Barclays And Citi Have Now Been Fined For Naked Short Selling

Barclays and Citi have now been fined for naked short selling by South Korea, with authorities stating they are considering record-high fines for the violations.

South Korea’s financial regulators are contemplating significant fines for Barclays plc and Citigroup Inc. due to their alleged illegal short-selling activities, which could result in the highest penalties of this kind in the country’s history.

According to sources within the Korean financial authorities, a recent investigation by the Financial Supervisory Service (FSS) revealed that both banks engaged in naked short-selling of Korean stocks.

While short-selling is a legitimate trading strategy in South Korea, naked short-selling—selling shares without first borrowing them or confirming that they can be borrowed—is prohibited under the Capital Markets Act.

A committee within the Financial Services Commission (FSC) is currently reviewing the FSS’s findings.

An official indicated that they are considering imposing a fine of up to 70 billion won (approximately $50 million) on Barclays and a maximum of 20 billion won on Citigroup.

The final decision will be made by the FSC following this review.

If Barclays is fined 70 billion won, it would set a record for fines related to illegal short-selling in Korea.

Last year, fines for 35 short-selling violations totaled 37.1 billion won, with the previous highest fine being 27.17 billion won imposed on two subsidiaries of the former Credit Suisse Group.

Since the government increased penalties for such violations in 2021, fines for short-selling infractions have risen.

Authorities are now able to impose fines equal to 100% of the profits gained from these violations.

However, it remains uncertain whether they will impose such steep fines on Barclays and Citigroup before short-selling resumes in Korea in March 2025.

A market-wide ban on stock short-selling was implemented in November 2023, which has been extended through the first quarter of 2025.

FSC Vice Chairman Kim So-young confirmed that short-selling is set to resume on March 31.

The ban on legitimate short-selling has been viewed as a barrier to foreign investment in Korean stocks.

In June, MSCI downgraded Korea’s short-selling accessibility in its annual review, which could hinder its inclusion in MSCI’s developed-markets index.

Multinational banks have strongly protested against fines for short-selling violations.

For instance, BNP Paribas has filed a lawsuit to overturn its fine, claiming that its naked short-selling was neither intentional nor profitable.

In December, the FSC fined BNP Paribas, its Korean brokerage, and HSBC Holdings a total of 26.52 billion won for naked short-selling activities.

The Korean financial regulator maintains that banks must be held accountable for their negligence in managing these prohibited trades.

Korean financial authorities assert that the Capital Markets Act allows traders to short only shares they have borrowed, rendering naked short-selling illegal regardless of the outcomes of the transactions.

However, Korea’s judiciary has ruled that only shares sold without prior borrowing are subject to fines.

For example, if an investment bank places a market order to short 10 billion won worth of shares without borrowing them, but only sells and repurchases 1 billion won worth, the fine would only apply to that final 1 billion won transaction.

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Market News Today - Short Sellers Are Now Under Federal Investigation For Collusion

Short sellers are now under federal investigation for collusion, resulting in the belief that firms are conducting orchestrated market manipulation tactics.

There’s been a lot of debate recently about short sellers and their strategies, especially after a lawsuit in Toronto revealed some surprising connections between investment firms and bearish researchers.

This has sparked debates among corporate leaders and investors alike about whether these short sellers are working together more than they admit, per a recent Bloomberg report.

In the lawsuit, a key figure from a Canadian hedge fund, Moez Kassam of Anson, mentioned that his firm has shared research with several well-known short-sellers like Nate Anderson from Hindenburg Research and Carson Block from Muddy Waters.

This raises eyebrows, as it suggests that these firms might be collaborating to drive down stock prices of companies they believe are overvalued.

While sharing research isn’t illegal, it does create concerns about potential market manipulation.

Many corporate leaders have expressed frustration over these practices, especially as they often lead to a negative impact on stock prices.

The short-selling community tends to keep their activities under wraps, particularly since companies have started fighting back with lawsuits and regulators are becoming more vigilant.

Interestingly, nearly all the firms mentioned in the lawsuit denied having formal partnerships with Anson, according to reports.

For instance, Muddy Waters stated it has never collaborated with Anson, and Viceroy’s Fraser Perring confirmed that while they’ve discussed research, there’s no financial relationship between them.

The lawsuit is part of a broader investigation by the U.S. Justice Department and the SEC into whether some of these short-selling firms have crossed legal lines.

Recently, Anson agreed to pay $2.25 million to settle claims that they failed to disclose payments to firms that published negative research, including payments to Citron’s Andrew Left.

However, Anson did not admit to any wrongdoing.

One example from the court documents involved a negative report by Hindenburg on a Canadian company called Facedrive, which it claimed was overhyped.

Emails revealed that Anson analysts helped Hindenburg with this report, even directing how it should be structured.

This raises questions about transparency and fairness in the research that influences stock prices.

Moreover, Kassam mentioned that Anson had previously collaborated with Left, yet both parties deny that any payments were made for research.

The SEC has pointed out that Anson sent over $1 million to Left in 2018 for publishing bearish content, which they claim was not properly disclosed.

For retail investors, this situation highlights the complexities and potential pitfalls of the stock market.

While short sellers play a role in market dynamics, the underlying alliances and secretive practices could manipulate stock prices in ways that are harmful to investors.

It’s crucial for retail investors to stay informed and vigilant, understanding that the world of investing is often more complicated than it appears.

As we uncover these connections, it becomes increasingly clear that transparency and accountability are essential to maintaining a fair market.