[Inside Chodong] Even Musk Was Frustrated by 'Short Selling'... Stark Contrast in Punitive Will Between Korea and the US

[Asia Economy Reporter Lee Seon-ae] In April, a conversation between Elon Musk, CEO of Tesla, and Bill Gates, founder of Microsoft, regarding Tesla stock short selling heated up the US stock market. A netizen shared a screenshot of a text message presumed to be the conversation between Musk and Gates, asking Musk if the content was true, to which Musk replied that it was accurate. According to the circulated text, Musk asked Gates, "Do you still maintain a $500 million (about 620 billion KRW) short position on Tesla?" Gates responded, "Unfortunately, I have to say the contract is still ongoing." In response to Gates' request for participation in charitable activities addressing the climate crisis, Musk rejected it, saying, "Aren't you holding a massive short position on Tesla, which is doing the most to solve climate change issues?" and "I cannot take your climate change charity activities seriously."

As inferred from the text, the world's richest individuals openly expressed discomfort regarding short selling. A CEO of a listed company in Korea, confiding like a complaint to a reporter, firmly called short sellers "stock price manipulation forces." He said, "Even if you acknowledge the positive functions of short selling, the short selling happening in our country is almost the same as stock price manipulation in its behavior, but the supervisory authorities just turn a blind eye." Another listed company CEO said, "When I claimed that there seemed to be many naked short sales, the supervisory authority's response was 'It is impossible in the system, and it cannot be,' but cases of naked short selling continued to appear."

Ultimately, the issue we need to consider here is the government's willingness to punish. In the past two years, there have been 22 cases punished for illegal short selling. Except for one domestic securities firm, 21 were foreign securities firms, and the fines were barely under 100 million KRW. Even though naked short selling was conducted, it was judged as gross negligence rather than intentional, resulting in only a 54 million KRW fine. In 2020, the Capital Markets Act was amended to impose imprisonment of more than one year or fines up to five times the amount gained for illegal short selling. However, actual punishments have been mild, and the number of detected illegal short selling cases has not decreased at all.

Short selling is actively conducted in the US market. The fact that, according to a report last month by financial data analytics firm S3 Partners, there is a short selling balance of as much as 24.2 trillion KRW (18.5 billion USD) on Tesla alone suggests this. However, the US allows such transactions but, if illegal naked short selling is detected, the Securities and Exchange Commission (SEC) confiscates all unfair gains or imposes civil penalties. Last year alone, civil penalties imposed amounted to about 5 trillion KRW. The willingness to punish illegal short selling in the US and Korea is worlds apart.

Conscious of criticisms that actual punishments are not properly enforced, the government has shown its intention to regularly investigate naked short selling and increase the severity of punishments to completely confiscate gains obtained from illegal short selling. Although the punishment level has been raised, if the ongoing 'mild punishments' continue, naked short selling, which undermines trust in the market and policies, will inevitably persist. Proper punishment without 'neglect' can sufficiently prevent illegal short selling. However, one more aspect to consider here is compensation for investors. Even if illegal transactions are punished, compensation for market participants is not clearly defined separately from punishment. Currently, if individual investors want to recover losses caused by unfair trading, they must use securities class action lawsuits (Securities-Related Class Action Act) introduced in 2005. It takes years from lawsuit approval to actually determining fault in the main trial. What 'benefit' have individual investors gained from this 'short selling measure'?