Speculators Fueling Company Rumors to Earn Profits

Daewoo Construction & Engineering`s stock dropped more than 40 percent between June 12 and July 17, falling from 18,400 won to 10,850 won. The building company does have a real problem: its parent Kumho Asiana Group has a heavier financial burden due to its aggressive takeover bids.

Daewoo Construction & Engineering`s stock plunge, however, is chiefly due to groundless rumors.

A Kumho Asiana Group source said, “Rumors have spread that Kumho will sell Daewoo and that Kumho is being investigated by prosecutors for raising slush funds. We immediately denied the rumors as groundless, only in vain.”

The source said it is doubtful whether short sellers of Daewoo stocks spread the rumors to earn profits. “We asked financial authorities to find the source of the rumors. They said the rumors seemed to have originated in other nations like Hong Kong. We cannot come up with effective countermeasures since we have no evidence.”

Hynix Semiconductor has also suffered from malicious rumors. After exceeding 30,000 won in June, its share price tumbled to 17,200 won Monday. A Hynix source said, “When we were about to issue convertible bonds, rumors spread that we were in deep financial straits. We think hedge funds are spreading false rumors to gain short-term profits via short stock selling.”

○ Rumors affecting investors

Short selling refers to the sale of securities borrowed from the Korea Securities Depository, or loan transactions, when stock prices are expected to fall. When stock prices fall as expected, short sellers gain profit by repurchasing stocks at a lower price.

Theoretically, loan transactions help stock prices stabilize and boost the liquidity of securities, but can also be abused by speculators attempting to manipulate stock prices.

Individual investors are especially vulnerable to loan transactions. Moreover, malicious short selling tarnishes the image and management of a business.

In the past, speculators used to spread false information to push up stock prices. After buying shares of a company, they used to spread rumors of takeover or the pending launch of new products. When share prices soared, they sold them to gain profits.

The pattern of stock rumors has changed, however. Since it is easier to create and spread malicious rumors, speculators now choose to do so to manipulate share prices.

Malicious rumors that certain companies have liquidity crises, combined with the rumor of a "black September" for Korea`s financial market that has sapped investor confidence, could deal a serious blow to the domestic capital market. Individual investors are dumping their shares in companies besieged by malicious rumors real or imagined.

A staff at a company suspected of having a liquidity crisis said, “Bankruptcy rumors spread fast via the Internet and documents in Yeouido (Seoul`s financial district). If rumors begin spreading, the firm is soon flooded with calls from worried investors.”

○ Foreigners do 90 percent of short selling

With more companies falling victim to short selling, the Financial Supervisory Service said a new task force will search for speculators spreading malicious rumors. Ninety percent of short stock selling is known to be done by foreign investors and the remaining 10 percent by domestic institutional investors.

According to the Korea Exchange, the balance of loan transactions has almost doubled to 860 million shares early this month, up from 450 million late last year. Shares of Hynix, LG Electronics and Daewoo Construction & Engineering have recently plummeted, and their share in the loan transaction balance has increased disproportionately.

Short selling has also posed a problem in the global financial market. The U.S. government said certain U.S. financial institutions including Lehman Brothers saw share prices plummet due to false rumors and temporarily banned short selling of stocks at dozens of financial institutions in July.

jarrett@donga.com