[Shadow Internal Transactions] ③ Legal profession needs regulation due to threats to capital market [Numbers]

While there have been cases in the United States where an act of profiting by investing in another company's stocks based on the company's internal information was judged to be insider trading and fined, there are voices calling for related regulatory measures in our law as well.

Under current law, insider trading is limited to cases of trading the company's own stocks. Accordingly, if a case like the US case occurs in Korea, there are limits to sanctions and it may have a negative impact on the fairness and reliability of the capital market. The legal community points out that legislative supplementation is needed to expand the scope of insider trading.

Betting on a rise in competitors' stock prices... U.S. court imposes three times fine for unjust enrichment

What sparked the discussion surrounding the scope of insider trading was the so-called ‘shadow insider trading’ incident that occurred in the United States. Shadow insider trading refers to the act of making profits by purchasing shares of another company based on the company's undisclosed internal information.

Previously, in 2016, Matthew Panuwat, an executive at the biopharmaceutical company Medivation, heard internal information that Pfizer, a large pharmaceutical company, was pursuing the acquisition of Medivation, and purchased options to bet on the rise in the stock price of competitors whose movements were linked to the company's stock price. The Securities and Exchange Commission (SEC) determined that Panuwat's actions constituted insider trading. Last September, the court accepted the SEC's argument and imposed a fine equivalent to three times the amount of unfair profits on Panuwat.

However, with the recent purchase of LS shares by Hoban Group, interest in shadow internal transactions has increased in Korea as well. Hoban purchased shares while the subsidiaries of both companies were engaged in a lawsuit. The stock of the other party in the lawsuit was purchased. In addition, when the stock price jumped due to a partial ruling in favor of an LS subsidiary, which would ultimately be good news for Hoban, suspicions were raised that the stock was traded using internal information.

“Clear legal regulations are needed... uncertainty must be resolved”

The legal community agreed that although it is difficult to view the Hoban case as a shadow internal transaction, laws to regulate such cases are needed to ensure a fair trading order. Attorney Kwon Moon-gyu of law firm Space and Gil said, “Shadow insider trading is an unfair transaction in which information is unequal,” and added, “Under the current Capital Markets Act, criminal punishment is difficult and provisions for other regulations are somewhat lacking, so legislative efforts to resolve this seem necessary.”

Ahn Hee-cheol, the representative attorney of DL Law Firm, also said, "Shadow insider trading is a new form of unfair trading that can avoid existing insider trading regulations." He added, "We need to expand the regulatory scope of insider trading and explicitly stipulate it in the Capital Markets Act to resolve legal uncertainty."

Weight was also placed on the possibility of related discussions taking place. Seungmin Lee, a lawyer at Seum Law Firm, said, "Korea's capital market law has been greatly influenced by the U.S. securities law, so if precedents such as the Panuwert case that punish shadow insider trading are established in the U.S., related discussions will inevitably continue in Korea."

Cho Young-gon, a lawyer at Daeryun Law Firm, said, "Considering the recent attitudes of financial authorities and prosecutors and the direction of system improvement, there is room to discuss the creation of new punishment provisions or revision of legal provisions, keeping in mind the need for punishment." He added, "In this process, it is necessary to analyze the impact of undisclosed information on the stock price of the industry as a whole and suspected cases of use of internal information that affect the industry as a whole."

However, the key point during the discussion process is to clarify the standards for shadow insider trading. Attorney Lee said, "The U.S. case was a case where insider trading was expanded to include trading the stocks of another company that is economically related (sharing market connection) using undisclosed information of one company. Since the term 'economically connected' is quite vague and can be interpreted broadly, if it is not defined accurately, there is a risk that trading in the stocks of competitors or affiliates will be unfairly restricted."

Reporter Park Seon-woo (closely@bloter.net)

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[Shadow insider trading] ③ Legal field says "regulation is necessary" due to capital market threat [Numbers] (Shortcut)