Financial Supervisory Service Conducts Planned Inspection of Private CBs... Securities Firm Executives Caught Pursuing Private Gains

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

On the 11th, the Financial Supervisory Service (FSS) announced that a planned inspection of a specific securities firm with a large holding of private convertible bonds (CB) uncovered employees' acts of pursuing private interests.

According to the FSS, the total issuance amount of private CBs over the three years from 2020 to last year reached 23.2 trillion won, with the issuance scale gradually expanding. In this context, unfair trading practices such as manipulating stock prices and spreading false information after acquiring private CBs to raise stock prices and convert them into shares for illicit gains have continuously occurred. Accordingly, the FSS selected the securities firms' unsound business practices in the trading and brokerage process of private CBs as a key inspection item this year.

At the securities firm A detected this time, private CB investments using insider information were uncovered. Employees of financial investment companies must not allow themselves or third parties to use information obtained through their duties without justifiable reasons. Nevertheless, employees of the Investment Banking (IB) division at securities firm A used insider information obtained through their duties related to arranging investors for listed company CB issuances and investing the firm's proprietary funds. Acts of pursuing private interests were found where employees themselves, their families, and acquaintances invested twice in the CBs under their responsibility and earned tens of billions of won in profits.

Additionally, IB division employees were responsible for arranging and investing in CB issuances of listed company B twice, during which they raised funds from themselves, their families, and acquaintances, deposited funds under the names of family and acquaintances into partnerships and special purpose companies (SPCs), and acquired and disposed of B's CBs through these entities, resulting in profits worth tens of billions of won.

It was also found that while securities firm A’s proprietary funds were invested as senior investors in the relevant CBs, the employees and their families’ funds were invested as subordinated investors through partnerships and SPCs without notifying the company.

Furthermore, securities firm A was found to have exploited its superior position when acquiring and disposing of collateralized bonds. When initially acquiring some CB issues from the issuers, securities firm A required the issuers to provide bonds equivalent to the full amount of the CBs as collateral. The contracts also included clauses requiring consent if collateral was set with bonds rated A0 or higher instead of government bonds or if collateral release was necessary for fund usage.

Securities firm A also provided benefits to related parties of issuers through over-the-counter (OTC) derivatives. Listed company C requested securities firm A to grant its related parties an opportunity to gain conversion profits from C’s issued CBs with minimal capital. In response, securities firm A acquired C’s CBs and entered into an OTC derivative (total return swap, TRS) contract with the related parties based on about 50% of the CBs. This OTC derivative contract was the only transaction securities firm A had with individuals related to CBs and was not subject to credit evaluation.

Moreover, only about 10% of the contract amount was received as collateral for the OTC derivative contract, which was significantly lower than the collateral ratios for other secured loans or derivative transactions such as contracts for difference (CFD) based on stocks or mezzanine (subordinated) assets. Typically, securities firms collect collateral amounting to 40-50% for stock-secured loans or CFD transactions.

The FSS stated, "We will take strict measures after reviewing legal violations related to the acts of pursuing private interests confirmed in the inspection results," and added, "Through additional inspections of securities firm A, we will focus on thoroughly examining the likelihood of other illegal acts and devise measures to restore trust in the capital market and protect investors."

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