[1] The meaning of "material nonpublic information" under Article 174 (1) 4 of the former Financial Investment Services and Capital Markets Act, and whether the information generated inside a corporation constitutes material nonpublic information even if some external factors or market information are combined with the information generated inside the corporation (affirmative)

[2] In a case where the Defendant was prosecuted for violating the Financial Investment Services and Capital Markets Act by participating in the creation of information that “the Defendant, who is the former president of the Company A, will take over bonds with warrants issued by the Company A in large quantity,” and by purchasing the stocks of the Company A before the information was disclosed, the case holding that the above information constitutes internal information related to the business affairs, etc. of the Company A, and the Defendant constitutes a person who became aware of the above information in the course of negotiating the conclusion of a contract, and Article 174(1)4 of the same Act applies

[1] Article 174(1) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013) provides that “a person falling under any of the following subparagraphs shall not use, or allow another person to use, any material nonpublic information related to the business affairs, etc. of a listed corporation for the sale and purchase of specific securities, etc. or any other transaction.” Article 174(1)4 provides that “a person who becomes aware of any material nonpublic information in the course of concluding, negotiating, or performing the contract with the listed corporation after entering into or negotiating the contract with the listed corporation.” Here, the term “material nonpublic information” refers to internal information that may have a significant impact on investors’ investment judgment, such as management or financial status, business performance, etc. of the listed corporation and that was disclosed prior to disclosure to the general public. If it was generated inside the corporation in connection with the business affairs, etc. of the corporation, it constitutes a material nonpublic

[2] In a case where the Defendant was prosecuted for violating the Financial Investment Services and Capital Markets Act by participating in the creation of information that “the Defendant, who is the former president of the Company A, will take over bonds with warrants issued by the Company A in bulk,” and by purchasing the stocks of the Company A before the information was disclosed, the Defendant was indicted for violating the Financial Investment Services and Capital Markets Act on the ground that: (a) the Defendant purchased the stocks of the Company A by proposing and negotiating the acquisition of bonds with warrants from the side of the Company A; and (b) immediately concluded the acquisition of bonds with warrants after the purchase, and immediately announced them to the public, the case holding that the above information constitutes not only the Defendant’s intent to decide whether to take over bonds with warrants, but also the information generated in the process of negotiating the acquisition of bonds with warrants with the Defendant, the subject of the issuance of bonds with warrants, the other party, and also constitutes internal information of the Company A even if some external factors are determined through the decision-making process inside the Company A, and the Defendant constitutes information related to the above company A and thus constitutes information related to Section 14 in the process.

[1] Articles 174(1)4 and 443(1)1 of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 11845, May 28, 2013) / [2] Articles 174(1)4 and 443(1)1 of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 11845, May 28, 2013)

[1] Supreme Court Decision 2014Do11775 Decided January 25, 2017 (Gong2017Sang, 490)

Defendant

Defendant

Attorneys Cha Sang-he et al.

Seoul High Court Decision 2014No2475 decided April 3, 2015

The appeal is dismissed.

The grounds of appeal are examined.

1. Case summary and key issue

A. The summary of the facts charged alleged in the ground of appeal is as follows.

(1) On May 29, 2011, the Defendant participated in creating information that “the Defendant, as the president of the former Nonindicted Co. 2 Company (hereinafter “Nonindicted Co. 2”) shall take over KRW 10 billion with the warrant bonds of Nonindicted Co. 1,” in negotiating the conclusion of the underwriting contract with the Nonindicted Co. 1 (hereinafter “Nonindicted Co. 1”) and purchased 447,980 shares of Nonindicted Co. 1’s shares from May 30, 201 to June 2, 2011, before the disclosure of the information.

(2) On July 7, 2011, the Defendant negotiated a contract to underwrite bonds with warrant with Nonindicted Company 1, and purchased Nonindicted Company 1’s shares 1,148,810 shares on July 20, 201 and July 21, 201, prior to disclosure of the information.

(3) Accordingly, the Defendant, who is negotiating the conclusion of a contract with Nonindicted Company 1, used material non-indicted 1’s business information related to the business of Nonindicted Company 1, which was known in the course of negotiating the contract.

B. As follows, the lower court found the Defendant guilty on the charge of violating Article 174(1)4 of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013; hereinafter “former Financial Investment Services and Capital Markets Act”).

