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Hanmi scandal reveals weakness of South Korean securities rules

Hanmi Pharmaceutical's manufacturing facility in South Korea.

SEOUL -- Allegations of insider trading at Hanmi Pharmaceutical have highlighted how vulnerable South Korea's securities regulations are to exploitation, with speculative investors suspected of making some 150 billion won ($133 million) with inside information about the drugs group.

Prosecutors raided 10 brokerage houses on Wednesday, including NH Investment & Securities and Shinhan Investment, which bet on short-selling of Hanmi stocks on Sept. 30. These followed a raid on Hanmi's headquarters in southern Seoul on Monday. Hanmi Pharmaceutical, a subsidiary of Hanmi Science, is suspected of leaking information about its termination of a $730 million license deal, which it struck with German drugmaker Boehringer Ingelheim last year, before it filed a public disclosure about the news. Hanmi denies this, saying it merely took some time to consult with the Korea Exchange on the matter.

However, there is a sticking point in that Hanmi technically did nothing wrong, having followed a regulation which requires a company to file a public disclosure on the termination of a contract within 24 hours, no matter how big the amount. Moreover, the regulation is not obligatory, which means Hanmi did not need to file a public disclosure if it did not want to do so.

"Important information affecting investors' decision should be open immediately," said Jeong Yoon-mo, a researcher at Korea Capital Market Institute. "A big technology license deal is critical information which should be included in obligatory matters."

Another problem this case underlines is that even if somebody takes illicit gains through insider trading, the punishment is currently too weak.

"Most of the cases end up with some fines because it is difficult to prove cause and effect of insider trading," said Nam Deock-hee, an attorney at Hannuri Law. "In cases of criminal charges, the punishment is also lighter than that in the U.S."

Chae I-bae, a lawmaker of the opposition People's Party, said that the parliament needs to revise the Securities Collective Lawsuit Act, opening the door for retail investors to file collective lawsuits against companies that file false public disclosures about contracts and other business matters.

Shares of Hanmi Pharmaceutical rose 0.25% to 401,000 won on Wednesday, but they are still far below the 620,000 won level reached on Sept. 29, before the announcement about the collapsed deal. Parent Hanmi Science saw its shares climb 0.69% to 87,700 won, but they are also far lower than the 139,500 won reached on Sept. 29.

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