SOUTH Korea’s financial watchdog is looking into Morgan Stanley’s order to sell SK Hynix shares before research analysts at the bank cut their recommendation on the stock, another sign of the country’s increased scrutiny of global banks and hedge funds.
The Financial Supervisory Service (FSS) has asked Morgan Stanley Seoul to submit documents for an examination into whether the US firm complied with regulations around a research report dated Sep 15 that downgraded Korean memory chipmaker SK Hynix’s stock, according to an FSS spokesperson.
South Korea’s capital markets laws prohibit publishers of market analysis from trading financial products subject to their analyses for 24 hours, in order to prevent insider trading based on nonpublic information, the spokesperson said.
On Sep 13, the Seoul branch of Morgan Stanley placed an order to sell about 1.01 million shares, around three times larger than a day earlier, according to Yonhap News, a South Korean media outlet. Morgan Stanley analysts downgraded SK Hynix to underweight from overweight two days later and cut the bank’s price target to 120,000 won from 260,000 won, saying “memory conditions are beginning to deteriorate” and investors should consider “moving up to quality in Samsung and value-oriented end markets”.
Because local markets were shut for the Chuseok holiday, SK Hynix shares were not trading between the close on Sep 13 and the reopen on Sep 19. The chipmaker’s stock tumbled more than 11 per cent intraday when it resumed trading and ended the day 6.1 per cent lower. Chip stocks in Korea are often volatile after foreign brokerages issue rating reports.
A Morgan Stanley spokesperson declined to comment.
Activities of global banks and hedge funds have been under the microscope in recent months in South Korea, as authorities boost steps to weed out naked short selling – a practice of selling shares without borrowing them first – which is illegal for the the nation’s US$1.8 trillion stock market. They have also made efforts to impose tougher penalties for stock manipulation and other unfair trades.
The FSS will start a wider probe if the examination indicates Morgan Stanley may have violated its obligations, according to a source familiar with the matter who asked not to be named.
Korea Exchange had already begun an account analysis of Morgan Stanley over any possible irregularities in its trading of SK Hynix shares, Yonhap also reported. BLOOMBERG
