Illegal short sellers face up to W90 million fine
The Financial Services Commission (FSC) announced a revision to its regulations on the “ill-use” of investment plans Thursday that will allow it to impose up to a 90 million won ($75,800) penalty for a single case of illegal short selling.
According to the planned revision, the financial regulator will be able to add another 50 percent to an initial penalty for a single violation of short selling regulations if it is related to unfair trade practices.
Currently, the FSC can fine a company up to 60 million won for a single act of illegal short selling. Once the revision goes into effect, the maximum penalty will be 90 million won.
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 the lower price.
Naked short selling, an illegal but common practice, refers to conducting short selling without actually borrowing the stocks first. Given that financial companies can input the number of borrowed shares into a stock trading system without prior approval from lenders, illegal short selling has been prevalent on the Seoul bourse.
The FSC said it was giving public notice of the planned revision until Nov. 26 and will implement it within the first quarter of 2020.
The regulator also said the recent measure is a follow-up to several others — of which some have been implemented — it announced in May 2018 in a stock trading rule reform plan. This was to prevent a recurrence of a trading blunder similar to one at Samsung Securities when an employee transferred the wrong number of shares — many times that which were supposed to be moved — to company employees, some of whom sold them for an immense profit.
“Based on our zero-tolerance policy, we will take strict measures, when we uncover violations of short-selling regulations, such as naked short selling,” an FSC official said. “As the fine is imposed on each violation, the total amount will skyrocket, if a corporation conducts a lot of illegal short selling.”
Goldman Sachs was slapped with a record-high 7.5 billion won fine in November 2018, after the U.S.-headquartered investment bank’s London subsidiary was found to have conducted illegal short selling on the Korean stock market.
To date, the FSC has been criticized for tolerating illegal short sellers.
Recent data given by the financial regulator to Rep. Joo Ho-young of the main opposition Liberty Korea Party showed it imposed fines on just 45 violations among 101 cases of naked short selling uncovered after 2010.
The same data showed 94 of these trades were conducted by foreign companies.