Financial Supervisory Service Refers 33 Individuals for Unfair Private Convertible Bond Trading to Prosecution... Illicit Gains of 84 Billion Won

A total of 33 individuals involved in unfair trading through private convertible bonds (CB) have been referred to the prosecution. The related illicit gains are estimated to amount to 84 billion KRW.

Financial Supervisory Service, Yeouido, Seoul. Photo by Jinhyung Kang aymsdream@

On the 25th, the Financial Supervisory Service (FSS) announced that it had uncovered 40 cases of unfair trading involving the misuse of private CBs and completed investigations on 14 of these cases. Among them, 11 cases have been criminally prosecuted through fast-track procedures, while the final handling plans for 3 cases are still under review. The investigation revealed illicit gains amounting to approximately 84 billion KRW, and the FSS has forwarded 33 suspects to the prosecution.

Private CBs are easy to issue and are subject to relatively relaxed disclosure regulations, which can be exploited to falsely portray large-scale fundraising and new business investments through issuance and disclosure. Therefore, as the issuance of private CBs surged and cases of misuse for unfair trading continued to occur, the FSS initiated a planned investigation.

Analysis of the 14 completed cases showed 10 cases of fraudulent trading, 3 cases of market manipulation, and 3 cases of insider trading. In fraudulent trading cases, most involved announcing false new business ventures related to COVID-19 or pretending to attract large-scale investments to deceive investors. Alongside fraudulent trading, market manipulation charges were found where initial stock price momentum was artificially created to sell CB conversion shares at high prices, and insider trading charges were detected where conversion shares were sold in advance before a sharp price drop using adverse material non-public information.

The FSS explained that many of the investigated individuals had a history of habitual unfair trading or were corporate raiders, accounting for 25 out of the 40 cases (62.5%). This confirmed that private CBs are being exploited as a major tool for illicit gains by serious disruptors of the capital market.

Most of the methods used by the investigated parties involved fraudulent trading exploiting theme stock investment sentiment. Among the 40 cases, 32 (80%) were identified as fraudulent trading, mostly involving falsely presenting new theme business ventures or large-scale investment attraction through private CB issuance to mislead investors.

Specifically, many cases involved announcing false new business ventures related to COVID-19 such as vaccine and treatment development, diagnostic kits, and mask production, or in the bio sector, or concealing collateral provision and the use of private loan funds during the CB issuance process. There were also confirmed cases of falsely disclosing private CB issuance with no likelihood of payment, pretending to have successfully raised large-scale funds.

Cases where unfair trading groups acquired private CBs through investment associations or investment companies accounted for 27 out of 40 cases (67.5%). This practice conceals the actual acquiring entity, complicates fund tracing, and simultaneously disguises the transactions as legitimate corporate acquisitions or investment attraction.

Furthermore, these unfair trading incidents caused significant damage to investors. Among 39 investigated companies, 29 experienced investor losses due to delisting, designation as management targets, or worsening business conditions. Currently, 4 companies have been delisted, and 14 have been designated as management targets. Additionally, 11 companies suffered deteriorated business conditions, such as a decrease of 30% or more in sales or operating/net profit compared to the previous year.

An FSS official stated, "We will proceed with and complete the planned investigation of private CBs more swiftly, and utilize a cooperative system across capital market sectors including disclosure, accounting, and inspection to relentlessly track down and strictly punish unfair trading cartels. We will also work closely with the Financial Services Commission to promote institutional improvements so that private CBs can be established as a sound means of corporate fundraising."

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