Samsung Securities' $105 Billion Fat-Finger Share Error Triggers Urgent Regulator Inquiry

Last week, an employee of Samsung Securities Co., Samsung Group’s stock-trading entity and one of the largest trading companies in South 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.

Embarrassingly, Samsung Securities admitted that it took 37 minutes to fix what had occurred after it became aware of the problem. Even more humiliating, sixteen 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.

The combined action of the mistake along with the rogue employee share sell-offs helped depress Samsung Securities’ stock price by nearly 12 percent. Currently, its stock price is about 10 percent below what it was before the incident, which means the brokerage has seen its market value drop about $300 million.

After news of the error became public, South Korea’s Financial Supervisory Service (FSS) announced that it was going to initiate an urgent “special” inquiry into what it called a “big financial incident that significantly undermines the safety of and trust in [Korea’s] capital markets.” Its inquiry will be concerned with: how 2 billion Samsung Securities shares―which did not exist― managed to get allocated; how those “ghost shares” could even be legally sold by Samsung Securities’ employees; why some employees continued to sell the shares after being instructed not to; and how the employees could sell the shares without the activity being reported to the brokerage.

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.

In addition, over 200,000 South Koreans signed an online petition at the presidential Blue House website (similar to the U.S. White House’s petition website) demanding that Samsung Securities and the 20 employees who either tried or successfully sold their shares be severely punished. The number exceeds the threshold required for the president’s office and other government agencies to begin an inquiry on the matter.

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.

Interestingly, the Samsung Securities debacle followed another in March that saw a total of 15.2 million shares of Formosa Petrochemical Corp mistakenly traded in Taiwan’s Stock Market (Taiex). Only about 2.9 million shares in the company are traded in a normal Taiex day. The mistake caused the company to lose about $3 billion in market value in 10 minutes and forced the shutdown of the entire Taiex for the day.

Mistaken trades are not uncommon, as demonstrated by incidents involving Deutsche Bank in 2015 and the Tokyo Stock Exchange in 2014. Those fat-finger events serve as vivid reminders that even when there are sophisticated trading-system internal controls operating, someone always seems to find a way around them.