South Korea's Financial Supervisory Service (FSS) will make a field inspection to Eugene Investment to scrutinise a recent revelation that one of its customers sold so-called "ghost stocks" after the brokerage firm failed to reflect a share split of an overseas exchange-traded fund (ETF) in its accounts.
The South Korean watchdog will also inspect Korea Securities Depository (KSD) for five working days starting this Friday, according to a statement release today, August 9.
In May this year, the retail investor sold all 665 shares of an inverse ETF called 'ProShares UltraShort Dow 30' that he held in his Eugene account, according to the regulator. In fact, the investor was holding 166 stocks as the shares of the ETF underwent a one for four reverse split on May 23. This means a shareholder would own only one share for every four stocks of the ETF owned before the split. With the South Korean brokerage firm overlooking the change, the investor made a profit worth KRW17 million (USD$ 15,000) out of 499 stocks that did not exist at that time. Eugene Investment later bought the 499 "ghost stocks" and asked its customer to pay back the profit he enjoyed by selling the shares. The investor reportedly filed a complaint to the FSS, blaming the securities firm for the incident.
A stock split that occurs in foreign markets is notified to the KSD headquarters in South Korea from its offices in different regions. South Korea's central securities depository then, informs brokerage firms about the changes so they are reflected in local bank accounts. Eugene Investment explained that it 'manually updates customers' accounts,' saying the text for the stock split was 'informed later than usual by the depository,' according to local reports.
The latest stock blunder by Eugene further exacerbates concerns over South Korea's out-of-date systems for verifying trades as well as the regulators lenient attitude toward supervising computer systems and legal requirements of local brokerages.
In April this year, Samsung Securities, an affiliate of the country's largest conglomerate, accidentally issued 2.8 billion shares to staff which is theoretically worth around USD$100 billion and more than 30 times the brokerage's outstanding shares. The FSS handed down a six month partial suspension of the company's operations and imposed roughly USD$ 130,000 in fines. Koo Sung-hoon, then CEO of Samsung Securities, resigned.
According to SRP data, Samsung Securities is one of the top distributors of structured products in South Korea, providing more than 1,000 products this year.
Related stories
Seoul's regulators boost monitoring on equity derivatives but markets remain calm
Product snapshot: Mirae debuts fixed coupon notes in South Korea
South Korean banks: Higher income but flat structured products activity