FSS "First Detection of Intentional Naked Short Selling... 33 Cases Sanctioned"

"Market Suspicion Uncovered"... FSC to Pursue Sanctions Against Several Foreign Firms
33 of 76 Naked Short Selling Cases Since June Last Year Addressed
Fines of 2.15 Billion KRW for 23 Cases and Penalties of 6.05 Billion KRW for 2 Cases Imposed

An illegal short selling case involving intentionally placing sell orders to drive down stock prices without borrowing stocks (naked short selling) has been detected for the first time. Until now, cases of naked short selling have been steadily uncovered, but most were sell orders due to mistakes or errors, resulting in fines of only tens of millions of won.

On the 1st, the Financial Supervisory Service's (FSS) Short Selling Investigation Team announced the progress of investigations and measures taken against illegal short selling. Since establishing a dedicated short selling investigation unit to eradicate illegal short selling, the FSS has completed actions on 33 cases of naked short selling. Most of these cases resulted in fines and penalties, and the FSS plans to pursue sanctions on 43 additional ongoing investigations of naked short selling.

[Image source=Yonhap News]

According to the FSS, the short selling investigation task force launched in June 2022 and expanded and reorganized into the Short Selling Investigation Team in August of the same year investigated 76 cases of naked short selling through April this year, completing actions on 33 cases. Among these 33 cases, fines totaling 2.15 billion won were imposed on 31 cases, and for the two cases subject to penalties after the introduction of surcharges for short selling violations, surcharges totaling 6.05 billion won were imposed. This is the first time surcharges have been imposed for short selling violations, with two foreign financial investment companies receiving these sanctions. Since its expansion in August last year, the FSS Short Selling Investigation Team has focused on two main goals: strict action against naked short selling and detection of unfair trading exploiting short selling.

An FSS official stated, “Although naked short selling disrupts market order, lenient measures such as fines and warnings have been criticized for their ineffectiveness. By imposing strengthened surcharges based on order amounts, we expect heightened awareness among domestic and foreign financial firms.”

Additionally, the Short Selling Investigation Team conducted targeted investigations on stocks with a high likelihood of unfair trading exploiting short selling and detected multiple actual abuse cases. The FSS revealed that they found evidence of short selling using swap transactions to drive down stock prices or short selling based on adverse information such as block deals, rights offerings, or clinical trial failures before such information was publicly disclosed. In cases of swap transactions intended to artificially lower stock prices, foreign hedge funds placed sell swap orders, which securities firms receiving these orders then submitted as short selling orders to the market.

The FSS also announced that it has detected for the first time malicious naked short selling cases that had only been suspected in the market. These involve intentionally placing sell orders in a naked state to drive down stock prices and maximize trading profits. An FSS official said, “We plan to swiftly pursue sanctions, including submitting the detected unfair trading cases to the Securities and Futures Commission (SFC) for agenda consideration.”

Meanwhile, according to the FSS, as the domestic stock market has recovered this year, the scale of short selling has surged recently, and the number of stocks designated as overheated short selling stocks has also increased. The average daily short selling amount recorded 604.3 billion won in the KOSPI market and 356.1 billion won in the KOSDAQ market. From January 1 to April 28, 2023, the number of overheated short selling stock designations totaled 253 cases, more than tripling compared to 83 cases during the same period last year.

The FSS stated, “We are well aware of investors’ concerns about illegal short selling and the authorities’ strong stance against it. In a situation where stock market volatility is increasing, we will strengthen inspections of short selling abuse cases and continue targeted investigations into unfair trading.” They added, “We will focus on checking for naked short selling especially in stocks with recent sharp price fluctuations and maintain a ‘zero tolerance’ policy against acts that disrupt market order.”

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