Top Ten Global IB Firm Investigated Over Illegal Activities

An unnamed global investment bank is being investigated over improper acquisition of overseas convertible bonds of domestic firms and profiting from it, according to financial authorities.

This is the first time the Korean government is investigating foreigners working for a foreign financial firm regarding illegal financial activities since it subpoenaed employees of U.S.-based Lone Star on suspicion of stock price manipulation in 2006. The investment bank is different from Lone Star, a U.S. private-equity firm, since it is considered one of the world’s ten largest investment banks.

According to the Financial Supervisory Service (FSS), Korea’s financial authorities are questioning the bank’s employees based abroad on charges that they acquired Korean firms’ overseas CBs at a giveaway price and made improper gains through insider contracts over the past two to three years.

The FSS said that the investment firm signed an insider deal under which it bought overseas CBs of Korean firms and borrowed shares of the Korean firm. When the stock prices of the local firms rose, the investment firm sold the stocks, received gains, converted the CBs into stock and returned the borrowed shares to the local firms.

According to the FSS, the local firms did not make public their insider deal and mislead unknowing investors that the CBs had been sold over the market when in fact they had in effect been given to the investment firm at a giveaway price. The financial authority is also investigating the investment bank on other suspicions, such as insider trading and stock price manipulation.

A source from the government said the investment bank’s improper gains were far larger than several billion won.

The FSS is trying to figure out whether the illegal activities had been systematically organized by the global investment bank and local firms or if just a handful of employees had been involved.

The investment bank runs business in around 50 nations and is one of the world’s ten largest investment firms. The bank has reportedly denied the allegations. Immediately upon completion of the investigation, the Securities & Futures Commission will decide whether to file charges against employees of the investment bank and the local firms.

jarrett@donga.com larosa@donga.com