Opinion Leaders` Digest 03-20
Date : June 27, 2003
Author :CHUN Sam-Hyun, shchun@ssu.ac.kr, Professor, College of Law, Soongsil University, President, Association for Corporate Litigations Research,

Criminal punishment on the market activity and legal interest

Recent case of SK Global would increasingly lead the court to make its judiciary judgment on the corporate managerial decisions and activities in the market.

Main controversial points of SK Global case were;
-fraudulent accounting,
-valuation of unlisted stocks,
-double contract for loss compensation.

The author reviews legal ground of criminal liability, scope of criminal punishment on market activity, legal interests to be protected by imposing such punishment, as follows.

-Case of fraudulent accounting
SK Global is suspected to have committed fraudulent accountings by concealing huge amount of debts borrowed from banks and fabricating great amount of false profits. Obscure statement of the operational assets, profit and loss would constitute legal ground of criminal liability in commercial (corporate) law. So would do failure of account booking, its forgery, fabrication or damage thereon in corporate restructure promotion law.

In such case, protect-worthy legal interest is property right of their creditor-bank, their customers and their investors. Accordingly, essential prerequisite of criminal liability on the fraudulent account would be unlawful violation of internal account practices and subsequent infringement on the legal interest. In this regards, not only direct profit and loss but also its related conditions, its subsequent effects in future should be considered and assessed totally. At the same time, it should be judged whether the fraudulent account would have been made for the best interest of corporate management.

-Case of valuation of unlisted stock price
The prosecutors are going to charge the suspected executives of the SK Global with professional breach of trust under the law of aggravated punishment for the special economic crimes since the suspects traded their unlisted stocks in exchange for the listed stocks by over- valuation.

Case of valuation of the unlisted stocks is found in the stipulations of the inheritance and donation tax laws but nowhere else. It has been a general practice that price of unlisted stocks were evaluated in accordance with the inheritance tax law. The suspects in case of the SK Global followed this practice. But the prosecutors evaluated price of this unlisted stock taking account of the corporate assets. And the prosecutors argued the suspects committed professional breach of trust in connection with the difference between the valuation between by the prosecutors and that by the general practice thus far.

In commercial law, the court may establish its final judgment on the valuation of the unlisted stocks just in case an agreement would not be established between the corporation and the redemption claimants in case of stock redemption.
It would be very difficult for the prosecutors to proceed criminal charge of professional breach of trust under the current legal system in connection with valuation of the unlisted stock price.

-Case of double contract for the loss compensation
A concealed double contract between SK Securities Company and JP Morgan for loss compensation would constitute a professional breach of trust violation as it may harm to the corporate capital and may infringe on the equal status of the stock holders.
So-called put option contract, a sort of double contract for loss compensation, is a contract between the corporation and the investors, rather disengaged and free from direct regulation according to laws now in force. In case of SK Securities Company, the parties of the put option contract were SK Securities Company and JP Morgan but they nominated third parties, or overseas subsidiaries of SK Global, to compensate loss. This was designed to shift the responsibility of compensation to the third party. This constitutes professional breach of trust.

-To comply with the legalism
The prerequisite of criminal punishment imposed on the lawbreakers or offenders ought be an existence of the protect-worthy legal interest. Punishment imposed without existence of this legal interest would constitute an abuse of power by the state and an infringement of citizen's private basic right. Punishment on the managerial decision made by corporation in good care may give rise to a serious problem.

Recently cases of economy activities in the market are growingly bring subjected to the criminal and civil trial by the court. Class action, if legislated, will enhance this. Accordingly, the author argues that the court should take prudent stand in its judiciary judgment of market activities by the corporations in strict compliance with the legalism.¡á

(July 28, 2003, summarized and re-edited in English by JUNG Churle, a CFE Research Fellow, jungchrl@unitel.co.kr. Some corrections and changes were made in the wordings in this summary by the good advices from the author.)