BNP Paribas, HSBC investigated for naked short selling

Financial Supervisory Service Governor Lee Bok-hyun / Yonhap

A group of lawyers has filed a complaint against the Hong Kong offices of BNP Paribas and HSBC with the Seoul Southern Prosecutors’ Office, Sunday, over a combined 56 billion won ($42 million) in suspected naked short selling, according to market watchers, Monday.

The illegal acts by the two global investment banks were the trigger for Korea’s ban on short selling altogether, Nov. 6. The ban will stay in place until next June.

Short-selling refers to the sale of borrowed shares expecting a profit from a price fall when the shares are bought back at a lower price. It’s been widely used by foreign and institutional investors seeking leverage to net greater gains. Placing a sale without borrowing or confirming to borrow first is called naked short selling and is prohibited here.

However, illegal short selling is essentially unmanageable under the current low-tech non-electronic monitoring systems. This enables many foreign investors to continue raking in undue hefty profits at the expense of retail investors, as best defined by the term “Korea discount” where Korean share prices remain persistently stagnant despite the growth of the economy and listed firms.

The complaint followed a finding of the Financial Supervisory Service (FSS) in October that BNP Paribas Hong Kong engaged in naked short selling of 40 billion won and Hong Kong HSBC did so with 16 billion won.

BNP Paribas' Hong Kong office sold without borrowing the shares of five firms including Kakao, from September 2019 to May last year.

Similarly, HSBC Hong Kong sold without borrowing the shares of nine firms including Hotel Shilla from August 2021 to December of the same year.

This, according to the lawyers, violates the local Capital Markets Act, punishable by a prison term of at least one year or fines of up to five times the illicit gains.

“No criminal cases have been filed over illegal short selling so far, but we demand a thorough investigation by the prosecution,” the lawyers said.

How stern a punishment the financial authorities will mete out remains to be seen.

The FSS in October said the illegal sales practice of global investment banks undermined the healthy operation of the local financial market system and has grave implications, a reason why it has since expanded the scope of the investigation to 10 of their peers.

Financial Services Commission Vice Chairman Kim So-young said last week that the short selling ban will not be lifted until June next year.