South Korea’s Supreme Court Upholds HSBC Acquittal in Short-Selling Case
The Supreme Court upheld the acquittal of HSBC’s Hong Kong unit in South Korea’s first criminal prosecution over alleged naked short selling, leaving intact a finding that prosecutors failed to prove knowing violations by bank employees.
South Korea’s Supreme Court on Thursday upheld the acquittal of HSBC’s Hong Kong unit in a closely watched criminal case involving alleged violations of the country’s short-selling rules.
The ruling leaves intact a lower court decision that found prosecutors had not proved the required knowledge behind the alleged misconduct. The case was notable because it was the country’s first criminal prosecution involving accusations of naked short selling.
Prosecutors indicted the bank in March 2024 under the Capital Markets Act, which prohibits naked short selling. They alleged that three employees knowingly carried out illegal short sales involving shares in nine publicly traded companies between August and December 2021. The transactions were valued at about 15.8 billion won, equivalent to roughly $11.8 million.
Short selling generally involves selling borrowed shares in the expectation that they can later be repurchased at a lower price. Naked short selling occurs when shares are sold without first being secured or without ensuring that they can be obtained for settlement. South Korean law bans that practice.
The Seoul Southern District Court had acquitted HSBC’s Hong Kong unit at the first trial. It concluded that there was insufficient evidence to establish that the employees conducted the transactions while knowing they were breaching South Korean rules. The Supreme Court’s decision upheld that outcome.
The judgment turns on the evidentiary threshold in a criminal case rather than changing the underlying prohibition. Naked short selling remains illegal in South Korea, but a criminal conviction requires prosecutors to prove the elements of the offense, including the defendants’ state of knowledge, beyond the allegations themselves.
The outcome is significant for financial institutions operating across borders because trading systems and stock-borrowing procedures may span multiple jurisdictions while remaining subject to local settlement and market rules. The decision also highlights the challenge regulators and prosecutors face when attempting to distinguish a prohibited transaction from conduct that can be shown to have been carried out knowingly.
For HSBC, the ruling ends the prosecution with the acquittal preserved. For South Korean authorities, it provides a major judicial reference point for future enforcement cases involving foreign financial institutions and alleged naked short selling.