the prosecution was not subject to the suspension application.
The Seoul Administrative Court's first division ruled, "It is recognized that there is an urgent need to suspend the effectiveness of the decision to prevent irreparable harm to STX." The court explained, "There is a possibility of STX winning the main lawsuit, and if sanctions are imposed immediately, it can cause significant damage, leading to a 'grant' decision."
The court seems to have taken into account the numerous projects STX is pursuing overseas. STX, a trading company, has signed contracts to supply armored vehicles and light tactical vehicles to Peru in cooperation with Hyundai Rotem and Kia. It is also overseeing a project to supply marine survey vessels to Peru in collaboration with Samwon Heavy Industries. If STX faces sanctions from authorities due to accounting fraud, its position will inevitably be weakened.
In relation to this, STX stated, "The 'irreparable harm' mentioned by the court is not merely limited to the possibility of business disruption, but also considers the possibility of errors in the commission's judgment and the risks arising from that." It added, "In particular, if CEO Park Sang-jun is immediately dismissed, it is inevitable that there will be disruptions to ongoing projects."
However, the court stated, "It is difficult to interpret that the administrative court recognized the commission's decision as unfair."
STX also denies the allegations of accounting fraud. CEO Park Sang-jun personally attended the Securities and Futures Commission meeting in July and claimed that the failure to reflect the facts of the overseas lawsuit in the financial statements was not a deliberate concealment.
However, authorities noted that CEO Park Sang-jun holds dual roles as the representative of both STX and STX Marine Services, and that STX pursued the sale of STX Marine Services to improve its financial structure while planning a spin-off in 2022. The commission concluded that STX's sale of STX Marine Services was motivated to conceal the overseas lawsuit.
Additionally, the commissioners viewed the failure to inform the external auditor of the highly uncertain facts of the overseas lawsuit as grounds for 'intentional accounting fraud.' They pointed out that it is difficult to accept the company's claim that the CEO was unaware of the accounting issues. In response, the company explained that the reason for not separately reporting to the external auditor was that it assessed that the relevant lawsuit against STX Marine Services had either been dismissed or was already accounted for as determinable liabilities, thus presenting no possibility of resource outflow.
Going forward, investors' attention will likely focus on the main lawsuit filed by STX. If STX wins, the effectiveness of the sanctions will be nullified; however, if STX loses, the sanctions imposed by the Securities and Futures Commission will regain effect 30 days after the announcement.