Elliott faces probe over Samsung merger-related disclosure breach

South Korea's financial authorities on Wednesday referred U.S. hedge fund Elliott Associates to state prosecutors for allegedly violating local disclosure rules when it tried to prevent a merger of two Samsung Group affiliates last year.

The Securities and Futures Commission said Elliott abused the total return swap (TRS) system to covertly increase its holdings. This marks the first time that the commission has taken issue with TRS and is expected to set an important precedence in the market.

It said all related files have been sent to state prosecutors, who will carry out an investigation into possible wrongdoings.

Last year, Elliott disclosed that it had bought an additional 2.17 percent stake on top of its 4.95 percent in Samsung C&T Corp, the conglomerate's fashion and trading arm, to own more than a 5 percent stake while making a clear objection to its merger with Cheil Industries. 

The new shares, however, were found to have already been held by foreign brokerage houses under a TRS arrangement with Elliott, leading the Financial Services Commission (FSC) to conclude Elliott had bypassed the local disclosure rule by illegally "parking" its shares in the investment banks.

Under local law, such a parking deal is banned, where a stock owner keeps his or her security holdings in others' accounts in order to hide real ownership.

A trader is also obliged to issue a public disclosure within five days of acquiring a stake of more than 5 percent in a listed company.

Last September, the FSC launched a probe into the case, and the Capital Market Inquiry Committee under its Securities and Futures Committee concluded earlier this month that Elliott violated the disclosure rule.

After wrapping up its bumpy merger process after the tough battle with Elliott, Samsung C&T was reborn as a new entity in September 2015. The merger is part of the group's efforts to streamline its structure through big shakeups of its affiliates. (Yonhap)