Stocks and Trading Volume Suddenly Changed in Distressed Companies, Revealed as 'Insider Trading' Unfair Practices

12 Cases of Unfair Trading Detected, All Involving 'Use of Non-Public Information'
Financial and Governance Structures Also Weak or Vulnerable

Average Stock Price Volatility of Accused Items at 145.3%, Trading Volume Up 293.7% Compared to Previous Month
Mixed 'Complex' Forms with Multiple Unfair Trading Allegations Increased Significantly from 48.4% to 75.0%

[Asia Economy Reporter Oh Ju-yeon] #1. The largest shareholder of Company A realized profits by selling shares after driving up the stock price through false and exaggerated media reports related to new business ventures. Additionally, they avoided losses by selling their holdings before the submission of an audit report with a 'disclaimer of opinion.'

#2. The former CEO and largest shareholder of Company B submitted large high-priced buy orders or manipulated opening and closing prices to stabilize the market price and prevent collateral value decline due to stock price fluctuations. They also avoided losses by selling their holdings before the submission of an audit report with a 'scope-limited qualified opinion.'

The Korea Exchange (KRX) analyzed the key characteristics of marginal companies and found them vulnerable to unfair trading. The exchange warned that marginal companies, which show overlapping traits such as poor business performance, frequent changes in major shareholders, frequent fundraising and investments in other corporations, indicating weak governance stability and business continuity, require careful consideration when investing.

On the 26th, the Market Surveillance Committee of the Korea Exchange announced that it had detected unfair trading suspicions in 12 out of 22 marginal companies with December 2019 fiscal year-end and reported them to the relevant authorities.

The number of 'complex unfair trading' cases, where multiple types of unfair trading were detected in the same stock, significantly increased from 48.4% to 75.0% compared to the previous year, and all 12 stocks analyzed were found to have insider trading suspicions.

The main types of allegations included two cases of fraudulent trading, two cases of market manipulation, and eight cases of insider trading. By market, 11 stocks belonged to the KOSDAQ market, and one stock was listed on the KOSPI market.

One key characteristic of these marginal companies was the sharp fluctuation in stock price and trading volume. During the investigation period, the average stock price volatility of the suspicious stocks was 145.3% (compared to an average index volatility of 40.2%), and trading volume increased by 293.7% compared to the previous month.

The financial structure was also poor. Operating profit and net income were low, showing a continuous deterioration trend over the past three years, and the debt ratio was high at an average of 584.5% in 2019. Additionally, eight stocks (66.7%) had capital less than 20 billion KRW, and four stocks (33.3%) experienced capital erosion.

Weak governance was another notable feature. The largest shareholder's stake was below 20% in all suspicious stocks, and in five stocks (41.7%), it was below 10%, indicating low ownership or shares pledged as collateral by the largest shareholder.

Moreover, frequent changes in the largest shareholder and CEO were observed, and in most cases, it was difficult to identify the actual largest shareholder.

Business continuity and disclosure reliability were also insufficient. Some companies added business objectives related to market themes with little relevance to their existing operations, issued favorable disclosures that could drive stock price increases, and then corrected or canceled them. Eight stocks (66.7%) had a history of being designated as companies with poor disclosure practices within the last two years.

Notably, unfair trading allegations were not isolated incidents. Complex allegations involving multiple unfair trading types were detected in nine stocks, increasing significantly from 48.4% in 2018 to 75.0% in 2019.

In particular, all stocks were found to have insider trading allegations related to adverse information such as delisting reasons.

Insiders such as largest shareholders and executives were directly involved in five stocks (41.7%), and quasi-insiders such as stock purchase contract assignees and participants in paid-in capital increases were involved in seven stocks (58.3%). Additionally, seven stocks (58.3%) had received unfair trading notifications within the past three years.

The exchange analyzed, "Compared to the previous year, complex unfair trading allegations have increased, indicating that recent unfair trading is evolving into a complex form involving multiple allegations such as fraudulent trading and market manipulation." It also added that insider trading allegations occurred in all stocks, and the involvement rate of insiders and quasi-insiders increased compared to the previous year.

Furthermore, "Marginal companies have a high likelihood that insiders or related parties sell their holdings before the disclosure of adverse material information such as delisting reasons related to financial statements, and often show complex allegations involving multiple types of unfair trading," and emphasized, "Companies with excessive stock price and trading volume fluctuations, poor financial structure, weak governance, and insufficient business continuity and disclosure reliability are characteristics of marginal companies vulnerable to unfair trading," urging caution when investing.

This content was produced with the assistance of AI translation services.