KB Securities "No Illegal Activity in Wrap Product Management... Intent to Provide Liquidity"

Financial Supervisory Service Conducts Spot Inspections on Hana Securities and KB Securities

The Financial Supervisory Service (FSS) has launched an investigation into KB Securities and Hana Securities over suspicions of illegal wash trading, but KB Securities has denied the allegations, stating that “there was no illegal activity.”

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On the 23rd, KB Securities explained in a press release that “there was no illegal activity in the process of selling and managing assets of wrap account products such as Money Market Wrap (MMW), and the measures were taken to supply market liquidity.”

Currently, KB Securities is under suspicion by the FSS for engaging in unsound practices such as ?mismatched maturity management different from product descriptions ?illegal wash trading during the operation of wrap account products including Money Market Wrap (MMW). Although investors were informed that their funds would be invested in “safe assets with a 3-month maturity,” the corporate client funds collected were actually invested in specialized finance bonds with maturities of 1 to 3 years. There are also allegations that KB Securities colluded with Hana Securities to conceal bond valuation losses through coordinated trades. The suspicion is that KB Securities committed illegal wash trading by using its trust account to purchase long-term bonds held in its corporate client accounts at book value before the valuation losses. Additionally, there are allegations of a Ponzi-like operation where funds from new clients were used to pay off clients whose maturities had arrived or who requested early termination.

First, KB Securities maintains that including products with different contractual maturities is not problematic. KB Securities emphasized, “At the time of product subscription, the customer guide clearly stated that assets with longer residual maturities than the contract period could be included and managed,” and “mismatched maturity management is not illegal.”

Regarding the suspicion of engaging in illegal wash trading to cover losses, KB Securities explained, “It was a choice made to supply liquidity, and we did not trade with other securities firms to cover losses.” Following the Legoland incident at the end of September last year, market interest rates surged and the commercial paper (CP) market tightened, and the transaction was conducted to prevent secondary damage to customers. KB Securities stated, “There was liquidity support through the transaction from late November to early December,” and “subsequently, the company discussed with the accounting firm for year-end financial closing and evaluated CP at market value instead of book value, recognizing losses at that point, so the timing does not suggest the purpose was to cover losses.”

The company added, “When providing liquidity support, we prioritized supplying liquidity mainly to small and medium-sized corporations facing difficulties such as payroll payments or balance settlements due to short-term liquidity issues.”

Regarding the Ponzi-like allegations, KB Securities emphasized, “When new client funds are deposited, it is not the case that previous clients’ assets are transferred to new clients,” and “even when clients request redemption, we respond by selling the assets held by the clients, not by operating a Ponzi scheme.”

Meanwhile, the FSS plans to conduct an unscheduled inspection of Hana Securities by the 26th and will also begin an unscheduled inspection of KB Securities. It has not yet been decided whether the investigation will be expanded to other securities firms.

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