Manipulation Using a Foreigner`s Account

Involved in an outstanding accounts incident of LG Investment & Securities on December 17, foreign institutional investors didn`t settle up 2.2 billion won of stocks purchase amount even in the account of Daishin Securities, and committed tactics for the issue of KOSDAQ.

According to the Financial Supervisory Service (FSS) on December 18, in seven accounts of Daishin Securities Hong Kong, the purchasing funds of 8 issues including Samsung Electronics were not settled, and so suffered a loss worth 2,263 million won. Owners of these accounts were the same as accounts owners of LG Investment & Securities, which had the outstanding accounts incident worth 170 billion won.

These foreign institutional investors were also suspected of gaining large marginal profits by raising the stock price through purchasing the large stocks of Kaya Electronics in August.

The FSS has been investigating whether there is any manipulation for other issues of KOADAQ possessed by owners of above seven accounts.

The securities companies interpreted that the foreign institutional investors brought about the manipulation case using the limitation and illicit use of the supervision of the Korea stock market. As the supervisory authority is at loss how to do for such case of foreigner`s account, the occurrence of the similar case could be concerned.

▽ Fraud Technique 〓 The stock experts presumed that this case is the large manipulation connected to a transaction of derivatives. The following is a scenario of exports.

The foreign institutional investors forecasted that the stock price will be changed to an upward tendency around an election of the president and so purchased large products of future and options before December 11. However, as the stock price was contrary to their expectation, they raised the KOSPI index by purchasing the large quantity of Samsung Electronics` stocks and then gained the marginal profits from the futures or options.

Because the large purchase of Samsung Electronics stocks was a lever for gaining the marginal profits from the transaction of derivatives, they didn`t intend to make the purchasing amounts from the beginning.

▽Problem of foreign investors supervision 〓 Experts presumed that the foreign institutional investors could be a paper company established in a tax evasion area by a fraud group of Korea.

However, any method cannot find whether these institutional investors are foreigners or Korean so far.

Jeong Eun-Yun, head of stock market team, FSS said, “We can not know a real nationality because we allowed the registration based on the official documents approving the company which receives the establishment approval from the foreign country. Also, we cannot confirm whether the official documents are manipulated or forged.”

The experts explained that the stern identification confirmation can tighten the foreigners` investment.

Accordingly, the securities companies are responsible for blocking the manipulation of domestic fraud influences or manipulation of foreigners.

However, they have provided various benefits such as exempting the margin to foreign investors to obtain customers.

▽Influence of the case 〓 Investors were shocked because stocks of Samsung Electronics were involved. Experts said that these fraud investors made use of a blue chip such as Samsung Electronics because they made light of domestic investors. They seem to make use of the point that domestic investors follow the trading pattern of foreigners as it is.

The stock price of LG Investment & Securities fell down by 4% on December 18 and so shareholders were damaged.

Cheol-Yong Lee lcy@donga.com