Regal Funds Management ‘considering its rights’ after Korean short-selling indictment

The Korean Prosecutor’s Office has indicted Regal Funds Management and former employee Deepan Pavendranathan, alleging breaches of securities legislation.

Regal Funds Management, led by Phil King, has been indicted by the Korean Prosecutor’s Office. Picture: Jane Dempster

The Korean Prosecutor’s Office has indicted Regal Funds Management and a former employee of the firm, Deepan Pavendranathan, alleging breaches of securities legislation in that market which occurred in 2019, according to three sources.

The Weekend Australian understands Mr Pavendranathan is the trader being targeted by South Korean authorities over allegations he breached short selling laws on a single trading day in 2019. Mr Pavendranathan declined to comment, while Regal said in an ASX statement it denied the allegations and was “considering its rights” under South Korean law. Regal said it understood “by extension” it had also been indicted as well as its former employee.

Regal and the Korean authorities have not named the former Regal employee that is the subject of the indictment.

Mr Pavendranathan departed as Regal’s head of trading and events and set up Catalyst Funds Management in 2021. He had joined Regal after a nine-year stint at Goldman Sachs and prior to that worked with Citigroup in a program trading role.

The indictment has occurred after Regal – an influential Australian hedge fund player – appealed a 313 million won ($340,000) penalty that was issued earlier this year and related to the 2019 alleged legal breaches.

It comes as regulators in Korea enforce a broader clampdown on short selling, which is essentially a trading strategy employed to profit when a stock’s price declines. The Regal and Mr Pavendranathan indictments are understood to relate to allegations of naked short selling.

Naked short selling is a more controversial practice that refers to selling shares that an investor doesn’t actually own and hasn’t borrowed from another party.

Last year, BNP Paribas and HSBC were fined for participating in naked short selling in South Korea, while earlier in 2024 HSBC in Hong Kong and three traders were indicted relating to allegations of illegal short selling.

Those regulatory actions followed a move in 2023 by Korean authorities to completely ban short selling, with a temporary ban that was due to be lifted in mid-2024 since having been extended into next year.

South Korea is pursuing short-selling reform measures since the decision to ban the practice late last year amid concerns about “frequent occurrences of naked short sale activities and their disruptive effects on market’s fair pricing function”, a statement on the Financial Services Commission’s website said. Earlier this year, Korean authorities said they were probing potentially illegal short-selling trades by nine global investment banks.

Regal’s ASX statement on Friday said there was no impact of the indictment on the company’s ability to manage capital.

“RFM is yet to receive a copy of any indictment. Regal will assess the materiality of any potential one-off financial impact to the group,” the statement said.

The Weekend Australian contacted the Korean Prosecutor’s Office requesting further details about the case on Friday. At the time of publication a response had not been received.

Bloomberg earlier reported Regal was the subject of a South Korean regulatory investigation regarding alleged violations of capital markets rules.

Regal was co-founded by industry stalwart Phil King, who is also the firm’s chief investment officer. It has about $17bn in funds under management and is also in the throes of pursuing a takeover of listed rival Platinum Asset Management.

Mr Pavendranathan departed Regal and set up hedge fund Catalyst Funds Management in 2021. It is a global multi-strategy manager and reports at the time had the firm starting with more than $2bn in funds under management.

Regal has confronted regulatory scrutiny in the Australian market several times over the last decade.

The corporate regulator in 2021 banned former Regal portfolio manager Dylan Rands for five years after finding that he engaged in market manipulation.

The ban came nearly two years after the Australian Securities & Investments Commission raided Regal’s offices.

In 2015, Regal entered into an enforceable undertaking with ASIC which was associated with the handling of information relating to Ten Network Holdings’ shares.

Originally published as Regal Funds Management ‘considering its rights’ after Korean short-selling indictment