The meaning of "the purpose of fixing the market price of securities, etc." as prescribed by Article 176 (3) of the Financial Investment Services and Capital Markets Act and the standard for determining whether there is an intention to fix the market price.

“Purpose to fix the market price of securities, etc.” under Article 176(3) of the Financial Investment Services and Capital Markets Act refers to the purpose of forming and fixing the market price or to fix the market price already formed by artificially manipulating the market price of securities, etc. to be formed in a free competitive market according to normal supply and demand based on other factors not attributable to market factors. As such, whether other purposes exist at the same time or either of them is the main purpose, and the recognition of the purpose is sufficient for doluence. The existence of the purpose of determining the market price should be determined by comprehensively taking into account the characteristics of securities, etc., the total number of issued securities, etc., the price and transaction volume trend, the transaction situation before and after the issuance of securities, the economic rationality and fairness of the transaction, the degree of market share ratio, and the continuous closing price management, etc.

Article 176(3) of the Financial Investment Services and Capital Markets Act; Article 443(1)6 of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 11845, May 28, 2013)

Supreme Court Decision 2002Do3131 Decided October 28, 2004 (Gong2004Ha, 1980) Supreme Court Decision 2003Do4320 Decided May 11, 2006 (Gong2006Sang, 1079) Supreme Court Decision 2007Do9051 Decided June 24, 2010 (Gong2010Ha, 1507)

Defendant

Defendant

Attorneys Son Ji-yol et al.

Seoul Central District Court Decision 2013No1066 Decided August 22, 2014

The appeal is dismissed.

The grounds of appeal are examined.

1. The term “purposes to fix the market price of securities, etc.” under Article 176(3) of the Financial Investment Services and Capital Markets Act refers to the purpose of forming and fixing the market price or fixing the market price already formed by artificially manipulating the market price of securities, etc. to be formed in a free competition market according to normal supply and demand based on other factors not attributable to market factors. Whether there exist other purposes at the same time or any of them is not an issue, but there is sufficient awareness of the purpose. Determination of whether there is an intention to fix the market price should be made by comprehensively taking into account the nature of the securities, etc. and indirect facts such as the total number of issued securities, etc., price and transaction volume trend, transaction situation before and after the issuance, economic rationality and fairness of the securities, degree of market intervention, and continuous closing management, etc. (see, e.g., Supreme Court Decisions 2002Do3131, Oct. 28, 2004; 2013Do4316, Apr. 3, 2016).

2. Review of the reasoning of the lower judgment and the evidence duly admitted and examined by the first instance court reveals the following facts.

(a) The stock-linked securities and deel hedging;

(1) The stock-linked securities (hereinafter “ESS”) is a derivatives-combined securities, the investment return of which is determined in connection with changes in the price of specific stocks or the stock price index. The ES, an underlying asset of which is stocks, has a structure in which the issuer purchases stocks, which are underlying assets, and continuously purchases and sells the stocks, in accordance with the financial method, “dedela hedging” and avoid risks arising from the price fluctuation in underlying assets by continuously purchasing and selling the stocks, and prepares a redemption fund for investors. If the redemption price of stocks, which is underlying assets, exceeds the redemption price based on the redemption date, the amount calculated by adding the agreed profits to the principal and then multiplying the principal by the redemption rate, if the redemption price exceeds the redemption price.

(2) In order to offset the fluctuation in the prices of derivatives based on the fluctuation in the prices of underlying assets, the deteel value is called detea hedging method to adjust the holdings of underlying assets by purchasing underlying assets and selling underlying assets if the detea value increases so as to offset the fluctuation in the prices of derivatives based on the fluctuation in the prices of underlying assets. In ES, profits structure as seen earlier leads to a rapid increase in the detea value if the prices of underlying assets are close to the redemption price at the vicinity of the redemption price. Although there are differences in the degree according to the type, etc. of the redemption date, the detea value is sharply decreased as the redemption date reaches the redemption price.

In addition, theoretically, the volume of underlying assets should be continuously adjusted in accordance with the changes in the deel value based on the price fluctuation in underlying assets. However, in real transactions, the amount of underlying assets should be calculated at a certain time (one to two times a day) and the amount of underlying assets should be adjusted at the end of the day, and the amount of underlying assets should be maintained in accordance with the deel value at the end of the day, and the amount of underlying assets actually owned is being appropriately managed by comparing the amount of underlying assets with the amount of underlying assets being appropriately held.

B. The issuance of the instant ES and the Defendant’s deel hedging work

(1) On April 18, 2008, Nonindicted Co. 1 (hereinafter “Nonindicted Co. 1”) issued and sold the instant ESS (hereinafter “instant ES”).

