A heavier sentence than the eight-year prison term handed down on appeal appears likely to be finalized for Ra Deok-yeon, the former head of Hoan Investment Advisory and the main culprit in the "SG (Société Générale) securities-driven stock plunge." The Supreme Court found guilty intent on issues the appellate court had deemed not guilty and remanded the case.
The Supreme Court's Third Division (Presiding Justice Noh Kyung-pil) on the 20th overturned the lower court and sent the case of Ra, who was indicted on charges including violations of the Financial Investment Services and Capital Markets Act and the Act on Regulation and Punishment of Criminal Proceeds Concealment, back to the Seoul High Court.
From 2019 for about four years, Ra and others operated an investment advisory firm without registering with financial authorities. They were brought to trial on charges of taking about 194.4 billion won as entrusted management fees for client-name contract for difference (CFD) accounts and hiding it in borrowed-name accounts.
In Apr. 2023, a flood of sell orders at the SG securities window triggered a crash in eight stocks including Daou Data and Samchully. Ra and others are accused of manipulating stock prices through CFDs, which allow leverage of up to 2.5 times.
A CFD is a derivative in which the securities firm buys the stock on behalf of the investor once the investor deposits margin, and later settles only the difference; the margin ratio is 40%–100% depending on the stock and the securities firm. If margin falls short, the securities firm executes a forced sale, known as a margin call liquidation.
At the first trial, Ra was sentenced to 25 years in prison and fined 146.5 billion won. The appellate court, however, sharply reduced the prison term to eight years while keeping the fine. The appellate court entered a conviction but found not guilty by reason with respect to the allegation that Ra and others manipulated stock prices using CFD accounts. A not guilty by reason ruling means that the judgment section recognizes guilt and imposes a sentence, but finds not guilty on specific issues.
The appellate court held that conduct using CFD accounts for the stocks targeted for stock manipulation did not violate the Financial Investment Services and Capital Markets Act. While the act bans price manipulation, it regulates only "listed securities or exchange-traded derivatives." CFDs are over-the-counter derivatives.
By contrast, the Supreme Court accepted the prosecution's appeal regarding the stock-manipulation charges using CFD accounts, found a violation of the Financial Investment Services and Capital Markets Act, and remanded with a guilty purport.
When Ra and others placed stock trading orders with a securities firm using CFD accounts, the securities firm hedged risk from price fluctuations by directly trading the underlying stock or by entering into a back-to-back derivative contract on the same terms with a foreign investment bank (IB).
The Supreme Court said, "The market capitalizations of the stocks (targeted for stock manipulation) were relatively small, and apart from the defendants' price-manipulation acts, trading in those stocks was not active," and added, "The defendants fully recognized the CFD trading structure and its advantages, and to carry out price-manipulation acts such as matched orders on the stocks, they placed orders with the securities firm using numerous CFD accounts."
In line with the Supreme Court's determination, the Seoul High Court is expected in the remand trial to convict on the transactions using CFD accounts that had been deemed not guilty.
A Supreme Court official explained, "It is the first time the court has held that a violation of the Financial Investment Services and Capital Markets Act can be established, and set criteria for it, even when over-the-counter derivatives and the like lead to orders for listed securities or exchange-traded derivatives."