It has emerged that an activist fund official was also involved in a 100 billion won stock-manipulation case in which wealthy figures such as hospital directors and cram school directors colluded with financial experts. The stock in question is a KOSPI-listed company that faced a management control dispute last year. The market suspects it is Company D. As of 1:39 p.m. on the 23rd, Company D was plunging by more than 10%.
For now, the financial accounts of the suspects mobilized for the scheme have been frozen, but financial authorities said they would consider market measures with the Korea Exchange if the stock continues to plunge. There may be more related accounts that have not yet been identified, and retail investors may continue to sell.
A joint response team to eradicate stock manipulation, launched by three institutions—the Financial Services Commission, the Financial Supervisory Service (FSS), and the Korea Exchange—held a joint briefing at the Korea Exchange in Yeouido, Seoul, on the 23rd, saying, "We detected an ongoing 100 billion won stock manipulation scheme, executed search and seizure, and froze the suspects' assets."
Lee Seung-woo, head of the joint response team (Financial Supervisory Service deputy vice governor), said, "There were seven targets of the search and seizure, but the investigation will continue," adding, "The payment suspension was recognized as having substantial indications, and prosecutors also expressed the view that a payment suspension is necessary."
The stock-manipulation ring consisted of super-rich individuals who run general hospitals and large cram schools, former executives of well-known private equity funds, and financial experts such as branch managers at financial companies. They cleverly evaded surveillance by splitting trades across dozens of accounts and engaged in tens of thousands of high-priced wash trades and matched orders over a long period to systematically rig prices. The stock in question rose to about twice its pre-manipulation level over one year and nine months. The following is a Q&A with Lee Seung-woo, head of the joint response team.
─Please explain the stock manipulation techniques.
"The suspects targeted stocks with low daily trading volume and used techniques such as wash trades and matched orders. Wash and matched trades refer to repeatedly conducting trades that have no economic benefit, even incurring transaction costs. By repeating such wash and matched trades tens of thousands of times, they increased trading volume, secured a significant portion of the float, and then created an upward trend through various price-rigging orders."
─What is the relationship among the suspects?
"At this point, the seven suspects are in collusion. Collusion can generally be identified through the flow of funds, such as linkages among accounts. We also determined there was collusion through family ties and senior-junior relationships."
─Financial experts such as branch managers at financial companies are involved. Is there any financial company likely to be affected with regard to this issuance of short-term notes?
"Of the seven search-and-seizure targets, three are affiliated with financial institutions, and none are in positions to influence the issuance of short-term notes or licensing for securities firms. That means there are no securities firm executives."
─Please describe which stock it is.
"The stock is a KOSPI-listed issue and is specified as having had a management control dispute. It is showing intraday declines today, which suggests the rumor is spreading to some extent. One of the suspects is linked to an activist fund, and whether the management dispute was intentionally targeted requires further investigation."
─You said about 100 billion won worth of shares in the accounts have been frozen. Eventually they would have to be sold later, which seems likely to have a big impact on the stock.
"We already think the stock could plunge if it becomes known through the suspects. Therefore, we deem the 100 billion won worth of shares they hold cannot be sold at present. If retail investors keep selling and a crash occurs, we may need to consider market measures with the exchange."
─You said seven people from various industries colluded. Is any suspect known to have a similar past record, or are there similar cases?
"None of the suspects has a past record related to price-rigging unfair trading. However, some of them have been professional stock investors, so even without prior records, their methods are highly sophisticated. There were signs of actively manipulating IPs, making detection difficult. It is possible there were similar cases in the past, but it is true they do not easily get caught by the surveillance of the exchange or the Financial Supervisory Service."
─What are the next steps?
"We conducted the search and seizure today, and we will now analyze the materials and enter a full-fledged investigation. Going forward, the Financial Services Commission, which has compulsory investigative powers, will lead, and the Financial Supervisory Service will provide support. Also, from the search-and-seizure stage, we must follow criminal procedures by analogy, so we will go through consent procedures with the suspects. We will also conduct forensics on electronic devices."
─Could the "one-strike-out" rule for unfair traders, such as restrictions on executive appointments, apply in this case?
"We expect active discussions after the Securities and Futures Commission's final decision is made."