The Hong Kong branch of global investment bank HSBC was acquitted in a first-instance trial on charges of 'illegal short selling.' This case was the first instance of a global investment bank being prosecuted since the criminal punishment provisions for illegal short selling were established in April 2021.
The 13th Criminal Division of the Southern District Court of Seoul, presided over by Judge Kim Sang-yeon, acquitted HSBC on charges of violating the Capital Markets Act on the 11th.
HSBC was prosecuted in connection with three of its traders who were charged with 'naked short selling' and were jointly indicted under the principle of joint penalty. The principle of joint penalty holds corporations accountable when their employees commit illegal acts.
Prosecutors concluded that three traders affiliated with HSBC conducted naked short selling of 318,781 shares (valued at 15.78 billion won) of nine domestic listed companies from August 2021 to December of the same year. Naked short selling refers to selling shares without borrowing them. It is a type of credit transaction where the seller promises to borrow the stock after the sale. Article 180 of the Capital Markets Act prohibits all short selling except for 'borrowed short selling' that utilizes stocks borrowed in advance.
The court ruled that it is difficult to establish a crime for the naked short selling by HSBC traders. The court noted, 'The act of selling itself is predicated upon the conclusion of a contract, so for naked short selling to constitute a crime, a trading contract must be established,' adding, 'The prosecution indicted based on the mere submission of short selling orders, which is an expansive interpretation of the Capital Markets Act.'
The court also stated, 'The affiliated traders were indicted without any investigation being conducted, and it is difficult to acknowledge the charges at this stage,' further asserting, 'There is no evidence that the traders colluded with the CEO or the short selling management system administrator to conduct naked short selling.'
Accordingly, the court declared, 'For HSBC to be convicted, it must be established that its employees violated the Capital Markets Act, and the company must also be recognized for not fulfilling its responsibilities in this respect,' leading to the acquittal.