Penalties for Naked Shorting Selling Too Light

Goldman Sachs could face up to 1 billion won (US$923,788) in fines if its naked short selling allegations prove true. The financial authorities said they would take stern measures against the Seoul branch of Goldman Sachs Group if it is found to have been engaged in the illegal practice. Yet the 1 billion won can hardly be said to be a heavy fine. The upper limit of the fines for an individual company is limited to 10 times of the fines per naked short selling transaction. Some say that this is nothing but a slap on the wrist.

The Seoul branch of Goldman Sachs placed short selling orders for 350 KOSPI and KOSDAQ stocks on May 30. Of the 350 stocks, the Seoul branch failed to buy back 20 stocks totaling about 1.38 million shares in time until the deadline for settlement on June 1, indicating the 20 stocks were not in its possession at the time. Each of the 350 stocks can be considered a separate transaction.

A company which is involved in naked short selling faces up to 100 million won (US$92,379) of fines for each transaction. The fines were limited to 50 million won (US$46,189) before but it was raised to 100 million won (US$92,379) last year. When each of the 350 stocks are all considered an individual transaction, the fines will go up to 35 billion won (US$32.33 million). However, the ceiling of the fines for an individual case is 10 times the fines for a transaction. In short, 1 billion won (US$923,788) is the limit. The financial authorities will impose a fine against Goldman Sachs International for mismanagement of the Seoul branch.

The Financial Supervisory Service (FSS) launched an investigation on June 4, saying the probe would continue through this week. Since Goldman Sachs International is an investment company, not a financial institution, the FSS is not able to punish any employees or executives who were involved in the alleged naked short selling.

Goldman Sachs International blamed the lenders for unilaterally canceling the transactions with its Seoul branch. It said that the stock lender suddenly canceled the contract to lend its shares but the Seoul branch placed a short selling order for the 20 items without knowing this.

Some also point out that the Capital Market Act should be revised to prevent naked short selling. The Financial Services Commission is preparing a revision bill to the act that imposes criminal penalties for violators of the shorting selling regulations and prescribes the collection of the profits earned through naked shorting.

In the U.S., a company or person who places a short selling order and fails to settle the transaction on purpose faces US$5 million (5.3 billion won) of fines or up to 20 years in prison.