[THE INVESTOR] South Korea’s financial regulator said on June 4 it has launched an inspection into the Seoul branch of Goldman Sachs Group for naked short selling.

On May 31, Goldman Sachs International supposedly borrowed 6 billion won (US$5.6 million) shares issued by 20 companies to engage in short-selling. The problem was, it was unable to buy back the stocks in time, indicating that the stocks weren’t in its possession at the time of the short selling. 

“It seems like Goldman Sachs International committed to a short selling deal without confirming if the shares were actually borrowed,” said Kang Jeon, head of the FSS financial investment investigation team.

The inspection will end on June 15, and may be extended if necessary, the FSS added.

It’s called naked shorting or naked short selling when an investor decides to make a short bet without actually borrowing the stocks first.

Short selling is when investors buy stocks with the expectation that prices will fall in the future. When they actually do, they buy it back at a cheaper price to make a profit.

In Korea, naked shorting has been banned since 2000. Retail investors, however, suspect that the practice is still prevalent among institutional investors, which is why they usually lose in the markets.

The latest incident involving Goldman Sachs came only one week after the country‘s financial authorities unveiled a set of regulations following Samsung Securities’ ‘fat-finger error,’ in which the brokerage mistakenly deposited 2.8 billion non-existent company stocks into employee accounts in April.

By Park Ga-young (gypark@heraldcorp.com)