South Korean tech giant Kakao Corp. and its affiliate, Kakao Entertainment, are in hot water as they face a raid by the Financial Services Commission (FSC) over allegations of stock manipulation during their takeover of SM Entertainment. The drama unfolds as a team of 40 FSC investigators descend on the companies’ premises in Pangyo, Gyeonggi province, searching for evidence.

The story began in February, when rival company Hybe filed a petition with South Korea’s Financial Supervisory Service (FSS) to investigate an “abnormal” purchase of SM Entertainment shares. Hybe alleged that the purchase violated the law and was made to manipulate the market price, ultimately interfering with Hybe’s own tender offer to buy SM shares at a lower price.

As a result of the controversial purchase, SM Entertainment’s stock price skyrocketed, and the deal with Hybe fell through. Instead, Kakao Corp. and Kakao Entertainment emerged as the largest shareholders of SM Entertainment, owning 20.78% and 19.14% stakes in the company, respectively. The identity of the purchaser, however, remains undisclosed.

Hybe’s accusations suggest that the transaction may have violated Article 176 of the Financial Investment Services and Capital Markets Act. The act prohibits efforts to “attract anyone to trade listed securities or exchange-traded derivatives.” If true, the companies could be found guilty of disturbing the market order and undermining the protection of innocent investors.

Adding fuel to the fire, Kakao Corp. and Kakao Entertainment might have also breached regulations requiring public disclosures upon acquiring over 5% of a corporation’s outstanding shares. As the investigation continues, the tech giants have yet to respond to the allegations.

With the raid rocking the South Korean entertainment and tech industries, all eyes are on Kakao Corp. and Kakao Entertainment as they navigate this high-stakes scandal.

Written by Robert D