[1] Whether the act of a representative, employee, etc. of a corporation trading stocks or any other transaction with the corporation's business by using material nonpublic information becomes subject to punishment under Article 443 (1) 1 of the Financial Investment Services and Capital Markets Act (affirmative)

[2] The meaning and calculation method of “profit gained from a violation” under Article 443(1) and (2) of the Financial Investment Services and Capital Markets Act and the burden of proof (=public prosecutor)

[1] Articles 174(1), 443(1)1, and 448 of the Financial Investment Services and Capital Markets Act / [2] Article 443(1) and (2) of the Financial Investment Services and Capital Markets Act

[1] [2] Supreme Court Decision 2009Do1374 Decided July 9, 2009 (Gong2009Ha, 1374) / [1] Supreme Court Decision 2000Do3350 Decided April 12, 2002 (Gong2002Sang, 1184)

Defendant 1 and one other

Defendants and Prosecutor

Law Firm LLC, Attorneys Jeong Seo-seok et al., Counsel for the defendant-appellant

Seoul High Court Decision 2016No1943 decided January 19, 2017

The part of the lower judgment against the Defendants is reversed, and that part of the case is remanded to the Seoul High Court.

The grounds of appeal are examined.

1. As to the Defendants’ grounds of appeal

A. After comprehensively taking account of the evidence adopted, the lower court determined that the Defendants’ act constitutes an act of material nonpublic information prohibited under Articles 448, 443(1)1, and 174(1) of the Financial Investment Services and Capital Markets Act (hereinafter “Capital Markets Act”).

(1) Nonindicted Co. 1 (hereinafter “Nonindicted Co. 1”) is “special purpose acquisition company” as prescribed by Article 6(4)14 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act (hereinafter “Nonindicted Co. 1”). In the case of a special purpose acquisition company, the stock certificates initially offered pursuant to Article 6(4)14 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act and Article 1-4-2(5) of the Financial Investment Services and Capital Markets Regulations (Notice of the Financial Services Commission) are dissolved if the registration of the merger with the corporation was not completed within 36 months from the date of payment of the stock certificates. Nonindicted Co. 1 was established as KRW 50 million (50,000,000,000 capital of April 22, 2014) and KRW 6.5 billion capital increase by means of general public offering on July 18, 2014.

(2) Nonindicted Co. 1 entrusted Nonindicted Co. 2 (hereinafter “Nonindicted Co. 2”) with the business of public offering, listing, and merger of shares. Nonindicted Co. 3’s employees of Nonindicted Co. 2 came to know of the material nonpublic information that “Nonindicted Co. 4 (hereinafter “Nonindicted Co. 4”) acquires in the course of performing the entrusted business as seen earlier, by means of a merger with Nonindicted Co. 1 (hereinafter “instant material nonpublic information”). On July 2014, Nonindicted Co. 1 notified Nonindicted Co. 1, a minority shareholder of Nonindicted Co. 4, as the representative director of Nonindicted Co. 2 Co. 4, who was Defendant 2’s minority shareholder. From July 23, 2014 to August 19, 2014, Nonindicted Co. 1 purchased the instant stocks of Nonindicted Co. 1 (hereinafter “Nonindicted Co. 1”) using the instant material nonpublic information in the name of its own name or securities account in the name of a third party, including Defendant 2 Co. 1, etc. (hereinafter “the total number of shares”).

(3) On August 25, 2014, Nonindicted Company 1 decided to merge Nonindicted Company 4 with a resolution of the board of directors (hereinafter “instant merger”). On the same day, the instant merger decision was publicly announced on the same day. From August 25, 2014, the date of publication of the instant merger decision, the instant shares were suspended until October 16, 2014, upon receipt of the qualified notice of the results of the listing preliminary examination under the bypass listing, until October 16, 2014, and transaction was resumed on October 17, 2014.

