Rumors and Speculation Mushrooming

The Financial Supervisory Commission (FSC) has set out to tackle ill-founded rumors from spreading in the domestic stock market in order to protect it from issues related to the upcoming presidential election and North Korea. The agency is expanding the scope of its investigation to cover the entire bourse, including the employees of securities companies instigating speculative trading and firms leaking rumor-based investment information.

It is in this context that the Financial Supervisory Service (FSS) also established a special investigation unit on January 9 to crack down on stock price manipulation related to growth concept stocks and unjust trading practices based on rumors regarding North Korea. The unit is analyzing and probing the trading status of shares showing signs of price distortion. “We will launch in-depth investigations on finding any signs of unfair transactions between those setting false rumors afloat and parties or persons concerned with trading,” said the FSS, adding, “We are currently monitoring dozens of accounts, including put option accounts, which have reaped large profits from unconfirmed information on North Korea.”

On January 12, in the meantime, the FSS began an all-out examination of illegal sales activities in regards to shares concerning candidates for the next presidential election, on the judgment that various rumors were getting through to investors via brokerage firms.

Regulatory Authorities Revealing Own Limitations

On the background of the establishment of the investigation unit is the false rumor that a light water reactor exploded in Yongbyon, North Korea. It was first leaked at 1:58pm, January 6 and dragged the Korea Composite Stock Price Index (KOSPI) down by 42 points in just 13 minutes. In the same session, the stocks of companies such as Daebong LS, a radioactive measurement equipment manufacturer, hit the ceiling in less than one hour. Though the impact of concept growth stocks linked to the presidential election has been rather limited to themselves, those in connection with North Korea shook the market across the board, which is why the FSS is so sensitive to such hearsay information.

The foundation of the new unit implies how serious such rumors are to the soundness of the local capital market. In fact, the FSS and Korea Exchange (KRX) have already been operating a joint team for the exact same purpose. It has looked into the so-called theme stocks and gossip in the market on an ongoing basis. However, the market disturbance by them has been much exacerbated these days with the team revealing its limitations.

The new unit is different from the joint team in that it deals with smartphone and social networking site-related information as well as Internet and online messengers. In addition, it has the right to skip deliberation by the Capital Market Investigation and Deliberation Committee if that the illegal acts taking advantage of such rumors do not subside. The committee, an advisory body to the Securities & Futures Commission, is responsible for judging whether an account involved in unfair trading should be investigated or not. Unlike the joint team, the unit can immediately bring charges against any person without having to go through the deliberation process, in order to respond swiftly to wild rumors. Nowadays, rumors in the stock market are spreading faster and through more diverse channels than ever before. Those in the past were circulated mainly on the Web and online messengers, leaving the disseminators’ IP addresses and LAN card serial numbers to facilitate investigation. The advent of smartphones, however, has made it tougher to find out who gives rise to such rumors. Besides, the FSS is not authorized to access messages exchanged between smartphones because it is information given and taken by individuals.

“We remove all messages between individual users from our servers every week,” said the CEO of a domestic social networking service provider, adding, “Though the list of senders and receivers remains, the content of the dialogues are erased completely and not restored.” This means that the FSS could lose vital evidence at any time.

At present, investigations into stock price manipulation and speculative rumors are conducted on an inter-agency basis. When the KRX detects a suspicious account, the FSS checks the trading history and calls in the police. If a charge of illegal trading is confirmed, the FSS reports it to the prosecutor’s office. The two then seek to establish any correlation between those spreading rumors and and unauthorized profits.

The KRX, meanwhile, issues a pre-warning against shares whose closing prices repeat the increase higher than 75% for five days in a row or does an increase of over 150% for 20 days, and against investors who gain repeatedly the earning rates higher than 100% during the most recent 20 trading days. The margin trading of those shares is then restricted. Investors have to deposit the same amount of customer margin as the actual turnover and substitute securities lose their effect. When the upper limit price is reached for three consecutive days in spite of such measures, it is banned from being traded for one day.

The FSS is given the names of these warned shares by the KRX and launches investigations. The unit traces the sources of rumors while also requesting a police investigation. It also sorts out accounts that made profits in order to identify owners and traders.

“Due to social networking services, the dissemination of rumors has become more complicated and stratified,” said Kang Jeon, who is leading the special investigation unit, adding, “The FSS traces profitable accounts and transfers work related to rumor dissemination to the National Policy Agency since it is better at the job than we are.” He went on, “Those disturbing the market can’t hide forever. They are destined to be caught, no matter how much time it takes, even if they run away overseas.”

Nevertheless, the unit’s limitations are rather clear. Under the current Capital Market Law, it is impossible to punish anyone who stirs up a rumor without actually trading shares. Though he or she may be subject to a light penalty for violation of the Telecommunications Security Protection Act and so on, it does not hold the person responsible for capital market confusion and the others’ investment losses. With the situation as it is, manipulators are running teams for bandying rumors and trading shares separately in the form of cell groups.

Another problem is the habitually belated response of the FSS. A securities company CEO pointed out, “It’s hard for me to understand the effectiveness of the investigation as the theme stocks associated with the presidential election have come to stay for long.” He continued, “The procrastination isn’t something that began yesterday, though.”

Lenient Punishment Adding to Stock Market Vulnerability

Compounding the matter is the fact that most price manipulators have been able to get away with light punishment. About 80% of repeat offenders have been sentenced to probation for first-time offenses. According to a local newspaper, a total of 149 relevant cases were brought to court between 2006 and 2010, with 129 of them, or 86.6%, sentenced to a stay of execution. 30 out of the 33 cases involved with more than five billion won of unfair profits received the same ruling during the same five years.

Furthermore, such crimes often go unchecked. “Sometimes, it takes a couple of months for agencies to track down an offender and investigations are prolonged owing to new criminal techniques, only to give them enough time to go overseas with big bucks,” said an official at the FSS.