Two foreign financial firms and one affiliated employee who repeatedly engaged in illegal naked short selling have been brought to trial.
On the 15th, the Illegal Short Selling Investigation Team (Team Leader Kim Suhong, Chief Prosecutor of the Financial Investigation Division 1) at the Seoul Southern District Prosecutors' Office announced that global investment bank Corporation A, foreign asset management firm Corporation B, and trader Mr. C affiliated with Corporation B were non-detained indicted the previous day on charges of violating the Capital Markets Act.
In the past, naked short selling was only subject to fines, but since April 6, 2021, related law amendments have stipulated punishment by imprisonment for more than one year or fines.
According to the prosecution, Corporation A engaged in naked short selling of a total of 573,884 shares of domestic stocks it did not own from September 1, 2021, to May 11, 2022, over 25,219 transactions. The order amount was approximately KRW 18.32261 billion.
The prosecution pointed out that traders affiliated with Corporation A repeatedly committed naked short selling over a long period, using the operation of multiple independent trading units (AUs) as an excuse, even after being notified of insufficient stock balances. An AU is an internal organization within a foreign financial firm that operates under certain conditions, allowing short selling calculations and judgments to be made per AU rather than for the entire corporation under regulations.
Foreign asset management firm Corporation B was found to have gained approximately KRW 3.568 billion in profits by naked short selling SK Hynix shares. Trader Mr. C of Corporation B received a block deal purchase proposal for SK Hynix shares on the morning of October 18, 2019. While negotiating the trading conditions, to lower the block deal price, he artificially dropped SK Hynix’s stock price from KRW 80,900 to KRW 81,000 through a sell swap, then agreed to purchase the block deal at a reduced price of KRW 77,100, lower than the initial proposal price of KRW 78,500. This method involved quickly releasing SK Hynix sell volumes to exhaust buy volumes or building sell walls to create selling pressure and lower the stock price. Notably, during this process, it was revealed that Mr. C repaid the naked shorted SK Hynix shares with block deal volumes sold below market price, earning a profit of KRW 348 million.
The prosecution viewed these acts as fraudulent means and tactics involving undisclosed block deal information, manipulative large-volume sell swap orders, and naked short selling aimed at arbitrage profits. Accordingly, Mr. C and Corporation B, which failed to fulfill its management and supervisory duties, were jointly indicted on charges of fraudulent unfair trading under the Capital Markets Act.
Naked short selling is fundamentally impossible for domestic individual investors. However, foreign financial firms, not subject to domestic financial system constraints, have been conducting illegal short selling using large-scale funds. The prosecution plans to promptly notify the Financial Services Commission, the competent authority, about the institutional issues of illegal naked short selling crimes using AUs, as in the case of Corporation A.
A prosecution official stated, "This case demonstrates that Korea’s Capital Markets Act is strictly applied to foreign financial investors and foreign investors who disrupt the domestic stock market order and cause losses to investors. We will do our best to maintain the prosecution to ensure that the defendants receive punishments corresponding to their illegal acts, and will continue to strictly respond to financial and securities crimes that undermine fairness and trust in the capital market, including illegal short selling."
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