Ghost Stock

The fiasco has been dubbed the "ghost stock" incident by major local news media. 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 had 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. A final decision hasn't been made yet, the official said.

To the researcher Mr 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 said.

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

Bloomberg