(1) The “information that the Defendant, the president of the former Nonindicted Company 2, acquired in bulk the bonds with warrants issued by Nonindicted Company 1 (hereinafter “instant information”) constitutes “material nonpublic information” under Article 174(1)4 of the former Capital Markets Act and constitutes “information related to the business affairs, etc. of Nonindicted Company 1” and “information known to the Defendant.”

(2) The Defendant purchased Nonindicted Company 1’s shares using the instant information.

C. The key issue of the instant case is: ① whether the Defendant purchased the shares of Nonindicted Company 1 using the instant information in relation to the violation of Article 174(1)4 of the former Capital Markets Act; ② whether the instant information constitutes material nonpublic information; ③ whether the instant information is internal information related to the duties of Nonindicted Company 1 and whether the Defendant was aware of the instant information while negotiating the conclusion of a contract with Nonindicted Company 1.

2. Ground of appeal No. 1 (in relation to No. 1)

A. In the event that a person falling under any subparagraph of Article 174(1) of the former Capital Markets Act trades or makes any other transaction with a specific securities, etc. while recognizing the material nonpublic information, such transaction may be deemed to have been conducted using the material nonpublic information, barring special circumstances, if it is deemed that the transaction was one of the factors that caused the transaction, even if the material nonpublic information was not made solely because of the material nonpublic information (see Supreme Court Decision 2016Do10313, Jan. 12, 2017).

B. For the following reasons, the lower court determined that the Defendant used the instant information for the purchase of Nonindicted Company 1’s shares, on the grounds that the instant information served as one of the factors for which the Defendant purchased Nonindicted Company 1’s shares in large volume.

(1) The Defendant, as a direct party to the 9th and 10th bonds with warrants issued by Nonindicted Company 1, purchased Nonindicted Company 1’s shares in the process of concluding the contract while acquiring the instant information in the process of concluding the contract.

(2) On or before May 27, 2011, the Defendant purchased Nonindicted Company 1’s shares at all. On May 30, 2011, the Defendant purchased each of the Nonindicted Company 1’s shares on May 30, 201, which was immediately before the public notice of the decision to issue the 9th bonds with warrants, and on May 31, 201, prior to the public notice of the decision to issue the bonds with warrants. This amounted to 14.6% and 29.9% of the trading volume of the pertinent day. The Defendant purchased Nonindicted Company 1’s shares on July 20, 201 and July 21, 201, which was immediately before the public notice of the decision to issue the bonds with warrants at least 10 times. As such, there was no special circumstance that the Defendant was extremely concentratedly traded, and there was no need to purchase Nonindicted Company 1’s shares in bulk in the public notice of the decision to issue the bonds with warrants.

(3) The Defendant recognized the financial difficulties of Nonindicted Company 1 in the course of negotiations for acquiring bonds with warrants. Nevertheless, the Defendant’s mass purchase of stocks can be deemed as having anticipated or anticipated that his bonds with warrants would have a positive impact on the share price by contributing to the resolution of the financial difficulties. Therefore, it is highly probable that the Defendant would have determined that the instant information would have a high possibility of purchasing stocks at a lower price than that prior to the disclosure, and such consideration would serve as a single factor in purchasing stocks prior to the announcement.

C. Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine regarding the degree of proof required in criminal proceedings, or by exceeding the bounds of the principle of free evaluation of evidence in violation of logical and empirical rules

3. Ground of appeal No. 2 (2)

A. “Information that may have a significant impact on investors’ investment judgment” under Article 174(1) of the former Capital Markets Act refers to information that has an important value in determining whether a reasonable investor purchases or continues to hold securities or to dispose of them. In other words, this refers to information that may have a significant impact on the price of securities if a general investor assumes that it is generally known (see Supreme Court Decision 2016Do10313, supra).

B. For the following reasons, the lower court determined that the instant information constitutes an material nonpublic information under Article 174(1) of the former Financial Investment Services and Capital Markets Act, since it is information that a reasonable investor considers to have an important value in making a decision on securities transaction.

(1) around June to July 201, the Defendant acquired the 9th and 10th bonds with warrants, Nonindicted Co. 1 was suffering from serious financial crisis, such as insolvency, in the event of realizing net loss of the current period and realizing the stock price due to external bad weather, Nonindicted Co. 3’s exercise of put-in options on bonds with warrants, imposition of penalty surcharges by the Securities and Futures Commission, etc.

