Korean authorities probe abnormal sell-off of stocks suspected of manipulation

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South Korean financial authorities and prosecutors have launched an investigation into possible stock manipulation following a massive sell-off of eight stocks by Societe Generale Securities this week.

According to Korea Exchange on Wednesday, the market capitalization of 8 stocks that hit their low limit on Monday, the first day of the incident, lost 7.4 trillion won ($5.5 billion) in just 3 days. The stocks are Samchully Co., Daewon Holdings Co., Seoul City Gas Co., Sunkwang Co., Harim Holdings Co., Sebang Co., DAOL Investment & Securities Co., and Daou Data Corp.

Of them, Samchully, Daewon Holdings, Seoul City Gas and Sunkwang hit the lower limit for three consecutive days, and Daewon Holdings and Sunkwang remained at the lower limit until Thursday.

Innocent investors who borrowed money from stock brokerages to purchase the affected shares fret over a possible forced sale by them requiring certain collateral levels to get out of margin calls. If the collateral ratio falls below a threshold due to the drop in stock prices, investors must deposit additional funds into their accounts by the following day, or the securities firm will execute the share sale two days later to redeem losses.

Many of the accounts involved in the compulsory sell-off are likely to contain some of the eight stocks in question, said an unnamed financial investment industry official.

Suspicions have been raised that manipulation tactics were employed to inflate the price of the affected stocks. Some argue that the massive sell-off occurred because of a sudden liquidation of positions held by manipulation forces that had been propping up the stocks for an extended period of time. This could be done through contract for difference (CFD) accounts.

“Large-scale sell-off began on Monday while there were reports of stock manipulation,” said an unnamed financial watchdog official. “The authorities are investigating whether there were any unfair trade practices before or after the reports.”

A full-scale investigation of the incident is underway. Prosecutors already issued travel bans on ten individuals who are suspected of engaging in deceptive trading practices, which involves buying and selling shares at predetermined prices using mobile phones under the names of other investors to inflate the stock prices.