Listed company A saw its profit structure worsen, with a drop in revenue and a widening operating loss. In this situation, company insiders each sold large blocks of their holdings before the earnings disclosure, and the share price plunged. Afterward, A had its trading suspended with an "audit opinion: qualified."Listed company B disclosed what looked like share-price boosting moves, including a zero-capital merger and acquisition (M&A) that changed the largest shareholder, reports of pushing into new businesses, and the issuance of false convertible bonds (CB). But the largest shareholder actually sold equity, sending the share price sharply lower, and grounds for delisting later arose, including an "audit opinion: adverse or disclaimer."
The Market Oversight Commission of the Korea Exchange (KRX) said on Feb. 26 it will issue an "Investor Alert" to remind investors of cautions, including unfair trading practices, as the deadline approaches for submission of audit reports by companies with December settlement of account.
The Korea Exchange (KRX) said that, in connection with settlement of account, marginal companies vulnerable to unfair trading share five major characteristics.
First, the share price and trading volume of marginal companies with weak operating results and financial structures swing sharply without cause as the deadline for submitting audit reports nears. Anomalous patterns can appear where prices rise despite negative disclosures such as worsening settlement results or being designated for administrative issues.
They attempt external financing such as issuing CBs and bonds with warrants (BWs) and paid-in capital increases via third-party allotments, while shrinking operating cash generation. With those funds, they may pursue M&A in fields unrelated to their existing businesses and then sell again, showing inconsistent behavior.
They also often fail to submit audit reports within the deadline. The Korea Exchange (KRX) noted this frequently implies large gaps in views between auditors and corporations, and that an external auditor's adverse or disclaimer opinion often triggers delisting grounds, warranting caution.
It is also evident that governance is relatively weak, such as when the largest shareholder's equity stake is low or changes in the largest shareholder occur frequently. The new largest shareholder can be an investment association that is hard to verify or a non–externally audited entity. In particular, weak internal controls create high risks of embezzlement and breach of duty allegations.
Lastly, to facilitate smoother financing, they report favorable catalysts to the media—such as adding business purposes or pursuing new businesses—or spread unverified rumors online related to settlement of account.
The Market Oversight Commission plans to intensively monitor whether unfair trading is involved when marginal companies' share prices and trading volumes fluctuate sharply without specific reasons.
It also plans to respond swiftly—through inquiries for disclosure, market alerts, and settlement-period planned surveillance—when it detects signs of market order disruption, such as theme-stock formation or the spread of false or exaggerated rumors online, to minimize investor damage.
An exchange official said, "If we judge that suspicions of unfair trading are high, we will work closely with relevant agencies to ensure that those responsible are punished through a thorough investigation," adding, "Investors are urged to review accurate information on listed companies and invest prudently."