Financial authorities, including the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS), have uncovered allegations of stock manipulation related to a Chinese company, hereinafter referred to as Company A, which is listed on the KOSDAQ in South Korea. These allegations suggest that the company’s executives and individuals associated with it artificially inflated its stock price in an attempt to facilitate a significant capital increase.
The FSC’s Securities and Futures Commission (SFC) announced on Oct. 23 that it held its 18th regular meeting during which it reported executives associated with Company A to the prosecutor’s office on suspicion of stock price manipulation.
Company A is a Chinese-based company with a market capitalization of less than 100 billion won (US$74.02 million) that conducts its actual operations through a subsidiary within China. To list its headquarters on the South Korean stock market, it adopted an offshore special purpose company (SPC) structure located in the tax haven of the Cayman Islands.
According to the SFC, financial regulatory authorities report that during a five-month period in 2017 to 2018, the largest shareholder and CEO of Company A, Chinese national Mr. B, along with another Chinese national, Mr. C, who resides in Korea and is in charge of Company A’s Korean liaison office, placed approximately 34,000 orders for stock price manipulation, artificially inflating Company A’s share prices.
At that time, Company A’s stock price was consistently declining, and even after announcing a decision for a paid-in capital increase to raise tens of billions of won, the stock price continued to drop. To address this, they aimed to keep the new share issuance price at a certain level during the calculation period. They eventually settled on the lower price between the first and second issuance prices. By manipulating the stock prices, they were able to exceed their targeted fundraising amount.
Mr. C, the head of Company A’s Korean liaison office, allegedly opened multiple undisclosed accounts in both his name and those of his family and acquaintances. Subsequently, he provided account information to a Chinese stock manipulation “expert” who used this information for stock price manipulation.
The stock manipulation expert, operating from abroad, used a Home Trading System (HTS) to submit orders for stock price manipulation. He primarily employed tactics like placing high buy orders, fictitious purchases, and wash sales. When excessive abnormal trading orders were detected from one account, and the orders were refused by brokers, he would switch to different undisclosed accounts, continuously changing the order medium and location to evade surveillance.
Through these tactics, they managed to raise the stock price by approximately 26.8 percent over a period of five months. Financial regulatory authorities have estimated their average bid-ask spread rate to be 11.94 percent.
Financial regulatory authorities have also reported to the prosecution that Mr. C, the head of Company A’s Korean liaison office, is suspected of using information about Company A’s second capital increase in 2019 to dispose of his holdings, thereby avoiding losses of approximately 350 million won.