Establishment of Dedicated Team for Illegal Short Selling Investigation... Aftermath of Hantoo Securities, Securities Firms Review Processes

[Asia Economy Reporter Ji Yeon-jin] Financial authorities have decided to establish a dedicated team to investigate illegal short selling. They will also inspect internal controls such as order processes at securities firms with high short selling activity. This move comes as individual investors' distrust in the system has grown following the short selling violations by Korea Investment & Securities, a subsidiary of Korea Financial Group.

On the 28th, the Financial Services Commission (FSC) held a meeting attended by Chairman Kim Ju-hyun, Financial Supervisory Service (FSS) Governor Lee Bok-hyun, Shin Bong-su, Head of the Anti-Corruption and Strong Crime Division at the Supreme Prosecutors' Office, and Kim Geun-ik, Chairman of the Market Surveillance Committee at the Korea Exchange (KRX). They discussed strengthening detection and punishment of illegal short selling and improving related systems, and then announced a comprehensive plan including these measures.

At the meeting, Kim Geun-ik, Chairman of the KRX Market Surveillance Committee, stated, "We will actively cooperate with relevant agencies for swift investigations and strict punishments by inspecting the short selling order processes and internal controls of securities firms with high short selling activity."

Chairman Kim Ju-hyun emphasized, "Without eradicating illegal short selling and illegal activities using short selling, it is very difficult to secure trust in the capital market," adding, "As the President instructed yesterday, this time we must root out illegal activities surrounding short selling with determination. Relevant agencies must closely coordinate to strictly punish illegal acts and promptly implement system improvements."

FSS Governor Lee Bok-hyun and Shin Bong-su, Head of the Anti-Corruption and Strong Crime Division at the Supreme Prosecutors' Office, proposed actively utilizing the fast-track process for illegal short selling cases.

Korea Investment & Securities was fined 1 billion KRW by the Securities and Futures Commission on February 23 for violating Article 180, Paragraph 1 of the Capital Markets Act, which includes short selling restrictions. This fine is the largest since Goldman Sachs International was fined 7.548 billion KRW in 2018 for naked short selling, and it is the largest among domestic securities firms. According to data received by Rep. Lee Jung-moon of the Democratic Party from the FSS, domestic institutional investors have been fined a total of 1.2 billion KRW over the past 12 years for short selling violations.

According to short selling data obtained by the Korea Federation of Investment Associations through an information disclosure request to the FSS, Korea Investment & Securities sold approximately 140 million shares of about 900 companies over about three years and three months from February 2017 without marking them as short sales. Article 208 of the Enforcement Decree of the Capital Markets Act requires investors who entrust the sale of securities to notify the brokerage whether the sale is a short sale, which was violated in this case. The largest volume traded as regular sales despite being short sales was Samsung Electronics with 25.52 million shares, followed by SK Hynix (3.85 million shares) and Mirae Asset Securities (2.98 million shares).

Since 2002, the FSS has publicly disclosed sanctions against financial institutions and their employees on its website for five years to enhance the effectiveness of disciplinary actions. However, the recent short selling violation and sanctions against Korea Investment & Securities were not disclosed.

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