Invest2 publishersIndependently confirmed3 min readPublished
South Korea's top court clears HSBC in the first trial under its 2021 naked short-selling penalties
South Korea's Supreme Court upheld HSBC Hong Kong's acquittal on 15.8 billion won of alleged naked short sales, the country's first such criminal case. Its holding that an unexecuted sell order is not the offence gives the next prosecution a stricter test to meet.
The Investor · Invest desk
What happened
- Prosecutors indicted three people in March 2024, including an HSBC Hong Kong trader, over 318,781 shares in nine listed companies, Hotel Shilla among them, sold between August and December 2021.
- HSBC itself stood trial under a provision that holds companies liable for acts committed by their employees.
- The Supreme Court ruled that submitting a sell order that is never executed is not in itself illegal short selling, since that would treat an attempt as a completed act.
- The court also found that the specific violators and violations tied to the alleged orders had not been sufficiently proven.
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Why it matters
- constraint A prosecutor bringing the next case needs executed sales with no borrow behind them, tied to named traders; a log of submitted orders does not make the offence under this ruling.
- exposure A bank charged through the employee-liability provision can be reached only after an individual employee's violation is proven, so a foreign broker's exposure runs through trader-level evidence.
- precedent As the first prosecution under the April 2021 penalties to reach a final verdict, this reading of the law is where defence lawyers in any later case will start.
The indicted sales averaged about 49,500 won a share and roughly 1.75 billion won per company [22][23]. The first of them came in August 2021, four months after criminal penalties for illegal short selling were introduced [3][19].
Korean law bans selling shares without having borrowed them in advance [10], so the case turned on when the borrow has to exist. The trial court said that "borrowing must be confirmed before short selling takes place, and because HSBC had a system that completed that step after the fact, it is established that it conducted covered short selling" [7]. The top court's second division, presided over by Justice Oh Kyung-mi, placed that moment at execution, according to the Seoul Economic Daily [5][13]. Penal provisions must be interpreted strictly, the court held, and expanding them by analogy in a way that disadvantages the defendant runs counter to the principle of legality [14].
The acquittal rests on separate findings, and a conviction needed the prosecution to win all of them. The trial court found "no evidence to establish that the chief executive or the operator of the management system conspired to carry out naked short selling" [8]. It also found no evidence that the employees knew they were breaking local rules, Yonhap reported [9]. The appellate court upheld the acquittal before the Supreme Court made it final [11][2].
Lee & Ko, the firm that represented HSBC, said the decision "sets out guidelines on when naked short selling becomes subject to criminal punishment" [18]. The firm said the ruling "puts an end to the dispute over whether HSBC bears criminal liability for violating naked short-selling rules" [17]. Reaching that end took about 31 months from the March 2024 indictment, for sales that finished in December 2021, almost five years before the final ruling [20][21].
The facts limit how far those guidelines reach. HSBC had a system that completed the borrow [7]. A broker that sold and never borrowed would be judged on executed sales with nothing behind them, and the execution test does not excuse those. The court also framed its holding around the old statute: "There was no error in the lower court's judgment in misapprehending the legal principles on the establishment of a violation under Article 443, Paragraph 1, Item 10 of the former Capital Markets Act," it said [16]. Neither report describes how the current provision reads. The proof failure, finally, is a finding about one prosecution's file, and a better-built file could overcome it [15].
I think the stricter standard is real, and narrower than a defence firm's word "guidelines" suggests. The execution rule and the strict-construction rule are law the court stated; the findings about HSBC's systems and staff are facts about one bank. A conviction built on order-level evidence, or a current statute worded to reach unexecuted orders, would show the bar is lower than this ruling implies.
What to watch
- Whether prosecutors bring another naked short-selling case built on executed sales tied to named traders, and whether it ends in a conviction.
- How courts treat conduct charged under the current Capital Markets Act, as opposed to the former Article 443 provision the Supreme Court applied.
- Any amendment that makes a submitted but unexecuted naked short order punishable in itself, the conduct this ruling placed outside the offence.