South Korea’s financial regulator has launched an investigation into Morgan Stanley, a global investment bank, over allegations that it used non-public information about chipmaker SK Hynix to place a large sell order. This comes after the Korea Exchange began analyzing accounts suspected of insider trading.
Morgan Stanley recently lowered SK Hynix’s price target from 260,000 won to 120,000 won ($90) and downgraded the chipmaker’s investment rating from “overweight” to “underweight,” citing bleaker memory chip price outlooks in a report titled “Winter Looms,” released on Sept. 15. When trading resumed after the five-day Chuseok holiday on Sept. 19, SK Hynix shares dropped by 6.1%.
However, two days before the report was released, a large-scale sell order for 1,101,719 shares of SK Hynix was placed through Morgan Stanley’s Seoul branch. This accounted for 20% of the bank’s total trading volume that day, raising suspicions of insider trading.
The Financial Supervisory Service (FSS) is investigating whether Morgan Stanley violated the Capital Market Act, according to the financial regulator on Sept. 22. The act prohibits securities firms from making investments based on research and analysis reports on a particular stock within 24 hours after the information in those reports has been finalized. While it is not illegal for a securities firm to execute customer orders, it becomes problematic if the customer was informed of the report in advance.
“When securities firms conduct business with major clients, they often provide investment ideas through analysts and receive orders in return,” said an industry insider. “The unusually large-scale order may suggest that non-public information was leaked to clients, who then placed orders through Morgan Stanley.”
However, proving a breach of the law could prove challenging as most clients trading through Morgan Stanley’s Seoul office are foreign investors. If any information was shared, it is likely that such exchanges took place in the U.S. “Authorities would need access to the smartphones of the analysts involved and the investors who sold SK Hynix shares, which would require cooperation from U.S. authorities,” said a source familiar with the matter.
This is not the first time a global investment bank has been suspected of insider trading or short selling following the release of a sell-side report. In 2021, Morgan Stanley issued a report titled “Memory ― Winter is coming,” drastically lowering its price targets for Samsung Electronics and SK Hynix. Both stocks fell after the report was released. Similar allegations were raised in 2017 when Morgan Stanley cut its price targets for Celltrion and Samsung Electronics, causing both stocks to weaken.
However, in all these cases, the suspicions of using non-public information were never confirmed. “The reason many retail investors in Korea demonize short selling is because of these recurring allegations of insider trading by foreign investment firms using non-public information,” said a source familiar with the matter.
“Some of these foreign reports appear to be aimed at manipulating stock prices to suit certain interests,” said Jeong Eui-jeong, head of the Korea Stock Investors Association. “The Korean stock market is vulnerable to foreign capital flows, which makes stock price volatility more severe.”
