Global investment bank UBS (formerly Credit Suisse), which was hit with a 16.9 billion won penalty surcharge for roughly 60 billion won worth of naked short selling, sued to overturn the financial authorities' action but lost. The court found that even shares provided as collateral can have ownership transfer under a contract, and that selling shares before returning borrowed shares constitutes short selling.
According to legal sources on the 5th, the Seoul Administrative Court's Administrative Division 2 (Presiding Judge Gong Hyun-jin, Director General) recently ruled against the plaintiff in UBS's lawsuit to cancel the penalty surcharge imposed by the Securities and Futures Commission under the Financial Services Commission.
The lawsuit stemmed from Credit Suisse's naked short selling, which UBS acquired. In July 2024, the Securities and Futures Commission (SFC) found that Credit Suisse violated the Financial Investment Services and Capital Markets Act by selling 60.33 billion won worth of shares it did not hold and imposed a penalty surcharge of about 16.94 billion won.
Including the penalty surcharge imposed on Credit Suisse affiliates, the total comes to about 27.1 billion won. It was the largest penalty surcharge since the system for naked short selling penalties was introduced in 2021.
UBS's main argument was that the shares in question differed from ordinary borrowed shares. It argued that the shares provided to domestic securities firms were not for lending but were pledged as collateral, so ownership remained with Credit Suisse.
It also argued that even if the shares were sold, they could be retrieved through a "recall," a midterm repayment request before settlement, so it could not be seen as selling while in a naked position.
The court rejected both arguments.
It held that the mere fact the shares were provided as collateral does not by itself establish that ownership remained with Credit Suisse. The purpose of the transaction—setting collateral—and the actual vesting of ownership are separate issues, and the determination must be made based on the specific contractual terms and legal form.
The court found that ownership was transferred in the process of Credit Suisse lending shares to domestic securities firms. It held that because the shares were sold before they were returned, the conduct constituted naked short selling.
It also rejected the argument that shares could have been secured before the settlement time through a recall. The court found that even with a midterm repayment request, there was no firm guarantee the shares would actually be returned by the settlement date.
The claim that the penalty surcharge was excessively large was also dismissed. The court noted that although the surcharge for the conduct was initially calculated at about 33.89 billion won, it was reduced by 50% considering that the problematic short selling occurred before the merger of UBS and Credit Suisse.
The court determined that the 16.94 billion won penalty surcharge was not excessive relative to the degree of the violation.