Morgan Stanley faces scrutiny in Korea for suspected insider trading

Investment bank dumps SK hynix shares, just two days before releasing ‘sell’ report

SK hynix's headquarters in Icheon, Gyeonggi Province (Newsis)

Global investment bank Morgan Stanley has come under the scrutiny of local authorities, following the suspicious execution of a sell order on SK hynix shares made before releasing a bearish report on the chip giant’s outlook.

On Sept. 15, during the Chuseok holiday, Morgan Stanley’s Asia-Pacific desk published a report titled “Winter Looms.” It suggested a skeptical projection of the company earnings, citing a weak demand for general dynamic random-access memory, or DRAM, and an oversupply of AI-specific high bandwidth memory.

The report slashed SK hynix’s target price to 120,000 won ($90), nearly half of the 260,000 won projection in June. It also downgraded the investment recommendation for SK hynix from "overweight" to "underweight."

The report faced backlash from local investors and the market, accusing Morgan Stanley of purposely suggesting a gloomy outlook on SK hynix to pull down its stock price. Local analysts also released reports, refuting the claims made by Morgan Stanley.

Yet investor sentiment on local chip shares weakened. SK hynix’s stock price dropped by 6.1 percent to 144,700 won on Sept. 19, the first trading day after the holiday. The plunge marks a sharp loss from how the stock price stood on July 11 at 248,500 won. The shares made a slight recovery Monday, closing at 162,000 won, up 4,900 won or 3.12 percent from the previous trading day.

Furthermore, Morgan Stanley's Seoul branch is facing suspicion of an insider trading charge, having executed a sell order for 1.01 million shares of SK hynix on Sept. 13, two days before the report was released.

The amount is nearly three times that of the sell order for 351,228 shares made by the investment bank the previous day.

Korea Exchange, the country’s sole bourse operator, launched an investigation into the allegation of illegal trading on Morgan Stanley. The Financial Supervisory Service, the top financial watchdog here, decided to look into the case as well, examining whether Morgan Stanley violated its obligations stated by the Capital Markets Act.

The act prohibits trading securities mentioned in a report for individual gain from when the research is finalized until 24 hours after it is publicly released.

Further suspicion looms as the investment bank had raised the target price on SK hynix to 300,000 won in a report issued in June, citing an AI-driven super cycle. At the time, the firm projected SK hynix's operating profit for this year to jump from 24.75 trillion won to 30.3 trillion won.

Yet, some also suggested the local market is overreacting to a typical “sell” report as it is not used to handling a skeptical outlook.

According to local market intelligence firm FnGuide, while domestic securities firms have issued a total of 13,076 reports this year as of Friday, only three were “sell” reports, taking up 0.02 percent. Of the reports, 93 percent recommended "buy," and 6.96 percent suggested "hold."

In the same period, over 10 percent of the reports issued by global investment banks here such as Morgan Stanley, Goldman Sachs, Merrill Lynch and JP Morgan were “sell” reports.

“In Korea, a 'sell' report exposes analysts to complaints from companies and investors. Even brokerage houses are reluctant to publish a 'sell' report as it could hinder the firm’s relationship with the mentioned company,” an official from a local brokerage house said.

By Im Eun-byel(silverstar@heraldcorp.com)