[The Editors' Verdict] Trust in the Capital Market Has Hit Rock Bottom

Consecutive Cases of Market Manipulation and Illegal Short Selling
A Time for Stern Punishment by Financial Authorities

#1. Yeongpung Paper, which was suspended from trading on the 19th due to allegations of market manipulation, resumed trading on the 26th. Yeongpung Paper's stock price immediately hit the lower limit as soon as the market opened. After the market closed, more than 18.6 million shares remained at the lower limit. The trading volume was only 5,438 shares. It was a situation where only those desperate to sell gathered.

#2. Regarding the market manipulation allegations involving SM Entertainment, the Financial Supervisory Service’s Capital Market Special Judicial Police handed over Bae Jae-hyun, Kakao’s Chief Investment Officer, and Kakao Corporation to the prosecution on the 26th. They are suspected of manipulating the market and failing to fulfill large-scale holding reporting obligations with the intent to obstruct HYBE’s public tender offer during the SM acquisition process in February.

On the day the KOSPI fell below the 2300 mark amid a series of domestic and international negative factors, the domestic stock market faced a “Black Thursday” compounded by the risk of eroding trust. The market struggled due to high interest rates and high exchange rates caused by the U.S.’s prolonged tightening, as well as geopolitical risks in the Middle East, and incidents that undermined market trust occurred one after another.

It doesn’t end there. Foreign investors also shamelessly engaged in illegal activities in the domestic stock market. On the 23rd, the Financial Services Commission’s Securities and Futures Commission notified the prosecution of the CEO (a foreigner) of foreign company A, listed domestically, on charges including stock price manipulation. They manipulated the market to successfully carry out a rights offering.

There was an even more shocking announcement. On the 15th, the Financial Supervisory Service revealed that it had detected for the first time illegal short selling practices habitually conducted by two global investment banks (IBs). They repeatedly engaged in illegal “naked short selling,” selling stocks without holding them for a long period and borrowing them later. As Kim Jung-tae, Deputy Director of the Financial Supervisory Service, said that day, despite nearly 10 million individual investors distrusting the short selling system and ongoing controversies in the stock market, these entities brazenly committed illegal acts, seemingly underestimating the Korean market. This was different from previous illegal short selling cases, which mostly involved simple mistakes or errors when hedge funds placed orders.

In particular, it was explained that they “seemed to believe they would not be caught.” They were either very audacious or looked down on domestic financial authorities and the stock market. The Yeongpung Paper manipulation group showed similar behavior. The financial authorities were sensitively responding to unfair practices such as market manipulation following the mass lower limit incidents in April and June. Nevertheless, these perpetrators did not stop manipulating the stock price until some accomplices were arrested. In a situation where such illegal activities are rampant, hoping for the disappearance of the “Korea discount” in the Korean stock market is unreasonable.

Of course, in a stock market where money flows, resisting the temptation of quick riches might be as difficult as quitting drugs that have recently caused a stir in the entertainment industry. Therefore, it is necessary to set examples by severely punishing these offenders. The so-called “family disgrace law,” which strongly punishes stock manipulators, is scheduled to be implemented, and Korea’s illegal short selling regulations are among the strongest in the world. However, there is a widespread perception that detection and punishment are lukewarm.

Anyone who has manipulated stock prices or committed illegal short selling even once, thereby polluting the market, should be isolated from the market. On the 17th, at the National Assembly’s Political Affairs Committee audit held at the Financial Supervisory Service, Lee Bok-hyun, Governor of the Financial Supervisory Service, said regarding the global IBs caught for illegal short selling, “If the offenders are foreigners or overseas corporations, we will closely cooperate with investigative authorities to bring them here and ensure they are criminally punished under domestic law.” Mere rhetoric is not enough. We expect drastic measures to restore the trust of the fallen capital market.