South Korea watchdog refers executives to prosecutors over alleged sham sale, hidden debt

Exterior of the Financial Services Commission building in Jongno-gu, Seoul. [Photo provided by the Financial Services Commission]

South Korea’s financial authorities said they have uncovered alleged unfair trading by executives at a listed company during a push to split and relist the firm, and have referred the case to prosecutors.

The Financial Services Commission’s Securities and Futures Commission said Thursday it decided at its 8th regular meeting on April 22 to file a criminal complaint against four people, including executives of Company A, for alleged violations of the Capital Markets Act’s ban on fraudulent trading. The commission said the suspects are accused of artificially propping up Company A’s value by making it appear its financial condition would improve after selling a troubled subsidiary at an inflated price to a third party unrelated to Company A.

According to the authorities’ findings, executives at Company A and its subsidiary, Company B, planned to sell loss-making Company B as part of a plan to split Company A into two listed companies and relist them. In the process, they allegedly used funds from Company A’s largest shareholder and an affiliate to have a paper company, Company C — with no real business operations or financial capacity — acquire Company B. The commission said Company A continued to support Company B even after the sale by providing ongoing debt guarantees and loans, including operating funds.

Graphic provided by the Financial Services Commission.

The commission said the suspects intentionally left large debts off financial statements, inflating the value of Company B’s shares. Authorities said the group then made it look as if Company B had been sold at a high price to an unrelated third party, suggesting Company A’s finances had improved, and succeeded in the split-and-relisting plan. The commission said it confirmed allegations that Company A’s share price surged sharply for a time and that the suspects reaped substantial illicit gains.

The commission noted that accounting violations tied to omitting Company B’s liabilities from Company B’s financial statements and Company A’s consolidated financial statements had already led to measures in July last year, including administrative penalties and a notice to prosecutors.

Under the Capital Markets Act, using fraudulent means in trading financial investment products, or making false statements or omitting material information to obtain money or other property gains, can be punished by at least one year in prison or fines of up to six times the illicit profit, the commission said.

Financial authorities said they will keep a close watch for unfair trading and will thoroughly investigate confirmed violations and impose strict measures to help maintain market order. They also urged the public to actively report suspected unfair trading in capital markets.

* This article has been translated by AI.

RYU SO HYUN