Prosecutors raid HSBC, BNP Paribas offices in short selling investigation

The Supreme Prosecutors' Office building in southern Seoul [NEWS1]

Prosecutors investigating illegal short selling allegations against foreign investment banks raided the Seoul offices of BNP Paribas Securities, HSBC Securities and HSBC Korea on Thursday.

The District Prosecutors' Office in southern Seoul officially launched a mandatory criminal investigation against the investment firms, which are alleged to have violated the Capital Markets Act by committing naked short selling, according to legal sources.

Naked short selling is the selling of tradable assets without borrowing them first, which is illegal in Korea.

The latest development follows the financial authorities’ decision to slap BNP Paribas and HSBC with combined fines of 26.52 billion won ($198.6 million), the heaviest-ever penalty for the practice in the country, in December.

The Financial Supervisory Service (FSS) found last October that BNP Paribas' Hong Kong operation had shorted some 40 billion won against 101 stocks, including those of Kakao, from September 2021 to May 2022. HSBC allegedly shorted roughly 16 billion won against nine stocks from August to December 2021.

The financial regulators reinstated a ban on the short selling of stocks in November, following the scandal, and vowed to improve the system to eradicate illegal short selling. The ban, which will last through the end of June, also invited criticism for its potential to damage foreign investors' trust in the Korean market.

President Yoon Suk Yeol called for the stricter regulation of naked short selling in November, saying that such practices “will make it difficult for the market to set a fair price and cause losses to retail investors, and also make investors lose trust and move away from the market” in November.

FSS Gov. Lee Bok-hyun recently mentioned that the Korean government is working with Hong Kong's financial authorities on a potential joint probe into illegal short selling by global investment banks. The results of those investigations are set to be announced as early as this month.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]