Il­le­gal short sell­ers face up to W90 mil­lion fine

The Korea Times - - FRONT PAGE - By Park Jae-hyuk [email protected]­re­

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.

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