Choi Heemun and Hong Wonsik Facing National Audit... "Could Our CEO Be Next?" Securities Industry on Edge

Meritz and Hi Investment & Securities CEOs to Testify at Political Affairs Committee Hearing on Nov 17
Attention on Whether Additional Witnesses Will Be Selected for Financial Services Commission and Financial Supervisory Service Comprehensive Audit on Nov 27

On the 4th, Committee Chair Baek Hye-ryun is conducting the plenary session of the National Assembly's Political Affairs Committee.
Photo by Yonhap News

On the 11th, as the National Assembly's Political Affairs Committee began its audit of the Financial Services Commission, Hong Won-sik, CEO of Hi Investment & Securities, and Choi Hee-moon, Vice Chairman of Meritz Securities, were selected as witnesses among current securities company CEOs. The exclusion of heads from Mirae Asset Securities and Kiwoom Securities, who were initially expected to be summoned, led to dominant reactions labeling the audit as a 'half-hearted audit' and 'ineffective audit.' However, with Vice Chairman Choi Hee-moon added at the last minute after only Hong Won-sik was initially selected, the securities industry is on edge, wondering if other CEOs will also be called.

According to financial authorities and political circles, on the 4th, the Political Affairs Committee held a plenary session and approved the attendance requests for 19 general witnesses and 11 reference witnesses for the audit. Among current securities CEOs, only Hong Won-sik was included. Then, on the 10th, the committee held another plenary session and selected Choi Hee-moon, Vice Chairman of Meritz Securities, as a witness for the Financial Supervisory Service audit scheduled for the 17th.

Accordingly, the securities industry is keenly watching whether another CEO will be summoned as a witness. The possibility of additional securities company heads being called for the comprehensive audit of the Financial Services Commission and Financial Supervisory Service scheduled for the 27th is increasing. The tension will remain high until the 20th. According to the National Assembly Witness and Expert Testimony Act, witness summons must be issued at least seven days in advance.

The securities industry expressed bewilderment at the summons of Hong Won-sik. The main topics of this year's capital market audit are preferential redemptions of Lime Asset Management funds and stock price manipulation. Accordingly, likely witness candidates included Choi Hyun-man, Chairman of Mirae Asset Securities; Kim Ik-rae, former Chairman of Daou Kiwoom Group; and Hwang Hyun-soon, CEO of Kiwoom Securities.

Hong Won-sik was selected as a witness to investigate the 'consumer protection status related to PF (Project Finance) product bundling.' Bundling refers to the practice of forcing customers to subscribe to other products such as deposits, savings, insurance, or funds as a condition for loans. The Political Affairs Committee found that Hi Investment & Securities induced additional collateral and product subscriptions during the PF loan process and requested Hong to appear as a witness.

Hi Investment & Securities has been criticized by credit rating agencies for the large scale of contingent liabilities related to PF, indicating the need for risk management in refinancing securitized bonds. PF contingent liabilities are not recorded as debts on financial statements but can become debts if the project operator faces difficulties. As of the end of the first half of this year, Hi Investment & Securities' contingent liabilities relative to its equity capital stood at about 81.5%, which is high compared to the average of other securities firms with equity capital under 3 trillion won (55%). Also, as Hi Investment & Securities is affiliated with DGB Financial Group, governance issues pointed out by Financial Supervisory Service Governor Lee Bok-hyun may become prominent.

The Political Affairs Committee summoned Vice Chairman Choi Hee-moon to hear opinions regarding the 'complete sale of convertible bonds with warrants (BW) before the trading suspension of the Ewha Electric Group.' Meritz Securities is suspected of insider trading for selling all its shares (32.22% of total shares) in Ewha Electric just before the trading suspension of the three Ewha Group companies on May 10.

Meritz Securities' sale period was from May 4 to 10. The shares sold were obtained by exercising warrants from a 40 billion won convertible bond with warrants (BW) issued by Ewha Electric in October 2021. The estimated profit Meritz Securities earned from the stock sale gains and interest is about 10 billion won. Meritz Securities also made about 23 billion won in gains from BWs of EID, a group company of Ewha Electric.

Following Hong Won-sik, Vice Chairman Choi Hee-moon's summons as a witness has made the financial investment industry anxious about whether their own heads will be selected as witnesses. There is a growing possibility that additional securities company heads will be summoned for the comprehensive audit of the Financial Services Commission and Financial Supervisory Service scheduled for the 27th.

According to the '2023 National Assembly Audit Issue Analysis' published by the National Assembly Legislative Research Office in August, a key focus of the Political Affairs Committee audit includes 'prevention of recurrence of unfair practices such as market manipulation.' There is a possibility of witness selection related to the Soci?t? G?n?rale (SG) Securities-induced stock price crash that shocked the market this year and the preferential redemption controversy of Lime funds. Chairman Choi Hyun-man is linked to the Lime fund preferential redemption suspicion, while former Chairman Kim Ik-rae and CEO Hwang Hyun-soon are related to the Soci?t? G?n?rale (SG) Securities-induced stock price crash incident.

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