The Seoul Administrative Court recently ruled against UBS in a lawsuit seeking to overturn the penalty imposed by the Securities and Futures Commission (SFC), according to legal sources Friday. UBS inherited the case after acquiring Credit Suisse.
The SFC, which operates under the Financial Services Commission, imposed the penalty in July 2024 after finding that Credit Suisse had sold 60.33 billion won worth of shares it did not own in violation of South Korea's Capital Markets Act.
Including penalties imposed on Credit Suisse affiliates, the total reached about 27.1 billion won, the largest since South Korea introduced a penalty surcharge system for naked short selling in 2021.
Short selling generally involves borrowing shares and selling them in anticipation of buying them back later at a lower price. Selling shares without first borrowing them, known as naked short selling, is prohibited in South Korea.
UBS challenged the regulator's decision, arguing that the shares involved were not ordinary borrowed stock but shares provided as collateral to domestic securities firms.
The company maintained that Credit Suisse had retained ownership of the shares and therefore could not be considered to have sold stock it did not possess.
UBS also argued that even if the transactions constituted short selling, Credit Suisse could have recovered the shares before settlement through a recall, or a request for early return, meaning the sales should not be treated as naked short positions.
The court rejected both arguments. Judges found that the fact that shares were provided as collateral did not automatically mean ownership remained with Credit Suisse.
The purpose of providing collateral and the legal ownership of the shares were separate questions, the court said, adding that ownership depended on the contractual terms and legal structure agreed between the parties.
The court concluded that ownership had transferred when Credit Suisse provided the shares to domestic securities firms and that selling them before they were returned constituted short selling.
It also dismissed UBS's contention that a recall would have ensured the shares were available by settlement.
A request for early repayment did not provide a firm guarantee that the shares would actually be returned before the settlement deadline, the court found.
UBS separately argued that the size of the penalty lacked sufficient basis and was excessive.
The court rejected that claim as well, noting that the original penalty had been calculated at about 33.89 billion won before regulators reduced it by 50 percent.
The reduction reflected factors including that the short-selling transactions occurred before UBS's merger with Credit Suisse.
The court said the final 16.94 billion won penalty could not be considered excessive relative to the violation. UBS could not be reached for comment.
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