Two investment banks to face penalties for $40 million worth of illegal short selling

Korea’s financial watchdog reported new cases of naked short selling by two additional global investment banks worth 54 billion won ($42 million).

Financial Supervisory Service Gov. Lee Bok-hyun speaks in a press conference held in central Seoul on Tuesday. [YONHAP]

Korea's financial watchdog found 54 billion won ($40 million) worth of illegal short selling on domestic stocks by two global investment banks amid its continued crackdown on the practice.

The Financial Supervisory Service (FSS) said it will promptly take necessary measures to impose penalties on the banks.

"We will swiftly launch the procedure for sanctions on short selling violations by the two global investment banks and also promptly probe into other global investment banks," the FSS said in a statement Sunday without specifying the names of the banks.

One investment bank shorted two stocks for three months from March 2022 while the other shorted three stocks from January 2022 through April last year, the FSS said Sunday.

One of them repeatedly overstated the number of borrowed shares in its system and failed to detect the repetition before issuing sell orders. The other bank over-counted the number of stocks it owned.

Selling tradable assets without borrowing them first is illegal in Korea.

The financial watchdog said it is strengthening cooperation with Hong Kong's Securities and Futures Commission to tackle illegal short selling effectively.

"Conventional naked short selling by global investment banks is continuously being discovered, and we will continue to strictly investigate and impose strict measures against illegal activities to recover fairness of the capital market and confidence [in the market]," the FSS said.

The financial watchdog has expanded its investigation into global investment banks over illegal short selling since last year.

In December, the FSS slapped BNP Paribas, HSBC and executing brokerage firms with a combined 26.52 billion won for illegal short selling committed between 2021 and 2022 and asked prosecutors to investigate them. It was the heaviest penalty imposed for illegal short selling.

BNP Paribas and HSBC are responsible for the illegal practice of trading assets worth 56 billion won, according to regulators, without specifying the names of the banks.

The financial authorities in November banned short selling of all stocks through the end of June next year to boost market fairness and upgrade the market system, which generated criticisms from foreign investors.

President Yoon Suk Yeol said earlier this month that the ban on stock short selling will remain in place until measures are devised to resolve the damage of short selling on retail investors.

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