South Korea’s Financial Supervisory Service on Monday began an investigation into Samsung Securities over it lacking internal controls to detect or correct a computational input error that caused slipshod dividend payments over 40,000 times larger than intended.

The watchdog denounced the firm for its “severe” systemic flaw that enabled erroneously created virtual stocks to be traded like real assets.

At a press conference Monday to unveil its plans to look into the fourth-largest securities firm by net asset value in Korea to find the cause of Friday’s incident, the FSS also criticized shareholding employees of Samsung Securities for moral hazard.

According to the plan, officials of the oversight body on Monday will meet Koo Sung-hoon, chief executive of Samsung Securities, and urge Koo to compensate investors in shares of Samsung Securities for their financial losses.

For two trading days through Tuesday, three FSS officials are to be dispatched to the company to monitor the trading process of its public shares on the stock market. Samsung Securities is listed on the Kospi market.

Starting Wednesday, the FSS will conduct an investigation on the securities firm for seven trading days to discover how unauthorized stocks were issued and traded on the market and how shareholding employees were able to unwittingly sell off large amount of shares at once and free of restraint, among other issues.

Any glitches found during the investigation will lead to legal consequences, according to the watchdog.

In Korea, shareholding employees of listed companies are paid dividends without the intervention of the Korea Securities Depository, unlike ordinary shareholders outside the company, according to the FSS.

Samsung Securities’ failure to detect and correct the error through internal screening prior to the dividend payment has “severely undermined stability and trust in financial system of Korea,” according to the watchdog.

The FSS also criticized the firm‘s action taken against the error. After internally recognizing the input error, it took an additional 37 minutes to halt the trades of the virtual stocks. 

“The FSS governor and I both agreed the incident should not be viewed as a mistake of an individual employee, but as an exposure of flaws in internal controls rampant among local securities firms,” said Won Seung-yeon, an FSS senior deputy governor in charge of capital market oversight.

The FSS also labeled employees’ attempts to sell shares despite the firm’s message of caution a “severe moral hazard.”

The response came after the brokerage arm of the Samsung conglomerate on Friday morning failed to detect the input error -- “1,000 shares” per share instead of “1,000 won” (94 cents) -- that caused shareholding employees to receive a combined 2.8 billion shares in dividends -- worth 112.6 trillion won -- instead of the intended 2.8 billion won.

Samsung Securities suffered an instant plunge by over 11 percent Friday morning, while the degree of loss narrowed to 3.6 percent by closing.

Meanwhile, the FSS downplayed possibilities that “virtual stocks” had been used in the process of short selling, which has largely been vilified by retail investors in Korea. 

The incident also shed light on a lack of financial authorities’ regulatory power in case of an accident.

Korea‘s nongovernmental organization advocating consumers’ rights, the Financial Consumer Agency, bashed the FSS for its “leniency” in addressing the “unprecedented fiasco” in a statement Monday. 

“In case of such unprecedented fiasco, the FSS should have raided Samsung Securities in the very first day of the accident and put the company under its control,” read the statement.


By Son Ji-hyoung
(consnow@heraldcorp.com)