Two Hong Kong investment banks hit for illegal short selling

Financial Supervisory Service Governor Lee Bok-hyun speaks during a meeting with CEOs from local financial firms in Seoul, June 30. Yonhap

The Financial Supervisory Service (FSS) has found that two Hong Kong-based investment banks (IBs) engaged in illegal short-selling practices estimated to be worth 56 billion won ($41.32 million).

The two companies whose names have not yet been made public conducted the unfair trades here targeting 101 listed firms, including Kakao, between September 2021 and May 2022, according to the watchdog, Sunday.

Most such cases have so far been considered unintentional or accidental, but these were conducted intentionally, according to the authority which slapped record-high fines of 3.87 billion won on overseas financial firms back in March.

“The FSS does not think we can attribute the continued illegal short selling by the global IBs to a lack of understanding of our regulations,” Kim Jung-tae, deputy governor at the FSS, said. “We perceive it as intentional illegal short selling, particularly given that they engaged in naked short selling for a long period of time.”

The authority plans to widen its investigation into other overseas global IBs to prevent the recurrence of such incidents.

According to the FSS, one IB, referred to as "A," submitted orders for short selling without borrowing shares worth 40 billion won for the 101 shares during the period. "A" placed the order on duplicate calculations, but did not rectify the error the following trading day and continued to engage in the illegal act, even as it was aware of its balance shortage.

Another firm, referred to as "B," also submitted naked short-selling orders worth 16 billion won for nine listed stocks, including Hotel Shilla, between August 2021 and December the same year. "B" received swap orders from foreign institutional investors, but engaged in an illegal contract based on quantities that could be borrowed in the future, not confirming specific quantities of borrowed shares.

The FSS urged the two companies to revise their trading system in line with the local regulatory environment.

The watchdog is leaving open the possibility of teaming up with foreign regulatory authorities if necessary. The FSS has carried out joint projects with Hong Kong’s Securities and Futures Commission and exchanged information on sources of suspicious funds.

“The Korean regulatory authority has tried to offer a favorable investment environment to foreign investors, but illegal acts have been detected,” an official from the watchdog said. “We need to hit back with stern measures in such cases and come up with specific measures against their recurrence.”