B. (1) Articles 443(1)1 and 174(1) of the Financial Investment Services and Capital Markets Act prohibit an executive officer or employee of a listed corporation, who becomes aware of the material nonpublic information in connection with his/her duties, a person who becomes aware of the material nonpublic information in the course of concluding a contract with the corporation (including its executive officers or employees), and a person who received the material nonpublic information from such a person from the said person from the said person from the purchase or sale of specific securities, etc. or any other transaction. The main text of Article 448 of the Financial Investment Services and Capital Markets Act prohibits the said corporation from using the material nonpublic information in connection with the business of the corporation or from allowing the other person to use it. In addition, if the representative, employee, etc. of the corporation uses the material nonpublic information in connection with the business of the corporation, the corporation is subject to punishment under Article 443(1)1 of the Financial Investment Services and Capital Markets Act (see Supreme Court Decision 200Do3350, Apr. 12, 2002).

(2) Examining the reasoning of the lower judgment in light of the aforementioned legal principles and records, the lower court is justifiable to have determined that the Defendants’ use of the instant material nonpublic information constitutes a violation of Article 448 and Article 443(1)1 of the Capital Markets Act based on the factual basis as seen earlier. In so doing, contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the principle of non-defluence, misapprehending the legal doctrine

2. As to the Prosecutor’s ground of appeal

A. The term “profit from a violation” under Article 443(1) and (2) of the Financial Investment Services and Capital Markets Act refers to a profit arising from a transaction related to the violation and the risk and causal relationship is recognized. In ordinary cases, the causal relationship may be calculated by calculating the gross income from a transaction related to the violation by deducting the total cost for the transaction from the total income from the total income from the transaction related to the violation. However, in cases where there are circumstances to deem that it is unreasonable to recognize the value of the profit from the violation in a specific case as above, the profit from the violation should be calculated by comprehensively taking into account the legislative intent of the above provision to eradicate unfair trading in consideration of the motive, circumstance, form, period, third party intervention, securities market situation, and all other factors that may have a significant impact on the share price, and the burden of proof related thereto is borne by the prosecutor (see, e.g., Supreme Court Decision 2009Do1374, Jul. 9, 2009).

On the other hand, in order to recognize such a causal relationship, the causal relationship between the act of violation and the profit can be acknowledged unless the act of violation is the only cause or a direct cause for the profit-generating, and even if there exists another cause, and it is nothing more than a ordinarily foreseeable cause for the profit-generating.

B. (1) The first instance court calculated profits by calculating the difference between the total income from the transaction using the instant material nonpublic information and the total expenses incurred for the transaction. As a result, with respect to the shares sold before November 5, 2014, the effect of the instant material nonpublic information was directly reflected in the share price, the realization profit was calculated by multiplying the difference between the unit price for sale and the unit price for purchase by the quantity of shares traded. As to the shares not disposed by November 5, 2014, the closing price as of November 5, 2014 was deemed the unit price for sale and the difference between the unit price for sale and the unit price for purchase was calculated by deeming the amount calculated by multiplying the remaining quantity as the income from the share transaction. As a result, Defendant 1, who used the material nonpublic information of this case, was determined to have realized profits equivalent to KRW 5,074,707,963, Defendant 21,53,427, and 300 won.

(2) On the other hand, the lower court acquitted Defendant 1 on the grounds that the value of the profit could not be calculated on the grounds delineated below, and found Defendant 1 not guilty on the grounds of the judgment on the charges that Defendant 2 obtained the profit of KRW 5,535,934,80 by the use of the material nonpublic information in this case and KRW 1,654,657,280 by Defendant 2

(A) From July 23, 2014, the date of stock listing, to August 22, 2014, the transaction day immediately before the public notice of the instant merger decision, there is room to deem that the instant share price increase was affected by the novel that it is merged with a mobile game company. Therefore, it is difficult to readily conclude that the entire amount is a causal relationship with the use of the instant material nonpublic information.

(B) Even if the share price increase after the public announcement of the instant merger decision, it appears that the merger ratio information, which can be deemed independent from the instant material nonpublic information, is included in the share price increase. Therefore, it cannot be readily concluded that there exists a causal relationship with the use of the instant material nonpublic information.

(C) On November 5, 2014, the prosecutor calculated the value of unrealizedd profits by making the closing price of the instant shares as the base price. However, there is room to view that the effect of stock price increase due to the instant merger decision and the merger ratio has been subsumed on October 21, 2014 or October 24, 2014.

