HSBC faces criminal charges for naked shorting in Korea

South Korean prosecutors on Thursday filed criminal charges against HSBC and three of its traders, accusing them of illegal short selling worth 15.8 billion won ($12 million). It marked the first time the country has brought charges against a global investment bank for short selling.

The move comes three months after the country's top financial regulator slapped a 7.5 billion won fine on HSBC’s Hong Kong office for naked short selling of shares in nine listed companies, including Hotel Shilla Co., in 2021.

The Seoul Southern District Prosecutors’ Office said that three of the Hong Kong-based bank's traders, including one at its securities borrowing and lending division, were found to have executed the trade in 11 batches from August to December 2021.

They were accused of shorting the stocks they did not first borrowed on behalf of foreign investors, including global asset managers, through a Korean brokerage company.

Their short selling amounted to a combined 15.8 trillion won for a combined 318,781 shares of the nine companies.

With the prosecutors' indictment, HSBC has become the first foreign investment bank to face criminal charges for naked short selling in South Korea since the country introduced criminal laws to punish illegal short selling in April 2021.

Under the Capital Markets Act, those involved in naked short selling are subject to one year in prison or a fine of three to five times the gains earned from the transactions.

Prosecutors are also looking into whether other senior officials, including those from global asset management firms, engaged in the short sales to bring criminal charges against them.

They said that HSBC periodically deleted files at its Korean branch’s server related to the naked short selling and stored some relevant files at overseas branches' servers to block Korean financial authorities’ access to them.

Prosecutors will report HSBC’s naked shorting activities to Korean financial regulators and the Korea Exchange.

HSBC was not immediately available for comment.

BNP PARIBAS UNDER PROBE

The prosecution office is also probing BNP Paribas on charges of shorting 40 billion won worth of stocks of some 101 companies without first borrowing them.

The French bank was fined 19.02 billion won in December of last year for these transactions.

Together with HSBC, the two foreign banks were slapped with a combined 26.52 billion won in fines for naked short selling, the largest-ever penalty imposed for illegal short selling in South Korea.

Write to Si-On Park at Ushire908@hankyung.com

Yeonhee Kim edited this article.