South Korea’s financial watchdog identified two global investment banks engaged in naked short-selling orders, a move that is illegal in the nation.

According to the Financial Supervisory Service (FSS) on Sunday, two additional global investment banks were found to be involved in naked short selling, with the amount involved totaling approximately 54 billion won ($41 million).

This is in addition to BNP Paribas and HSBC, previously exposed for their illegal short-selling during the FSS investigation of the top 10 global IBs for their involvement in short-selling transactions between 2021 to 2022.

The FSS suspects the two banks of engaging in illegal shorting on five stocks. “We have expanded the target period and stocks in the investigation as we suspect that similar violations have been repeated,” a FSS official said.

One of the two banks allegedly placed naked short-selling orders for two stocks between March and June 2022. The bank relied on overstated borrowing balances to place the short-selling orders and lacked verification on the duplicated borrowing details.

The second bank placed naked short-selling orders for three stocks between January 2022 and April 2023, often managing stock balances via interdepartmental borrowing and trading when necessary. During this process, errors or mistakes occurred in entering interdepartmental borrowing quantities and confirming the borrowing of stocks, leading to short-selling orders being placed based on incorrect information. “Cases where short-selling orders are based on duplicated borrowing balances during interdepartmental transactions were the most common,” the FSS said.

Observers say that these banks may face civil lawsuits for damages if it is confirmed that stock prices were affected by their illegal activities, given that as much as 54 billion won was involved in their illegal activities while the transactions were concentrated on five stocks. “Although proving the cause-effect relationship between illegal activities and damage will be challenging, as is often the case in capital market cases, there could be room to establish a legal basis for damage once more specific details are revealed,” Barun Law lawyer Han Tae-young said.

The FSS plans to uncover additional cases of illegal short selling by multiple global IBs, with expectations for announcements as early as the first quarter of 2024.

“We will swiftly impose sanctions on the two banks and expand cooperation with foreign financial authorities, including with Hong Kong’s Securities and Futures Commission (SFC), for effective illegal short-selling investigations,” the FSS said.

By Choi Hee-seok and Chang Iou-chung

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