In a capitalist economy, the stock market is expected to play a central role in financing corporate investment and monitoring companies’ performance. But in Korea, this has not been the case. Here, the bourse has ceased to be a source of capital and has instead become a playground for stock speculators and manipulators.
The Korea Exchange has recently released data showing how serious the problem is. According to the bourse operator, the number of stocks that were improperly traded last year amounted to 200, more than 10 percent of the entire 1,921 stocks listed on the KOSPI or KOSDAQ market.
A large number of these stocks are “theme stocks” ― stocks that are believed to be related to a political, economic or social theme or issue. One of the most powerful themes last year was related to Ahn Cheol-soo, a popular software entrepreneur who jumped into the presidential race as an independent.
Stock manipulators sought to pump up the prices of a group of stocks by spreading rumors that they had connections with Ahn. They lured retail investors into purchasing these stocks so they could sell off their holdings at higher prices. As many as 34 stocks were grouped as Ahn-related theme stocks.
Now, the government is rolling up its sleeves to root out unfair stock trading practices. This week, officials from the Financial Services Commission, Financial Supervisory Service, Korea Exchange and Supreme Prosecutor’s Office will hold their first meeting to discuss where to begin.
Their move follows an instruction from President Park Geun-hye earlier last month. In her first Cabinet meeting on March 11, Park told officials to rid the stock market of price manipulators as they “drive retail investors to despair and make huge illegal gains.”
The FSC and other related agencies have already announced a set of measures to step up the regulatory authorities’ ability to detect and investigate improper stock trades. They also decided to toughen penalties for those involved in price rigging and other illegal schemes.
One notable move is the introduction of a fast-track system for a speedy investigation of unfair trading cases. Currently, prosecutors launch an investigation only after the Korea Exchange detects suspicious activity and the FSS makes an initial inquiry into it. This pre-investigation process usually takes a year, giving criminals enough time to destroy evidence or flee overseas.
Under the new system, the FSC will refer a case directly to prosecutors if it is deemed urgent. This measure will sharply reduce the time required for prosecutors to launch an investigation.
The government will also give greater investigative power to FSS officials so that they can look into a suspect’s financial transaction record and access his call history. This police power will help FSS inspectors secure evidence of wrongdoing in the initial stage of investigation.
The package unveiled last week also calls for toughening penalties for price riggers. Currently, stock manipulators, if convicted, face either a jail term of up to 10 years or a fine of up to three times the amount of illegal gains. The relevant law will be revised so that offenders face both a jail term and a fine.
Furthermore, the government plans to amend tax laws to enable the National Tax Service to levy penalty taxes on stock manipulators and their financiers.
A stock manipulation ring usually has a financier who provides the necessary funds for their operation. If tax laws are revised, the NTS would be able to impose gift taxes on the manipulators for the money they have received from the financier. It will also trace the financier’s money and collect taxes from him if the money has come from undeclared sources.
Whether these measures will rein in unfair trading activities on the local bourse remains to be seen. The government agencies involved in the clean-up campaign will have to cooperate closely to ensure that the package takes effect as expected.
Unfair stock trading should be rooted out as it not only undermines investors’ confidence in capital markets but prevents them from playing their role as a source of capital for corporations.
As the government is keen to cultivate a creative economy, the need to normalize the operation of capital markets is all the greater. This is because vibrant venture companies, which are crucial to a creative economy, cannot prosper without well-functioning capital markets.