This case’s ES is the ESS whose underlying assets are Non-Indicted 2 Company’s stocks (hereinafter “Non-Indicted 2 Company’s stocks”) and Non-Indicted 3 Company’s stocks (hereinafter “Non-Indicted 3 Company’s stocks”) and whose maturity is two years after the maturity, and whose closing price of the underlying assets comes every six months after the date following the date of issuance as the first base price, and whose closing price of two underlying assets comes every six months (85% in the case of the first early redemption compared with the first base price, 80% in the case of the second early redemption, 80% in the case of the second early redemption, 75% in the case of the third early redemption, and 75% in the case of the third early redemption). If the maturity comes due without fulfilling the terms of early redemption, all of the underlying assets whose maturity falls below the first redemption base price (70% in the first redemption base price) or whose underlying assets fall below 25% in total due to the decline in the redemption base price (20% below the first redemption base price).

(2) The Defendant, including the instant ES, performed the hedge business by integrating the total underlying assets of 123 ES issued by Nonindicted Company 1, for each underlying asset, and performed the hedge business by integrating the total underlying assets of Nonindicted Company 3, including the instant ES, with respect to the stocks of Nonindicted Company 3, nine of the underlying assets, including the instant ES, etc.

C. The change in the share price of Nonindicted Company 3 and the sale and purchase of Nonindicted Company 3’s shares

(1) The share price of Nonindicted Co. 3’s shares fell due to the global financial crisis around July 2008, and did not meet the repayment conditions on October 27, 2008, and went back to the rise rate of KRW 43,950 on October 27, 2008, and later, the rise rate was continuously increased, and thereafter, the redemption price came back near 96,00 won, which was the redemption price, at the vicinity of April 15, 2009, the second early redemption base date of the instant ES (hereinafter “instant base date”).

The Defendant repeated the purchase and sale of Nonindicted Company 3’s shares in response to the change in deel value following the change in the share price of Nonindicted Company 3’s shares, and purchased Nonindicted Company 3’s shares in line with the increasing deel value.

(2) On the day of the instant base date, Non-Indicted 3’s share price began to be KRW 96,500 and fell to KRW 95,00,00 for the first half of the year, and went back to the early 09:40, and entered above KRW 96,00,00, which is the redemption base price, after 09:40. Around 10:50, but thereafter, until around 14:30, Non-Indicted 3’s share price fell to KRW 96,00,00, which is the redemption base price, for most hours, except that there was a little lower price than KRW 10,00 from around 13:20 to below KRW 96,00.

In such a situation, the Defendant purchased 500 shares of Nonindicted Co. 3 when the share price of Nonindicted Co. 3 appears to have fallen temporarily in the beginning of the year, and sold 5,00 shares in either KRW 100 or KRW 97,400, or KRW 98,000, or KRW 900,000, or KRW 100,000, or KRW 103,000, or KRW 106,000, or KRW 100,000, or KRW 2,700, or KRW 8,700, or KRW 64,000, or KRW 103,00, or KRW 106,00, or KRW 100, or more.

Since then, the Defendant did not place any order on Nonindicted Company 3’s shares. From 14:30 to 14:50, most of 60,500 shares were sold at a lower price or at the same price for a total of 62 minutes from 14:30 to 14:50, and due to the Defendant’s sale, the share price of Nonindicted Company 3, which was 97,000 shares at around 14:30 to KRW 95,90, was lowered to KRW 14:50.

(3) In order to determine the closing price as of the base date of the instant case, the Defendant continued to make a large volume of sales orders for Nonindicted Company 3’s shares during a single selling period (14:50 to 15:00, and for 10 minutes, the Defendant received both sales orders and purchase orders, and then traded at a single price at which the highest volume can finally be sold and purchased by adjusting the highest volume from the highest purchase orders, in order, in accordance with the highest priority of prices and the principle of time priority. The Korea Exchange has given notice of the expected purchase price and the estimated purchase volume calculated based on the sales orders and purchase orders made up until the real time). The order price was 96,00 won, the redemption price.

In other words, at around 14:52:00, the Defendant issued 7,000 orders for selling 7,00 won (96,00 won for the anticipated conclusion price before the order, 11,668 weeks for the anticipated conclusion price, 95,500 won for the anticipated conclusion price after the order, 14:58:50 won for 95,900 won for 97,400 won for the anticipated conclusion price before the order, 33,653 weeks for the anticipated conclusion, 95,90 won for 95,90 won for the anticipated sale price at KRW 90,90 for 95,90 for the anticipated sale price at KRW 95,90 for the anticipated sale price at KRW 95,90 for the anticipated sale price at KRW 90,50 for the anticipated sale price at KRW 90,90 for the anticipated sale price at KRW 95,90,90 for the anticipated sale price at KRW 90,905,95950 for the anticipated sale price for the order.

As above, the Defendant sold 78,763 shares of Nonindicted Co. 3 at the redemption price of KRW 95,90 below 100,00, which was closed by the head of the 15:00 final redemption price. Accordingly, even if the share price of Nonindicted Co. 2 was much higher than the redemption price as of the base date of the instant case, the early redemption condition of the instant LS could not be satisfied. The sale volume of the shares of Nonindicted Co. 3 was 81.1% of the total trading volume of the shares of Nonindicted Co. 3, which was concluded during the single provisional sale period, and the premium rate was 24.3%.

