Regulator transfers corporate hunters to prosecutors for private CB abuse

A signboard of the Financial Supervisory Service. [Photo by Han Joo-hyung]

South Korea’s financial authority has identified 84 billion won ($65.9 million) in illicit gains involving private placement convertible bonds (CBs) and handed over 33 suspects to prosecutors.

The Financial Supervisory Service announced Tuesday that it has completed its investigation into 14 out of 40 unfair trading cases where private placement CBs were frequently issued in a short period of time and the stock price surged for no reason at the time of stock conversion.

The remaining 26 cases are still under investigation.

Of the 14 cases where the investigation was completed, 10 cases were related to fraudulent transactions. The cases involved falsely announcing new business ventures, such as developing a cure for Covid-19, to deceive investors.

There were also three cases of market manipulation to drive up the price of CB convertible shares and three cases of using undisclosed information to sell convertible shares before negative news emerged. One case involved multiple types of unfair trading practices.

For example, five people, including a former chief executive officer of a certain company distributed a press release stating that they were pursuing a biotech business and issued a large-scale private placement CB.

However, the underwriter of the private placement CB was a paper company and had no ability to pay, and the company had no intention of actually promoting the business. The former CEO and others made tens of billions of won by creating a favorable situation to boost the stock price and sell it at a high price.

According to the FSS, most of these cases took advantage of the trend of various theme stocks emerging during the pandemic. They issued private placement CBs under the pretext of attracting investments to develop vaccines and treatments or to enter new businesses related to Covid-19, such as diagnostic kits and mask production.

In the process, they falsely disguised their financing by concealing that they used debenture funds or disclosing the issuance of private CBs with no possibility of capital payment.

CBs were used in these schemes because they are easier to issue than stocks. CBs can be issued with only a board resolution without filing a securities registration statement. The securities report must detail the purpose of using the funds, the company’s management situation, and business-related risk factors for review.

Many of the perpetrators in unfair trading using private placement CBs had previous records of such activities, according to the FSS. Out of the 40 cases under investigation, 25 were linked to repeat offenders and corporate hunters.

“It has been confirmed that private placement CBs are being abused as a major tool for illicit gains by capital market manipulators,” an FSS official said.

Meanwhile, the Korea Exchange announced on Tuesday that its special investigation team for contract for difference (CFD) trading conducted an intensive inspection of 22,522 CFD accounts of 13 domestic securities firms for unfair trading practices and notified financial authorities of its findings.

According to the Korea Exchange, the main feature of the identified unfair transactions was that stock manipulators utilized the anonymity and leverage of CFDs.