Prosecutors Say "Different from Before"... Government Declares War on Illegal Short Selling

President Yoon Suk-yeol "Will Eradicate Short Selling"
Comprehensive Measures Announced Two Days After Short Selling System Improvement Plan
"Restored Southern District Prosecutors' Joint Investigation Team Will Actively Investigate Short Selling"

[Image source=Yonhap News]

[Asia Economy Reporter Ji Yeon-jin] "(The Southern Seoul District Prosecutors' Office Securities Crime) Joint Investigation Unit has been restored and organized, and the Financial Services Commission and the Financial Supervisory Service have recently recognized the seriousness of the problematic short selling damage related to the stock price decline, so it will be different from before." (From the government’s comprehensive short selling measures press briefing on the 28th)

The government has declared war on illegal short selling. In response to the Korea Investment & Securities short selling regulation violation case, individual investors' anger has intensified, leading to a comprehensive plan to significantly strengthen investigations and punishments for illegal short selling and to improve the system. It is just one day after President Yoon Seok-yeol instructed, "Prepare measures with the determination to eradicate illegal acts surrounding short selling."

According to financial authorities on the 29th, the Financial Services Commission, Financial Supervisory Service, Supreme Prosecutors' Office, and Korea Exchange held a joint meeting the previous day and announced that they would significantly strengthen detection and punishment of illegal short selling. Short selling is an investment strategy where stocks are borrowed and sold, then repurchased later to return the borrowed shares; since profits can only be made if the stock price falls, individual investors have expressed strong dissatisfaction that short selling encourages stock price declines.

Accordingly, the government established a dedicated short selling investigation team within the Financial Supervisory Service to conduct planned investigations into unfair trading linked to short selling, and if suspicions are found, the recently restored Securities Crime Joint Investigation Unit at the Southern Seoul District Prosecutors' Office will actively investigate through a 'fast track' (rapid investigation transfer) and strictly prosecute. The measures also include confiscation of criminal proceeds and concealed assets.

Yoon Byung-jun, Head of the Anti-Corruption and Strong Crime Investigation Support Division at the Supreme Prosecutors' Office, stated at a briefing the previous day, "Securities crime investigations were conducted by the Southern Seoul District Prosecutors' Office Joint Investigation Unit, which was abolished but restored just over a month ago," expressing the unit’s strong will to actively investigate illegal short selling cases. The Southern Seoul District Prosecutors' Office Joint Investigation Unit was abolished in January 2020 by former Minister of Justice Choo Mi-ae, who clashed with then Prosecutor General Yoon Seok-yeol over the investigation of former Minister of Justice Cho Kuk, but it was revived under the current administration.

Earlier, on the 27th, President Yoon Seok-yeol said, "I recognize that investors' concerns are increasing regarding illegal short selling and market disruption acts using short selling in the capital market, and under such circumstances, our stock market cannot gain investors' trust," and instructed, "The financial authorities and related agencies such as the prosecution must establish related measures with the determination to eradicate illegal acts surrounding short selling."

This came one day after the Financial Services Commission announced measures on the 26th in the ‘Capital Market National Task Implementation Plan’ to adjust short selling collateral ratios and expand the designation of overheated short selling stocks, with President Yoon directing additional measures.

The distrust of individual investors toward short selling further spread after it was belatedly revealed that Korea Investment & Securities violated regulations and was fined 1 billion KRW by financial authorities for short selling transactions involving about 900 stocks including Samsung Electronics (refer to page 17 of the June 26 issue). It was also additionally confirmed that major domestic and foreign securities firms such as CLSA Securities (600 million KRW), Meritz Securities (195 million KRW), Shinhan Financial Investment (72 million KRW), and KB Securities (12 million KRW) were fined for short selling-related violations following Korea Investment & Securities.