South Korea’s financial authorities have imposed the biggest ever fine on Goldman Sachs Group for its naked short selling activities.
The Securities & Futures Commission (SFC), an investigative body of the Financial Services Commission (FSC), decided on Nov. 28 to impose a 7.5 billion won ($6.65 million) in fine on Goldman Sachs Group's subsidiary Goldman Sachs International for violating the short selling rules.
Out of the 7.5 billion won fine, 7.48 billion won (US$6.64 million) is for short selling activities without securing underlying assets and the remaining 16.8 million won (US$14,887) is for its failure to report the net balance of short selling stocks.
Previously, the Financial Supervisory Service (FSS), which carried out an inspection on Goldman Sachs, recommended the SFC to charge a 1 billion won (US$886,132) fine. However, the SFC decided to levy more than seven times higher fine than the amount suggested by the FSS.
According to the SFC, Goldman Sachs International placed short selling orders for 156 listed stocks worth 40.1 billion won (US$35.53 million) between May 30 and 31 without securing those stocks. By market, they were 13 KOSPI stocks and 83 KOSDAQ stocks.
The company was also found to have failed to file a disclosure with the regulator on 210 stocks it actually short sold from June 2016 to June 2018.
It was found that the naked short selling occurred as the person in charge of borrowing at Goldman Sachs tried to enter the stocks into the “online bargaining” menu on the screen of the stock lending and borrowing system and ask lenders for borrowing but he entered the stocks into a “borrowing result manual input” menu by mistake.
However, the suspicions that Goldman Sachs were involved in unfair trading practices, such as market price manipulation and use of undisclosed information, were not confirmed.
The primary reason the financial authorities imposed the largest fine on Goldman Sachs in history is the great number of naked short sales undertaken by the company. A fine for naked short selling is determined by case. Goldman Sachs illegally traded over 150 items through naked short selling.
Given that fines for naked short selling have never exceeded 1 million won (US$88,613) until now, the latest decision shows the government’s intention to impose a heavy punishment on naked short selling amid a public outcry for the abolition of short selling, according to market experts.
In fact, FSC Chairman Choi Jong-ku said, “We will tighten the procedures for short selling and impose steeper penalties on any investors involved in naked short-selling.” Critics pointed out that the domestic short selling market has become exclusive for foreign investors. Lawmakers expressed great concern over naked short selling during the audit held at the National Assembly in October.
As the financial authorities have taken weak disciplinary action on naked short selling so far, individual investors have claimed that foreigners and institutions, which are the main force of short selling, are committing illegal acts like naked short selling using the inadequate system, calling for the abolition of short selling altogether.
According to lawmaker Kim Byung-wook of the ruling Democratic Party, there were 71 banking investment companies were sanctioned for carrying out naked short sales from January 2014 to August 2018. However, 45 of them, or 63 percent, were simply cautioned, while the remaining 26, or 37 percent, were fined. The largest amount of the fines was 60 million won (US$53,168), only 60 percent of the upper limit of 100 million won (US$ 88,613). As there was a growing criticism about the soft punishment amid a growing series of naked short selling cases, the financial regulator has made Goldman Sachs an example.
In consideration of the public outcry for the abolition of short selling, the financial authorities is preparing for the revision of the capital market act to toughen penalties. The FSC is currently considering a measure to impose a sentence of less than 10 years and a fine 1.5 times the amount of unfair profits made through illegal short selling transactions when anyone caught violating short selling rules.
It is also planning to establish a stock balance and trading monitoring system that can detect abnormal transactions, such as more trading than holding stocks and naked short selling, in real time as soon as possible in order to improve the system.