The $105 Billion ‘Ghost Stock' Blunder Rocking Markets in Korea
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.”
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.
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.”