D. Other circumstantial facts before and after the base date of this case

(1) After April 2008, Nonindicted Company 1, which issued the instant ES, reported losses from the operation of Nonindicted Company 2’s stocks and Nonindicted Company 3’s stocks, which are its underlying assets, and began to make profits from April 2009. However, during the period from June 2009 to June 2009, Nonindicted Company 1 suffered losses from the sale and assessment of KRW 2.49 billion from Nonindicted Company 2’s stocks, and from Nonindicted Company 3’s stocks, KRW 6.127 million from Nonindicted Company 3’s stocks, and suffered losses from a variable swap agreement to hedge the assessed debt amount of the ES, and the cumulative losses have reached KRW 1.5 billion from January 2008 to March 2009.

(2) Meanwhile, when a civil petition was filed regarding the failure to fulfill the early redemption condition of the instant instant LS after the instant base date, Nonindicted Co. 1’s representative of Nonindicted Co. 4’s management support headquarters was responsible for the full-time director of Nonindicted Co. 5, his superior. Nonindicted Co. 6, who filed a civil petition with the Financial Supervisory Service, was contributed by two other executives at the request of Nonindicted Co. 7, and paid the principal amount plus the agreed profit when the early redemption condition was met on the instant base date.

(3) On October 14, 2009, as of the date of early redemption of the instant LS, both Nonindicted Company 2’s stocks and Nonindicted Company 3’s share price were higher than the redemption price, and the amount calculated by adding the principal and the agreed profit to the investors around the above time was terminated.

3. In light of the legal principles as seen earlier, we examine whether the Defendant was engaged in the above transactions with the intent to form or fix the market price of Nonindicted Company 3’s stocks by artificially manipulating the above facts in the market.

A. The issuer of the ES has prepared funds for redemption to investors due to the trading of underlying assets based on deel hedging. In the case of the instant ES, a significant loss was reported in the hedge trading between Nonindicted Company 2’s stocks and Nonindicted Company 3’s stocks, which are its underlying assets. As such, profits accrued from the date of the instant base date. As such, the Defendant may be deemed to have induced the early redemption on the instant base date in order to obtain an opportunity to meet the losses, by operating the said underlying assets until the base date of early redemption or the base date of maturity redemption.

B. The Defendant purchased Non-Indicted Party 3’s shares and increased their holding quantity according to the dela value increase around the base date of the instant case. However, as the base date of the instant case was anticipated to reduce the dedela value, it was necessary to sell the shares of Non-Indicted Party 3 at a considerable amount of 5,000 shares on the base date of the instant case, despite the need to sell the shares of Non-Indicted Party 3, the Defendant only issued an order for selling 100,000 shares at a high price without reality, and maintained the holding quantity of Non-Indicted Party 3’s shares until 14:30.

On the other hand, Non-Indicted 3’s share price was relatively stable from 09: 40 to 14: 50 won, and Non-Indicted 2’s share price was far above 96,00 won, which is 5:0 won redemption base price; thus, there was a considerable possibility that the early redemption condition of the instant LS might be fulfilled on the base date. As above, the Defendant maintained the shares of Non-Indicted 3 for 20 minutes immediately before a single sale, and sold 60,500 won at a lower price than 97,00 won prior to 14: 97,00 won, which was 10:5 won prior to the first sale of shares, at 0: 50 won, the estimated sale price at 96,00 won, which is 9:50 won prior to the first sale of shares, was lower than 10:50 won, and the anticipated sale price at 90,000 won, which is 9:50 won at the time of a single sale.

C. In light of the motive and attitude of the above transaction as well as the details of Nonindicted Company 1’s countermeasures against the civil petition filed with respect to the instant ES, it is reasonable to deem that the Defendant, as seen earlier, placed an intensive order for sale of Nonindicted Company 3’s shares at a price lower than the redemption price for 87,000 shares at a price lower than the redemption price for 87,00 shares during a single temporary sale period immediately before the closure in the way as seen earlier, for the purpose of artificially forming and fixing the closing price of Nonindicted Company 3’s shares below 96,00 won, which is the redemption price of the instant ES on the instant base date. Even if it was necessary to sell the above volume of Nonindicted Company 3’s shares for deel hedging, such circumstance does not interfere with the recognition of the Defendant’s intention to fix the redemption price.

Therefore, in the same purport, the lower court did not err in its judgment that found the Defendant guilty of the instant facts charged by misapprehending the legal doctrine regarding the determination of market price under Article 176(3) of the Capital Markets Act, or by exceeding the bounds of the principle of free evaluation of evidence

4. Therefore, the appeal is dismissed. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Park Poe-young (Presiding Justice)