GIC's 3rd party agent involved in South Korea’s crackdown on naked short selling, fined S$105,000

Singapore’s sovereign wealth fund GIC Private Limited has been fined by South Korean regulators as part of a broader enforcement drive targeting illegal naked short selling in the Korean stock market.

A third-party agent of GIC has since taken full accountability and paid a 120.6 million won (S$105,000) fine, stated The Straits Times.

GIC was among six asset managers and securities firms sanctioned by South Korea's Securities and Futures Commission (SFC) and fined a total of 3.97 billion won (S$3.47 million), reported The Korea Times.

The incident involving GIC happened in 2022 and was a result of a sell order of 8,415 shares worth 666.1 million won (S$582,000) for Hotel Shilla, a South Korean luxury hotel chain.

Naked short selling

Short selling is an investment strategy where a trader borrows shares of stock from another investor and sells the borrowed shares at current market prices.

Once the stock drops in price, the trader buys back the stock to return it to the lender.

Traders engaging in short selling keep the difference as profit.

Illegal or naked short selling occurs when a trader sells shares that they do not own and have not borrowed, increasing the risk that the seller fails to deliver the shares back to the investor by the settlement date.

Naked short selling can distort markets by creating a fake supply for shares and artificially influencing prices, undermining confidence as buyers may not receive the shares they were promised.

GIC's third-party agent at fault

In response to Mothership's queries on Jan. 22, a GIC spokesperson stated that “The incident was due to the operational lapses, errors and breaches by GIC’s third-party agent of its contractual arrangement with GIC, which resulted in the short sale violation."

GIC added that the agent had accepted full accountability to GIC for its lapses, hence the agent had fully borne and paid the financial penalty for and on GIC's behalf.

“GIC is a long-term investor and does not engage in uncovered short sales. We have been investing in Korea for over two decades, and it remains an important market for us.”

People close to the matter noted that the SFC's act of cutting GIC's fine by half to 120.6 million won (S$105,000) was highly unusual.

SFC cited GIC's status as a foreign public institution, making "involvement in unfair trade and non-payment of dues highly unlikely" and noting that there are "no gains from violations, only losses".

Tougher regulatory stance

The Korea Times stated that the scale of files is indicative of a tougher regulatory stance and a policy shift towards "zero tolerance" enforcement.

Norway-based Pareto Securities was imposed with the heaviest penalty of 2.26 billion won (S$1.97 million).

The others sanctioned included Canada’s Alberta Investment Management Corp at 546.9 million won (S$477,800), US-based Invesco Capital Management at 532.3 million won (S$465,000).

South Korea's Shinhan Asset Management was fined 370.6 million won (S$323,800), followed by Hong Kong's Northern Trust, which was fined 141.7 million won (S$123,800).

Top photo from GIC website and The Shilla Seoul/Google Maps