Financial watchdogs crack down after suspicious stock crash

Financial regulators are tightening oversight over brokers and unlicensed investment advisories to prevent illegal trades after a handful of stocks crashed and wiped out more than $9.7 billion within a month.

Financial Supervisory Service Gov. Lee Bok-hyun speaks during a policy debate in central Seoul on April 12. [NEWS1]

Financial regulators are tightening oversight over brokers and unlicensed investment advisories to prevent illegal trades after a handful of stocks crashed and wiped out more than $9.7 billion within a month.

Financial Supervisory Service (FSS) Gov. Lee Bok-hyun told its executives Tuesday to create a task force designed to detect and investigate illegal acts by quasi-investment advisory businesses, which provide advice to investors in return for membership fees.

The Capital Markets Act bans investment advisories without a certified advisory license from receiving investment funds from its clients.

The remarks followed last month's crash of eight stocks, including Samchully and Daesung Holdings, which resulted in the evaporation of more than 13 trillion won ($9.7 billion) in market capitalization in just three weeks.

Ra Deok-yeon, who ran a quasi-investment advisory firm, is a key suspect and is being investigated over his involvement in the crash.

Arrested on charges of stock manipulation last week, Ra and affiliated people are believed to have illegally profited 264.2 billion won through stock manipulation.

Damages persist caused by businesses “that habitually attract and conduct illegal trades by attracting investors through SNS and YouTube by riding on people’s anxiety of financial market volatility,” Lee said.

The FSC chief also ordered measures to restore investor trust, including possibly strengthening the FSS’s ability to collect and analyze data.

The Financial Services Commission (FSC) is looking over more than 3,000 derivative accounts for signs of stock manipulation linked to the stock crash.

The stock plunge was accelerated by the liquidation of contracts for differences (CFD), a leveraged derivative that dumps shares at the opening price if deposits fall below a certain percentage.

Opening an account that can trade CFD became easier in 2019 when the FSC relaxed the criteria for obtaining a professional investor license required to run an account .

“The FSC, FSS and the Korea Exchange are launching an inspection of some 3,400 CFD accounts in connection with price manipulation and unfair trades,” said the FSC in a statement Sunday. The inspection will be completed in two months.

CFD accounts issued by 13 domestic and five overseas brokers held between January 2020 through April 2023 are subject to inspection.

The FSC vowed to strengthen surveillance of “evolving stock manipulation methods.”

Alleged victims who lost money in the latest stock crash argue they lost at least 135 billion won.

Some of them are preparing to file a civil complaint against brokers such as Kiwoom Securities and eBest Investment & Securities, arguing that disclosures related to the risks of trading through investment accounts were not properly made.

BY JIN MIN-JI [jin.minji@joongang.co.kr]