Why Is “Separate-Case Prosecution” Wrong for Cho Kuk but Fine for Samsung Biologics?

[Op-Ed] Samsam Jeon, Professor, Department of Law, Soongsil University

An accounting fraud dispute turns into a courtroom battle over allegations of evidence destruction

With no false disclosures and no investor losses...

It has been two years since left-leaning civic groups and a member of the National Assembly filed a criminal complaint with prosecutors against Samsung Biologics (hereinafter “Samsung Bio”) over alleged accounting fraud, yet it remains unclear when a final ruling will be reached. At present, rather than accounting fraud, the criminal trial is focused on the destruction of evidence. In the first trial last year, executives of Samsung Bioepis (hereinafter “Epis”) and Samsung Electronics were sentenced to prison terms for destruction of evidence and instigation, among other charges, and the appellate trial is now underway.

What is unusual is that the case initially centered on alleged accounting fraud, but has now developed into an intense courtroom battle over charges of destruction of evidence. In other words, there is strong suspicion that the criminal proceedings are being conducted through an investigation into a separate case.

An investigation into a separate case refers to an investigative method in which, while probing a specific criminal allegation, investigators examine unrelated matters and use evidence or circumstances collected there to uncover the offense they originally intended to prove. From the suspect’s standpoint, this makes it difficult to defend oneself because the true purpose of the investigation is unclear. In Korea, such investigations have also long been criticized as a means by which prosecutors pressure suspects.

I believe that when the current government stressed the need for prosecutorial reform and enacted the law establishing the Corruption Investigation Office for High-Ranking Officials, the fact that a majority of the public supported the legislation was by no means unrelated to the practice of investigations into separate cases.

From a legal standpoint, the Samsung Bio accounting fraud case also presents problems. The accounting firms agreed that the disputed asset revaluation complied with international accounting standards, and the financial authorities also approved it. That means it would in fact be difficult to secure a conviction unless the suspects gave false confessions.

Nevertheless, prosecutors, in line with the intentions of left-wing civic groups and political circles, treated Samsung Bio’s asset revaluation as accounting fraud and indicted it, pushing the case into what appears to be a loophole.

In fact, Samsung Bio’s asset revaluation benefited not only Samsung C&T and Vice Chairman Jay Y. Lee, but all stakeholders holding Samsung Bio shares. It benefited Samsung C&T, Samsung Electronics, Samsung Bio, Epis, and even the shareholders and creditors of the U.S. company Biogen, as well as employees, securities firms, the exchange, accounting firms, and the National Tax Service.

Of course, if someone had suffered losses because of the asset revaluation, the accounting fraud case would have proceeded in a completely different direction from where it stands today. Not only Samsung Bio executives and employees, but Vice Chairman Lee as well would likely have been indicted not only for accounting fraud, but also for breach of trust, embezzlement, and fraud under the Act on the Aggravated Punishment of Specific Economic Crimes, and would have faced enhanced punishment. But that did not happen. This can be interpreted to mean that a guilty verdict for accounting fraud was, in effect, a hypothesis destined to be dismissed.

Under the Capital Markets Act, two major requirements must both be met for a conviction for accounting fraud to stand. First, there must be a false disclosure based on fraudulent accounting books. Second, investors must have suffered losses as a result of investing in reliance on that false disclosure.

From this perspective, the Samsung Bio case raises the suspicion that prosecutors may have misjudged the matter and brought the indictment based on an algorithm devised by malicious political engineers who knew from the outset that it would fall into a loophole.

As for Samsung Electronics and Epis executives who have been indicted or convicted on charges of destruction of evidence, it cannot be ruled out that, in the course of an investigation into a separate case, they may have unintentionally engaged in conduct meeting the legal elements of destruction of evidence while trying to defend themselves against unexpected questioning as suspects.

Of course, since the trial is still underway, guilt or innocence cannot be prejudged before a final ruling is issued. Nevertheless, it is clear that shaping public opinion as though criminal punishment were justified, on the premise that the actions of those executives—who unexpectedly found themselves reduced to the status of suspects—were unlawful, poses a serious threat to the rule of law.

With respect to the destruction of evidence, it is known that the contents of the Securities and Futures Commission’s resolution dated November 14, 2018 may serve as important evidence. The court is said to have granted Samsung Bio’s request for an order to submit documents related to that resolution. As expected, procedures such as immediate appeals by the Securities and Futures Commission, the Financial Services Commission, the Financial Supervisory Service, and Samjong KPMG, all of which received document submission orders, along with the court’s dismissals and re-appeals, are reportedly underway.

Whatever the outcome, one cannot help but wonder why, even after 3 years and 6 months have passed since the allegations were first raised, the authorities have not reached a conclusion on the accounting fraud issue itself and instead are detaining and trying the suspects only on ancillary charges.

Samsung Bio was already suspended from stock trading on November 14, 2017 over the accounting fraud issue, but since December of that year it has resumed normal operations, with its listing maintained and its shares traded again. On the date trading was suspended, November 14, 2017, the stock price was 382,000 won per share, but as of the closing price on May 15, 2020, it stood at 605,000 won. The share price alone rose by more than 30 percent, and operating profit also appears to have increased by about 30 percent, from 63 billion won in 2017 to 91.7 billion won in 2019.

If Samsung Bio had truly engaged in accounting fraud, then by now its very survival should have been in jeopardy because of securities class-action litigation. From this perspective, it is clear that the prosecution and trial over Samsung Bio’s alleged accounting fraud will generate substantial controversy going forward.

Some observers say that once the Corruption Investigation Office for High-Ranking Officials is launched on July 15 and begins operating, the harms caused by excessive investigations and the practice of investigating separate cases may be reduced, since prosecutors’ monopoly over indictments will be constrained. However, I believe it is still too early to predict. We will have to watch a while longer to know.

Watching the judicial process in the Samsung Bio case unfold, I find myself deeply curious what the political engineers behind it are thinking. If they designed the Samsung Bio accounting fraud algorithm while knowing it would fall into a loophole, it would hardly be an exaggeration to say that the rule of law in the Republic of Korea has already disappeared.

Samsam Jeon, Professor, Department of Law, Soongsil University

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Original title: '별건수사' 조국은 안되고 삼성바이오는 해도 되나

Author: Sam-hyun Jeon

Date: 2020-05-27

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=21&idx=22768