FSS to conduct on-site inspection on Meritz Securities' mezzanine business

Meritz Financial Group headquarters in southern Seoul / Courtesy of Meritz Financial Group

By Anna J. Park

The Financial Supervisory Service (FSS) plans to conduct an on-site inspection of Meritz Securities later this month to check for any unethical business practices on the part of the firm.

According to the financial industry on Tuesday, the financial authority will conduct an ad hoc inspection in mid-August to closely look into practices surrounding the firm's overall convertible bonds and bond warrant businesses.

The financial watchdog agency's ad hoc inspection of the firm was somewhat expected, as Rep. Lee Yong-woo, a lawmaker from the main opposition Democratic Party of Korea, pointed to the need for further investigation during an Assembly committee meeting in June over the firm's controversial sale of Ehwa Technologies Information stocks. FSS Governor Lee Bok-hyun responded to the lawmaker's point, vowing to take further measures to investigate the aforementioned matter.

Earlier this year Meritz Securities sold off its entire stakes in Ehwa Technologies Information, E-trons, EID ― all affiliates of the same Ehwa group ― right before the arrest of its Chairman Kim Young-jun on charges of embezzlement and malpractice. Meritz held Ehwa bond warrants worth 40 billion won ($30.4 million) since 2021, and the firm converted the bond warrants into stocks earlier this year.

It succeeded at selling the stakes right before the plunge of their stock prices as well as the suspension of stock trading, avoiding the negative impacts of the arrest of the group's chairman. The firm is estimated to have garnered 23.3 billion won from the trading. The suspicious timeline of the conversion of the stocks as well as the stock sale made market watchers suspicious of whether the brokerage company utilized illicit insider information.

According to data released by Rep. Lee, Meritz Securities helped various companies by financing hundreds of billions of won through issuances of mezzanine bonds, either convertible bonds or bond warrants, during the past five years, and 18 of the companies' stocks were suspended from local stock markets on charges related to embezzlements or insolvency.

Due to such records, the firm has been suspected of aiding improperly run or insolvent companies' financing and thereby unintentionally contributing to stock manipulation schemes. Altogether, 780 billion won was financed to the 18 companies through Meritz Securities' mezzanine bonds issuance.