KOREAN REPUBLIC: FSC Impose 2.4bn Won Fine Following Series of Large Short Selling Transactions

The Financial Services Commission of Korea (FSC) has fined 14 individuals a combined 2.4 billion won (US$2.1 million) for using undisclosed information to illegally profit through stock trading of Hanmi Pharmaceutical, a leading local drug firm, in September 2017.

Additionally, the largest ever fine against an individual of 1.34 billion won, was imposed since the regulation was first enacted in July, 2015.

The FSC’s move is a follow-up measure after Seoul prosecutors had found in December that the 45 offenders, including Hanmi employees, had engaged in strategic stock transactions to reap illegal profits worth 3.3 billion won based on inside information about a deal’s collapse between Hanmi and Germany’s Boehringer Ingelheim.

Of these 45 offenders, the prosecution had asked the FSC to investigate 25, who avoided indictment as second, third, fourth and fifth information receivers. Among these 25, 11 were exempt from the fine. Those who were prosecuted were predominantly Hanmi employees and retail investors who traded using undisclosed inside information, comprising mostly of friends and family members of Hanmi workers.

The Financial Services Commission, was, however, unable to find concrete evidence of short sellers’ (including institutional investors) use of non-public information, though the sequence of events backed the allegation.

In March 2017, the FSC began disclosing stocks that experience a heavy influx of short sales and suffer steep falls after the market closes, and then suspending the stocks’ trading the next day (E.g. Com2uS in April 2017). The efficacy of the measure though has been questioned because only the overheated shares – not the entities behind the short sales – are revealed.

The regulator will also ban short sellers from buying new securities on a secondary offering if they placed a short position on the stock during the offering period. Sellers often borrow shares on securities lending for the secondary offering then buy the discounted shares and return them, a strategy that could generate price differences.

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