C. We examine the above facts in light of the legal principles.

(1) First, we examine the increase in share price of the instant shares from July 23, 2014, the stock listing date, to August 22, 2014, the transaction date immediately before the instant merger decision is announced.

According to the records, the share price of this case was KRW 2,160 on July 23, 2014 based on the closing price, and was KRW 3,100 on August 23, 2014. During this period, Defendant 1 purchased approximately 12.7% of the total number of shares issued by Nonindicted Company 1. During this period, Defendant 2’s employees, Nonindicted Co. 5, Defendant 1’s wife, and their family members, including their births, and their family members, etc., were also purchased the shares of this case. Dur this period, the share price and share price increase, the number of shares traded by Defendant 1 and their relatives, and Nonindicted Co. 4’s employees, etc. were for the purpose of acquiring the shares of this case, and the share price increase and profits accrued from the use of the nonpublic information of this case, other than the information on merger, can be acknowledged as having a causal relationship between the Defendants and the share price increase.

On the other hand, in light of the fact that the written form or the written form of a merger with the instant material nonpublic information or mobile game companies all are information that Nonindicted Company 1, the purpose acquisition company, merges with another company, and that the aforementioned causal relationship cannot be denied merely because the written form of a merger with the mobile game companies, in light of the fact that, even if comparing the growth tax of the manufacture and sale (the main business of Nonindicted Company 4) companies before and after the publication of the instant merger decision as indicated in the record with the mobile game companies, it does not seem that there is a big difference between the other party to the merger and the other party to the merger, depending on which the merger was made.

(2) Next, we examine the increase in stock prices after the public announcement of the instant merger decision.

The first instance court deemed that the instant material nonpublic information had influenced the share price of the instant shares until November 5, 2014, and calculated the value of profits the Defendants acquired on the basis of the closing price on November 5, 2014. The record reveals that ① the share price of the instant shares was KRW 3,100 on August 22, 2014, immediately before the closing price was suspended, and KRW 7,130 on October 17, 2014, the transaction was resumed; KRW 8,970 on October 21, 2014; KRW 10,200 on October 24, 2014; KRW 13,00 on November 5, 2014; ② on the basis of the merger value of Nonindicted Company 13,50 on August 25, 2014, the merger value of the instant shares was determined and announced on the basis of the merger value of Nonindicted Company 13,500 on August 16, 2014.

However, the merger ratio decision with the merger value is a procedure that is necessarily accompanied by the merger, and the above merger ratio decision does not seem to go beyond the scope ordinarily foreseeable in light of the above facts.

Therefore, the causal relationship between the use of material nonpublic information in this case and the profits accrued to the Defendants due to the increase in the share price cannot be denied solely on the ground that Defendant 1 was unaware of the contents of the merger ratio prior to the public notice of the merger decision in this case. Of them, the profits accrued from the merger ratio and the profits accrued to the Defendants as a result of the use of material nonpublic information in this case

(3) Finally, there is room to view that the effect of the share price increase due to the instant merger decision and the merger ratio was all advanced prior to November 5, 2014, only is a matter of the amount of profit and the amount of profit to be calculated specifically, and it does not mean that it is impossible to calculate the amount of profit that the Defendants received as a result of the instant use of material nonpublic information.

D. Nevertheless, the lower court determined that the amount of profit from the use of the material nonpublic information in this case cannot be calculated solely on the grounds stated in its reasoning. In so doing, it erred by misapprehending the legal doctrine on the concept of “profit from the violation” and the method of calculating the amount thereof under Article 443(1) and (2) of the Capital Markets Act, thereby failing to exhaust all necessary deliberations, thereby adversely affecting the conclusion of the judgment. The Prosecutor’s ground of appeal

3. Scope of reversal

The part of the judgment of the court below against the Defendants should be reversed for the same reasons as seen earlier. However, since the above reversed part of the judgment of the court below is in a concurrent relationship with the guilty part against the Defendants or the former part of Article 37 of the Criminal Act, the part of the judgment of the court below against the Defendants should be reversed

4. Conclusion

Therefore, the part of the lower judgment against the Defendants is reversed, and that part of the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Park Poe-dae (Presiding Justice)