Who must return short-swing trading profits: whose trade counts as the insider's? Supreme Court Decision 2007Da24459 on being the direct subject of the trade

Question

Article 188(2) of the Securities and Exchange Act established a system under which an insider of a listed or KOSDAQ-registered corporation who bought and sold the corporation's shares within a short period of six months had to return the profit from the trade to the corporation. When a claim for that return is brought against someone who did not place the orders himself, the question is what the provision requires of the person charged, and whose trades are counted as his.

Decision 2007Da24459 raises that question on a claim by Hana Securities Co., Ltd. against the defendant, whose money funded the purchase and whose wife carried out the short-term trade through a securities account held in the name of her older sister. The Seoul High Court held the defendant liable; he appealed, and the Supreme Court dismissed the appeal.

Material to check

The statute is Article 188(2) of the Securities and Exchange Act, which the decision cites as repealed by Article 2(1) of the Addenda to the Framework Act on Capital Markets and Financial Investment Business of 3 August 2007. The decision describes the system it created: where an insider of a corporation listed on the stock exchange or registered with KOSDAQ bought and sold the corporation's shares within a short period of six months, the trade itself was permitted, but without asking whether the insider actually used undisclosed inside information or intended to profit from it, strict liability was imposed on the insider to return the profit gained from the trade to the corporation, so as to regulate indirectly the trading of the corporation's shares on undisclosed inside information. The precedents also refer to Article 188(8) and to Article 83-6 of the Enforcement Decree of the Securities and Exchange Act, as former provisions, in setting out the statutory exceptions and the interpretive exception discussed below.

The decisions are Decision 2007Da24459 (30 November 2007) and the two it cites: Decision 2001Da36580 (13 February 2004), holding that the management premium reflected in the price on a sale of controlling shares is part of the profit to be returned, and stating the purpose of the system and the interpretive exception for trades with no possibility of using inside information; and Decision 2003Da60396 (28 May 2004), stating the same purpose and exception, and holding that a person who attempted a hostile takeover, became a major shareholder, then abandoned the takeover in the face of the target management's resistance and disposed of a large block of shares on the open market was liable.

Possible readings

On the reading stated in Decision 2007Da24459, which cites Decision 2003Da60396, Article 188(2) is a system of strict liability: the possibility that undisclosed inside information was used is inferred from the short six-month round trip, and neither actual use of the information nor an intent to profit from it has to be proved. The trade is not prohibited; instead the profit is returned to the corporation, which indirectly regulates trading on inside information.

From the purpose and content of the provision the decision draws a condition of the person charged: to bear the duty of return under Article 188(2), the insider must be the direct subject of that share transaction or, if not the direct subject, must fall within a case where the acts of the direct subject can be identified with the acts of the insider. Merely funding the purchase price, or being married to the person who traded, is not by itself enough to treat the lower court as having expanded the range of insiders.

A third reading comes from the cited precedents, which hold that the statutory exceptions in Article 83-6 of the Enforcement Decree are exhaustively listed, but that in light of the legislative purpose of the short-swing profit system, the character of those exceptions and the constitutional guarantee of property rights in Article 23 of the Constitution, a court may also exclude from Article 188(2) a type of trade which, viewed objectively, had no possibility whatever of using inside information (Decision 2001Da36580; Decision 2003Da60396).

What the decisions held

Decision 2007Da24459 set out the purpose and the strict liability of the short-swing profit return system and held that the insider charged under Article 188(2) must be the direct subject of the share transaction or a person whose acts can be identified with those of the direct subject, and dismissed the appeal, ordering the defendant to bear the costs of appeal. The Seoul High Court's judgment of 16 March 2007 (2006Na90055) thus stood.

On the first ground of appeal, the decision rejected the contention that the lower court had expanded the meaning of 'insider' and had imposed the duty merely because the original source of the purchase money was the defendant and because Non-party 1, who carried out the short-term trade, was his wife. The decision held that the lower court had reasoned from the same legal rule, and that the contention arose from a misunderstanding of the lower court's judgment.

On the second ground, the lower court had found that the defendant was the substantive owner of the securities brokerage account in the name of Non-party 2 (the older sister of Non-party 1, the defendant's wife), which it called the nominee account, and had merely entrusted Non-party 1 with stock trading through that account, so that Non-party 1's short-swing trading could be identified with the defendant's own acts. The Supreme Court held those findings and that judgment proper on the evidence adopted by the lower court, and found no error such as misapprehension of facts through violation of the rules of evidence.

Points left open

The decision leaves the line of identification to be drawn case by case. It states that the subject's acts must be capable of being identified with the insider's acts, and it confirms the lower court's finding of identity on facts of a nominee account, substantive account ownership and an entrustment to trade; it does not say what other combinations of funding, control and relationship would or would not meet that condition.

The decision also leaves undecided how the interpretive exception of Decision 2001Da36580 and Decision 2003Da60396 for trades with no possibility of using inside information applies beyond the situations those decisions describe, and it does not address the effect of the repeal of Article 188(2) on claims under the successor provisions of the Framework Act on Capital Markets and Financial Investment Business.

When to reconsider

We revisit this brief if a later decision states the conditions of identification between a trader and the person charged more precisely, if a decision applies or narrows the interpretive exception for trades with no possibility of using inside information, or if the corresponding provisions of the Framework Act on Capital Markets and Financial Investment Business are amended.

Statutes referred to

• 증권거래법 제188조

Decisions referred to

• 대법원 2007. 11. 30. 선고 2007다24459 판결 · Decision ledger
• 대법원 2004. 2. 13. 선고 2001다36580 판결 · Decision ledger
• 대법원 2004. 5. 28. 선고 2003다60396 판결 · Decision ledger

Verification status

All texts below were read at the National Law Information Center (law.go.kr) on 24 October 2026. The decision was read in its published summary, cited provision, cited precedents and full reasons, and the two cited precedents in their published holdings and summaries.