HSBC Hong Kong Unit Acquitted in First Case of Naked Short Selling

The HSBC Hong Kong unit has been acquitted in the first trial concerning allegations of violating regulations on naked short selling.

On October 8, the Supreme Court's second division, led by Justice Oh Kyung-mi, upheld the lower court's ruling that found HSBC Hong Kong not guilty of violating the Capital Markets Act.

Three traders from HSBC Hong Kong, including Trader A, were indicted in March 2024 for allegedly engaging in naked short selling of 318,781 shares from nine listed companies, including Hotel Shilla, between August and December 2021. The HSBC unit was also prosecuted under the principle of joint liability.

Naked short selling involves selling shares that have not been borrowed in anticipation of a price drop, with the intention of buying them back at a lower price. In South Korea, this practice is deemed illegal if shares are not borrowed in advance.

HSBC Hong Kong was under investigation by financial authorities for violations of naked short selling regulations along with other global investment banks. The unit was reported to prosecutors around December 2023, and it was the first case to be prosecuted after the introduction of penalties for violations of naked short selling regulations in March 2024.

Both the first and second trials concluded that there was no evidence to support the claim that HSBC Hong Kong knowingly engaged in naked short selling violations, resulting in a not guilty verdict.

Kwangjang Law Firm, which has represented HSBC Hong Kong since the investigation stage, stated, "Investigations related to naked short selling are still ongoing, and it is certain that this will continue to be an issue. This ruling is significant as it provides guidelines on when violations of naked short selling may be subject to criminal penalties."

The firm added, "By defending HSBC Hong Kong, we demonstrated comprehensive litigation capabilities that integrate high-level basic competencies in responding to investigation procedures and criminal trials, as well as expertise in capital market issues and the response of foreign financial institutions to domestic criminal procedures, leading to a complete victory."