Samsung Securities Acknowledges Liability for 'Ghost Stock' Dividend Incident After 41 Months

Court Orders Payment of Half the Damages to 3 Investors Affected at the Time
Additional Lawsuits May Follow

[Asia Economy Reporter Minwoo Lee] A ruling has been made that securities firms are responsible for compensating investors who suffered losses 41 months after the controversial 'ghost stock' dividend accident at Samsung Securities occurred.

According to the legal community on the 26th, Judge Jang Chan of the Civil Division 37 at the Seoul Central District Court recently ruled in the first trial of a damages claim lawsuit filed by three investors against Samsung Securities, ordering the payment of 28 million to 49 million KRW per person, which is half of the damages. This marks the recognition of the securities firm's liability for compensation about 3 years and 5 months after the incident on April 6, 2018.

At that time, Samsung Securities allocated a dividend of 1,000 KRW per share to employee stock ownership shares. However, due to an error, 1,000 shares per stock were mistakenly credited. The stocks distributed at that time amounted to 2,812,950,000 shares, which, based on the closing price of the previous trading day, reached 111.9 trillion KRW. This scale exceeded the stock issuance limit stipulated in Samsung Securities' articles of incorporation by several tens of times, earning the notorious label of 'ghost stocks.'

Fortunately, there were no computer system issues related to dividends for shares held by general investors. Samsung Securities also took immediate action to normalize the mistakenly credited stocks. However, the problem arose when some Samsung Securities employees immediately sold the erroneously credited stocks on the market. Twenty-two employees placed sell orders for 12,080,000 shares, and among them, 16 employees' orders for 5,012,000 shares were actually executed.

As the volume of 'ghost stocks' flooded the market, the trading volume of Samsung Securities shares on that day surged to more than 40 times that of the previous day. The stock price also fluctuated wildly. The volatility interruption mechanism was triggered seven times in one day. At one point during the trading session, the stock price plunged by 11.68%.

Among the employees who sold Samsung Securities shares, eight were indicted and are currently undergoing appeal trials. In the appellate court, four received suspended prison sentences and fines, while the other four were fined.

Regarding this issue, which involved both a company computer error and employees' moral hazard, the Securities and Futures Commission under the Financial Services Commission imposed a fine of 144 million KRW on Samsung Securities in July of the same year. At that time, Samsung Securities CEO Koo Sung-hoon also resigned. Investors expressed dissatisfaction, citing losses from selling shares amid a sharp stock price drop caused by Samsung Securities' dividend error incident.

Meanwhile, in this trial, Samsung Securities emphasized that it did its best to manage the situation. It argued that some of the stock price decline was due to media reports. They explained that through active accident management, the stock price recovered to the previous day's level around 11 a.m. on the day of the incident, and the sharp decline was due to panic selling driven by media coverage and other factors.

However, the court rejected Samsung Securities' claims, stating, "The cause of the accident was Samsung Securities' failure to properly establish internal control standards and risk management criteria at the time of the dividend accident." Nevertheless, considering that the employees' criminal acts were the cause and the difficulty in proving each factor affecting the stock price, the court ordered Samsung Securities to compensate only half of the investors' damages.

If this ruling is finalized, investors who suffered losses during the market downturn at that time are likely to file lawsuits one after another. Samsung Securities is expected to decide whether to appeal after analyzing the first trial ruling.