[Invest&Law] Prosecution Avengers Target Illegal Short Selling

Elite Investigation Team of Southern District Prosecutors' Office Deploys Over 20 Members
Kim & Chang, Gwangjang Step Up to Defend Against Prosecutors Wielding the Sword

The prosecution investigating allegations of illegal short selling worth approximately 56 billion KRW by foreign investment banks (IBs) has reportedly expanded its dedicated investigation team to around 20 members. As this is the first crackdown on illegal short selling, which had been a 'regulatory blind spot,' the team is intensifying evidence analysis and legal argument development to prove illegality. The overseas IBs have appointed Kim & Chang Law Office and Law Firm Gwangjang, major domestic law firms, as their legal shields and have begun preparing for a full-scale response.

According to reporting by Legal News, the Seoul Southern District Prosecutors' Office has analyzed over 20 academic papers related to short selling and completed a legal review of the illegality. Since this is the first investigation applying criminal penalties for naked short selling under the Capital Markets Act enforced in 2021, the legal framework has been carefully constructed. It is said that the referenced papers alone amount to several hundred pages.

Photo by Yonhap News

The prosecution has launched a compulsory investigation into BNP Paribas Hong Kong branch and Hong Kong HSBC, which are suspected of placing naked short selling orders worth approximately 40 billion KRW across 101 stocks and 16 billion KRW across 9 stocks, respectively. The investigation team is reviewing plans for selecting suspects and summoning them by analyzing stock transaction records secured during last month's raids.

The dedicated illegal short selling investigation team, consisting of about 20 members, includes most of the prosecutors from the Financial Investigation Division 1 and 2, as well as dispatched personnel from the Financial Supervisory Service. The team leader is Kwon Chan-hyuk, head of Financial Investigation Division 1, and the deputy team leader is Park Geon-young, head of Division 2.

The prosecution is expected to focus its investigation on the domestic account details of the overseas IBs. Since they used domestic securities firms as 'conduits,' securing domestic accounts will allow the prosecution to identify stock holdings and balances. The prosecution views that overseas IBs exploited lax domestic regulations to repeatedly engage in naked short selling, plundering the domestic capital market with a much higher success rate than ordinary investors. They are investigating under the assumption that a 'broker' global asset management firm is behind this structural speculation.

The key issue in the investigation is 'intent.' While the IBs do not deny that naked short selling occurred, they claim it was due to employee errors. The prosecution is focusing on the fact that naked short selling was repeated over several months to determine intent. They argue that this was not a simple mistake or error but a planned speculative act carried out by global asset management firms and overseas IBs for financial gain.

Reporter Lim Hyun-kyung, Legal News

※This article is based on content supplied by Law Times.