Government Launches First-Ever Foreign Fund Prosecution

Financial supervisory authorities indicted British Hermes Property Asset Management (HPAM) for its attempt to manipulate the stock prices of Samsung Corporation.

This is the first time a foreign fund has been prosecuted.

The financial authorities issued a warning to foreign banks including Deutsche Bank for trading currency derivatives illegally with corporations such as Korea Highway Corporation.

Foreign Funds Are Not Exempt From Regulations-

On July 22, the Securities and Futures Commission (SFC) accused HPAM for making handsome profits by spreading merger and acquisition rumors on Samsung Corporation, which led to a surge in the company’s stock prices.

The SFC indicted a fund manager Mr. C of HPAM in charge of Korea businesses and Mr. Kim who traded stocks as an agent. Mr. Kim is in the London branch of Daewoo Securities Co.

The HPAM fund manager Mr. C bought out a five percent holding or 7,772,000 shares of Samsung Corporation from November 2003 to March 2004.

In an interview with Chosun Ilbo on November 29, 2004, in collusion with Kim, the fund manager warned that “if corporate governance in Samsung Corporation does not improve, HPAM will help companies pursuing Samsung Corporation’s takeover.”

After the news broke out December 1, the stock price of the company surged and HPAM sold its entire stake, garnering as much as 29.2 billion won (including currency trading profit).

In doing so, he earned 54 million won by disposing of his 8,300 preferred shares.

The FSC issued institutional warnings to the Seoul branches of Deutsche Bank and BNP Paribas Bank for not notifying customer of the possibility of losses when the banks sold derivative contracts to government-owned corporations.

The manager of Deutsche Bank’s Seoul branch was punished with a one month suspension while the manager of BNP Paribas Bank’s Seoul branch received a warning. Five employees of Deutsche Bank, BNP Paribas Bank and Barclays Bank had to face dismissal or pay cuts.

Effectiveness Questions-

The SFC’s decision to accuse the HPAM is interpreted as its determination to regulate speculative funds.

Under the Securities Transactions Law, authorities can impose penalties three times more than unlawful profits earned through stock market manipulation.

However, prosecution is unlikely to lead to punishment, and critics say this is mere grandstanding. If foreign firms without local branches and non-residential foreigners do not comply with the investigation, the prosecution has no leverage but to suspend the proceedings.

Jeong Tae-cheol, assistant vice commissioner of the Financial Supervisory Service (FSS), said “It’s up to the prosecution, but usually non-resident foreigners get a suspension of prosecution.”

The HPAM said “the company will do its best to get to the bottom of the case but it’s not been decided whether the company will appear in the prosecutors’ office.”

During the process of investigation or the suspension of proceedings, HPAM is allowed to continue its investment activities through foreign branches. The company holds stocks in Hyundai Development Company (7.03 percent), Hyundai Marine and Fire Insurance Co., Ltd. (5.5 percent), and Hansol Paper (5.19 percent).

Under the circumstances, Daewoo Securities employee Kim is the only one to be regulated. The FSS did not present any material evidence, saying “The prosecution will uncover the details.”

The decision involving Deutsche Bank is receiving complaints. Initially, the regulation review committee comprised of FSS executives and independent experts decided that it would impose three month and one month operation suspensions on the Seoul branches of Deutsche Bank and BNP Paribas Bank, respectively.

However, the FSS backed down and eased regulations. The institutional warning is to strengthen regular oversight on financial firms.

Ki-Jeong Ko koh@donga.com