The Bank of Korea suspended its foreign exchange bond trading with Samsung Securities on April 13 following the securities firm’s fiasco over an errors that wrongly gave its shares as dividends instead of money on April 6. Those who got the stocks as dividends sold them on the stock exchange for cash.
An employee of Samsung Securities Co., Samsung Group’s stock-trading entity and one of the largest trading companies in Korea, accidentally issued shares worth some $105 billion to 2,018 of its employees who are members of its stock-owner program.
The employees in the program were supposed to receive a dividend totaling 2 billion won (or about $0.93 per share they owned), but were mistakenly issued 2 billion shares instead. The amount issued was more than 30 times the total number of outstanding Samsung Securities’ shares.
The company intended to pay dividends worth 2.8 billion won ($2.6 million) under a share ownership plan, but the employee entered the figures into the system as “shares” instead of “won”, the South Korean currency.
Embarrassingly, Samsung Securities admitted that it took 37 minutes to fix what had occurred after it became aware of the problem. Even more humiliating, 16 Samsung Security employees were able to still sell off some 5 million shares of their payout, despite repeatedly being warned not to do so by their managers. Perhaps the warnings were ignored because they were able to make about 10 billion won ($9.3 million) each. Four other employees tried to sell their shares, but their trades were stopped before being completed.
Director Suh Bong-kuk of the Bank of Korea Foreign Asset management Institution, said the central bank temporarily suspended its foreign exchange bond deals with the securities firm and the Financial Supervisory Service on the case and the central bank will await the outcome of the investigation to make the decision permanent or not.
Samsung Securities will no longer be able to earn the commission from selling the foreign exchange bonds for the central bank to the customers. Only three securities firms including Mirae Asset Daewoo, NH Investment and Securities, and Korea Investment and Securities are allowed to continue to deal with the foreign exchange bonds.
The central bank allowed four securities firms including Samsung Securities and the three securities firms named above to deal with the foreign exchange bonds. The central bank manages the nation’s foreign exchange reserves with 90 percent of them converted to foreign exchange bonds. As of the end of February, the foreign exchange reserves amounted to $394.8 billion.
The fat-finger fallout continued this week when Korea’s National Pension Service, the world’s third-largest pension fund (and South Korea’s largest), suspended its relationship with Samsung Securities. It took that step because of what it termed “concerns of poor safety measures following the financial accident.” Other pension services, including the government’s Employee Pension Service and the Private Pension Service, have followed suit, with more entities likely to announce similar actions.
Although Samsung Securities has already fired the employees, and announced that it would make amends to any stockholder who lost money because of the incident, the FSS is still indicating that it plans to deal harshly with both the brokerage and its now terminated employees.
The fat-finger fiasco has also fueled public suspicion that the country’s financial sector is operating without proper oversight and with poor internal controls. The FSS, which is itself embroiled in a scandal, is no doubt going to dig into the trading controls of Samsung Securities and other brokerage firms if for no other reason than to deflect the public’s attention from its own troubles.
The FSS, the Korean Exchange, and the Korea Securities Depository, along with the Financial Services Commission (which oversees the FSS) have already announced they are going to check into the dividend management and stock trading systems operated by Korea’s trading houses to ensure that there aren’t any other problems lurking about.