The naked face of securities firms

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The naked face of securities firms

Shares of Natural Endotech, which is accused of using the banned ingredient Cynanchum auriculatum Royal in its Cynanchum wilfordii products, has hit the daily limit 17 times since April 22. Shares traded at 86,600 won ($79) on April 21, the day before the Korea Consumer Agency released the report, plummeting to one-tenth of the price to 85,500 won on May 18.

Then on May 19, it hit the daily upper limit. Securities firms publishing corporate analysis reports should be on alert. But in the past six months, the companies that have published 17 reports on Natural Endotech and recommendations to buy its shares have remained quiet. On April 23, Natural Endotech held a conference call with analysts and investors, but Samsung Securities and Nomura were the only two companies to issue related reports and modified the investment recommendation.

While analysts stay indifferent, individual investors began trading Natural Endotech shares, and the transaction surged. Brokerage firms that charge a fee for buying and selling stocks for clients made money. The momentary advice from specialists was most needed, they abandoned the investors on one side while making money out of it on the other.

An analyst at a major firm claimed it was customary and that the company’s unofficial position was to remain quiet when problems arose to avoid legal liability. Because this particular issue garnered media attention, some companies made a belated announcement to exclude Natural Endotech from the list of companies they analyze.

“It is rather cowardly to take our hands off the issue without even writing a report explaining the decision,” said the analyst, “But there is no other way.”

Customary practices grow in legal blind spots. On May 15, the Financial Supervisory Service called in compliance officers from securities firms and asked them to manage the case, but it drew the line at the publication and management of analytical reports, which are under the industry’s autonomous control. The Korea Financial Investment Association says firms are required to announce whether they exclude a certain item or don’t publish a report on it for more than six months after it has been mentioned in more than three reports annually. But it does not regularly verify whether this rule is enforced.

When the Kospi remained in the boxed range for years, securities firms extensively restructured to reinvent themselves into advanced companies that prioritized clients’ profit over short-term earnings. However, that justification was a vain promise, as the fake Cynanchum wilfordii case demonstrates. When the stock price surged, they published a series of reports recommending buying to encourage individual investors, but when the accusation was raised, they remained indifferent. But they made sure they pocketed the transaction fees.

The author is a business news reporter for the JoongAng Ilbo.

JoongAng Ilbo, May 20, Page 29

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