After President Lee Jae-myung ordered authorities to "confiscate even the principal invested in stock price manipulation," there has been growing momentum in political circles to confiscate not only the capital gains from stock rigging but also the principal used for the illegal activity.
When unfair trading such as stock price manipulation occurs, can the state confiscate not only unjust gains but also the principal? To start with the conclusion, the legal basis to confiscate the principal used in stock manipulation is already in place. However, confiscating the principal as well as unjust gains requires a court decision, and Korea's judicial authorities have taken a somewhat conservative stance. As a result, there has not yet been a case where the principal was actually confiscated.
After the joint task force to eradicate stock manipulation, formed by the Financial Services Commission, the Financial Supervisory Service, and the Korea Exchange, announced its first case of stock manipulation—raising 100 billion won and reaping 40 billion won in unjust gains—Rep. Oh Ki-hyeong of the Democratic Party of Korea wrote on his Facebook page, "If this case results in a conviction, we need to set a precedent by confiscating not only the revenue but also the 100 billion won in principal used for the manipulation."
Oh told ChosunBiz, "If even one case shows the system being applied, it will raise the risks for those considering unfair trading such as stock manipulation, so it will be effective," adding, "Above all, establishing one case produces the strongest deterrent effect."
The legal basis to confiscate the principal used in stock manipulation has been legislated. The relevant provision is Article 447-2, Paragraph 2 of the Capital Markets Act, newly established in 2021. It states that property "provided or intended to be provided" for unfair acts such as stock manipulation shall be confiscated, and if confiscation is not possible, its value shall be collected. Here, "property provided or intended to be provided" can be interpreted as the principal used for stock manipulation.
Although there has been no case of principal confiscation so far, tougher sanctions by financial authorities have created the possibility of such a strong measure. A representative example is the account payment suspension measure used in this first case. Under the Capital Markets Act enforcement decree revised in Apr., the Securities and Futures Commission under the Financial Services Commission can impose payment suspension on accounts suspected of being used for stock manipulation.
An FSC official said, "If we do not freeze the accounts through payment suspension, stock manipulation rings can move or spend the funds," adding, "Then there may be no assets left for the court to preserve for collection." Payment suspension can last up to one year.
If the principal remains in an account with payment suspended, along with the unjust gains, confiscation of the principal is also possible depending on the judgments of prosecutors and the court. Because this is a form of punishment, it can only be carried out if prosecutors and the court actively pursue investigation, indictment, sentencing recommendations, and rulings.
However, it is not easy to expect a forward-leaning ruling that confiscates the principal. A source in the investment industry said, "In crimes like stock manipulation involving price rigging, the scope of the damage can be ambiguous, which seems to make it difficult for courts to determine sentences."
There are also concerns that recovery could be difficult because the principal for stock manipulation may not be entirely the capital of the manipulation ring. Such rings often increase leverage by adding stock-collateralized loans to their own capital. If there are loan contracts concluded before the manipulation, the principal may be reduced.
A legal source familiar with the Capital Markets Act noted, "In stock manipulation, people use their own funds but also borrowed money," adding, "The idea is to confiscate all funds mobilized for the manipulation under the concept of principal, but there may be technical issues in deciding how far confiscation should extend."
Currently, financial authorities can impose a penalty surcharge of up to twice the unjust gains, but this applies only to unjust gains and does not cover the principal.