(2) In such circumstances, the information that the Defendant, who was the former president of Nonindicted Company 2, recognized as a successful manager in the market, acquired bonds with warrants in the amount of KRW 30 billion issued by Nonindicted Company 1 constitutes information that reasonably investors expect to be able to resolve the financial difficulties of Nonindicted Company 1.

C. Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and the evidence duly admitted, the lower court did not err in its judgment in the selection of evidence regarding the recognition of material nonpublic information, or exceeded the bounds of the principle of free evaluation of evidence in violation of logical and empirical rules.

4. Ground of appeal No. 3 (Ground of appeal No. 3)

A. Article 174(1) of the former Capital Markets Act provides that “a person who falls under any of the following subparagraphs shall not use, or allow any other person to use, any material nonpublic information related to the business, etc. of a listed corporation for the trading of specific securities, etc. or any other transaction,” and Subparag. 4 thereof provides that “a person who becomes aware of any material nonpublic information in the course of concluding, negotiating, or performing a contract with a listed corporation and is entering into or negotiating the contract with the said corporation.” Here, “material nonpublic information” refers to internal information that may have a significant impact on investors’ investment judgment, such as management or financial status, business performance, etc. of a listed corporation and that has been disclosed to the public prior to the disclosure of such information. If a corporation’s business affairs were generated inside a corporation, it constitutes a material nonpublic information even if certain external factors or market information are combined (see Supreme Court Decision 2014Do1775, Jan. 25, 2017

B. Review of the reasoning of the lower judgment and the evidence duly admitted reveals the following facts.

(1) The Defendant was solicited from Nonindicted Company 1 to acquire bonds with warrants issued by Nonindicted Company 1; on May 29, 201, the Defendant discussed Non-Indicted Company 1’s bonds with warrants; and on May 29, 201, the Defendant purchased Non-Indicted Company 1’s stocks from May 30, 201 to June 2, 201. After that, the Defendant entered into a contract with Nonindicted Company 1 on June 2, 201 to underwrite Non-Indicted Company 1’s stocks 447,980 stocks; and Non-Indicted Company 1 announced this to the public on June 2, 2011.

(2) On July 201, the Defendant, once again from the beginning of Nonindicted Company 1, consulted on the terms and conditions of issuance upon receiving a proposal to underwrite the bonds with warrants issued by Nonindicted Company 1, and proceeded with the acquisition of the bonds with warrants with Nonindicted Company 1 on July 7, 2011, and purchased Nonindicted Company 1’s shares 1,148,810 shares on July 20, 201 and July 21, 201. The Defendant concluded a contract with Nonindicted Company 1 and the Defendant to acquire the bonds with warrants ten times on July 21, 2011, and publicly announced this on July 14:39, 201.

C. Examining these facts in light of the legal principles as seen earlier, the instant information is internal information related to Nonindicted Company 1’s business, etc., and the Defendant constitutes a person who became aware of the instant information in the course of negotiating a contract. As such, Article 174(1)4 of the former Capital Markets Act applies. The reasons are as follows.

The instant information is not only the internal intent to decide whether the Defendant would accept bonds with warrants, but also the information generated in the process of negotiating the conclusion of the underwriting contract with the Defendant, the other party to the issuance of bonds with warrants. This is not only related to Nonindicted Company 1’s management, i.e., business, but also the final decision-making process in Nonindicted Company 1’s internal information, and thus, it constitutes Nonindicted Company 1’s internal information, and it does not vary even if some external factors are combined. Furthermore, the Defendant was negotiating the conclusion of the underwriting contract with Nonindicted Company 1 prior to the purchase of Nonindicted Company 1’s stocks, and was involved in the creation of the instant information during that process.

Therefore, the lower court did not err by misapprehending the legal doctrine on the use of material nonpublic information, contrary to what is alleged in the grounds of appeal, that the lower court determined that the instant information was “information related to business, etc.” under Article 174(1)4 of the former Capital Markets Act and was “information known” during the negotiation process of concluding a contract

5. Conclusion

The Defendant’s appeal is dismissed as it is without merit. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Chang-suk (Presiding Justice)