Goldman Sachs faces fine for alleged naked shorting
The financial authorities said they will take stern measures against the Seoul branch of Goldman Sachs Group for alleged “naked short selling.” Short selling refers to the sale of borrowed shares in the hopes of making a profit from a price fall by buying the shares back at a lower price.
Naked short selling is the practice refers to conducting short selling without actually borrowing the stocks first and is prohibited in Korea.
According to the Financial Supervisory Service (FSS), Thursday, Goldman Sachs International placed a short selling order via its Seoul branch for 350 stocks on the bourse, May 30.
Of the 350 stocks, the Seoul branch failed to buy back 20 or about 1.38 million shares in time, indicating the 20 weren’t in its possession at the time. They were reportedly three KOSPI and 17 Kosdaq stocks worth about 6 billion won ($5.6 million).
“It seems like Goldman Sachs International committed to a short selling deal without confirming if the shares were actually borrowed,” said an FSS official.
“The FSS is currently looking into the case, but it has confirmed through the case that naked shorting is systemically possible in the nation’s stock market. There is also no instrument to oversee such a practice at this point. Securities firms are the only players here that could closely examine whether investors are committing naked short selling.”
The financial overseer launched an investigation June 4, and said it will continue through this week, noting it could take stern action against Goldman Sachs.
Goldman Sachs International blamed the borrower for unilaterally canceling the transaction with its Seoul branch.
“The stock lender suddenly canceled borrowing shares with us. But our Seoul branch placed a short selling order for the 20 items without knowing this,” Goldman Sachs said in an explanation submitted to the FSS.
Naked short selling has been banned in the nation’s stock market since 2000, but concerns are mounting among private investors as they believe they lose in the market because such a practice is still prevalent among institutional investors.
The naked short selling case involving Goldman Sachs came a week after the FSS announced a set of regulations following Samsung Securities’ “fat-finger error” where the brokerage mistakenly gave 2.8 billion non-existent company shares to its employees as dividends instead of 2.8 billion won.
Lloyd C. Blankfein, Gold- man Sachs chairman