The $105 Billion `Ghost Stock' Blunder Rocking Markets in Korea

(Bloomberg) -- It started with a $105 billion blunder, and then it got worse.

Someone at Samsung Securities Co., one of South Korea’s largest brokerages, was trying to pay employees 1,000 won (93 U.S. cents) per share in dividends under a company compensation plan. Somehow, they gave them 1,000 Samsung Securities shares instead. In total, the company distributed 2.83 billion shares, worth -- on paper -- about 112.6 trillion won. That was more than 30 times the company’s market value.

The fact that the shares didn’t exist didn’t stop 16 employees from selling them. And that spurred a rout in Samsung Securities’ stock. It plunged as much as 12 percent in the space of minutes on April 6, the biggest decline since the global financial crisis. Many retail investors got burned.

Then the recriminations started. People are angry with Samsung Securities. They’re angry with the employees who sold the phantom shares. And they’re angry with the government and regulators for the system that allowed people to dump stock they didn’t own -- and wasn’t even real.

“Nobody expected to see something like this,” said Hwang Seiwoon, a Seoul-based research fellow with the capital markets division of Korea Capital Market Institute Co., a research company. “An employee selling a million company shares during business hours? Now, that’s weird.”

Ghost Stock

The fiasco has been dubbed the “ghost stock” incident by major local news media outlets. Regulators are reviewing Samsung Securities’ internal controls. On Monday, South Korea’s giant pension fund stopped using Samsung Securities brokerage services. The brokerage says it will sternly punish staff who sold the shares, and repay shareholders who lost money when the stock tanked.

“We are going to compensate investors who suffered losses in the widest possible way,” Koo Sung-hoon, the chief executive officer of Samsung Securities, was quoted as saying in a company statement.

In another perhaps surprising consequence, the mood in the country has turned against short selling. In an attempt to prevent recurrence of what happened at Samsung Securities, more than 200,000 people have signed a petition to the Blue House, South Korea’s presidential office, as of Thursday, asking the government to ban such trading. Because the petition has that many signatories, the Blue House must respond.

Naked Shorting

What happened at Samsung Securities, while different, has one parallel with a practice called “naked shorting,” where investors sell shares they don’t own and haven’t borrowed in the hope of buying them back later at a lower price. The Samsung employees weren’t selling their shares to profit from declines, but they did sell shares they didn’t possess.

“This doesn’t make sense at all,” the petition on the Blue House website cited one person, who wasn’t identified, as saying. “Employees sold shares even though they knew it was wrong. This is worst case of moral hazard. Overall inspection on brokerages is needed.”

Samsung Securities, fighting to respond to the crisis, said it will compensate any retail investor who had been holding the company’s shares prior to 9:35 a.m. on April 6 -- the time the first sale of the ghost shares took place -- and ended up selling their shares that day as prices dived. The brokerage said it will use Samsung Securities’ intraday high price from that day to provide maximum compensation.

Lax System

But it will be no easy road back. Other pension funds are reportedly considering stopping doing business with the brokerage. Kim Dong-yeon, the finance minister, lashed out on Monday according to local media reports, telling a group of reporters that Samsung needs to conduct a thorough review of its "lax" internal system.

The South Korean government is considering removing Samsung Securities from its list of primary bond dealers for government bonds after its erroneous dividend payout incident, according to a finance ministry official on Friday. A final decision hasn’t been made yet, the official said.

To the researcher Hwang, the snafu had a combination of causes: the initial blunder, a moral mistake on the part of the employees who sold, and a flaw in the system that made it all possible. The incident calls for a broad review of how transactions are handled at South Korean brokerages, he says.

“We can’t rule out the possibility that some investors will leave the market,” Hwang said. “Confidence in the stock market has been severely damaged.”

--With assistance from Shinhye Kang and Sarah McDonald

To contact the reporters on this story: Min Jeong Lee in Tokyo at mlee754@bloomberg.net, Kyungji Cho in Seoul at kcho54@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Tom Redmond, Peter Pae

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