[Invest&Law] Prosecution Indicts HSBC for 15.8 Billion Won Illegal Short Selling

The prosecution investigating allegations of illegal short selling by global investment banks (IBs) has indicted the Hong Kong branch of HSBC on charges of illegal short selling worth approximately 15.8 billion KRW. This is the first case of a global IB being prosecuted for naked short selling since the criminal penalty provisions for illegal short selling (Capital Markets Act) were established in April 2021.

The Illegal Short Selling Investigation Team of the Seoul Southern District Prosecutors' Office (Team Leader Kwon Chan-hyuk, Head of Financial Investigation Division 1) announced on the 28th of last month that they had indicted the Hong Kong-based HSBC branch and three traders, including Mr. A, without detention on charges of violating the Capital Markets Act.

According to the prosecution, from August 2021 to December 2021, they are accused of short selling 318,781 shares (15.78468 billion KRW) of nine listed companies, including Hotel Shilla, through the securities department of the domestic branch after receiving sell swap orders from investors such as global asset management firms, despite not having borrowed the stocks.

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Naked short selling refers to short selling without having borrowed the stocks in advance; it is a type of credit transaction where the seller sells first and borrows the stocks later to deliver.

The prosecution viewed that Hong Kong HSBC executed naked short selling to save costs associated with borrowing stocks for short selling and to avoid inventory risk from failing to sell some of the borrowed stocks. The investigation revealed that Hong Kong HSBC regularly deleted server storage data of the domestic branch that executed naked short selling and stored key data on overseas servers, deliberately evading domestic regulations and supervision.

The prosecution is cooperating with overseas judicial authorities to uncover the collusion between global asset management firms and other related parties behind the scenes and the global IB that executed the illegal short selling. The prosecution plans to notify relevant agencies such as the Financial Services Commission, Financial Supervisory Service, and Korea Exchange about the securities firms’ monitoring gaps and the IB’s malicious evasion of management and supervision confirmed during the investigation.

Reporter Woo Bin, Legal Newspaper

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