The financial regulator said Monday it will ask the prosecution to investigate the chairman of Tong Yang Group for allegations that he sold his company debts to investors even though he knew about their default risks stemming from the group's liquidity shortage.

"We found that there is a need for an investigation on (Tong Yang's) controlling stakeholders in relation to their financial transactions between the group's affiliates," Kim Gun-sop, the deputy governor of the Financial Supervisory Service (FSS) told reporters at a press briefing.

His remarks pointed at Hyun Jae-hyun, the head of South Korea's 38th-largest conglomerate, who has come under scrutiny after investors accused him of selling his company bonds through the group's brokerage unit, knowing that Tong Yang was running short on cash to repay them.

Tong Yang Group has filed five of its affiliates for court receivership since Sept. 23, as it failed to raise funds needed to pay back some 110 billion won (US$102.7 million) that matured at the end of last month. It has to cover debts worth 1.1 trillion won by early next year.

The FSS, however, said it is not looking into including Hyun's wife Lee Hye-kyung -- the vice chairwoman of the troubled conglomerate -- in the probe request at this stage, since they have found no suspicious activities that support allegations.

Investors have claimed that the daughter of Tong Yang's founder pulled out 600 million won worth of cash and gold from the Tong Yang Securities' headquarters in the lead up to the group's request for court receivership.

The FSS said the conglomerate sold asset-backed commercial papers, a type of a short-term debt, worth nearly 160 billion won to thousands of retail investors in July and September.

The FSS has been conducting an all-out inspection into assets tied to Tong Yang's financial affiliates including the asset management and insurance arms.

 On Sunday it said the probe will continue without a due deadline, given the gravity of the crisis. It is the first time since the 1997 Asian financial crisis that Korea's financial watchdog extended a probe for an indefinite period of time.

The FSS can report to the prosecutors' office if it has obtained substantial evidence on the suspected company with a certain amount of loans owed to banks. Tong Yang's total bank loans fall short of the FSS threshold to qualify for a company subject to the regulator's inspection. (Yonhap News)