South Korea’s Financial Supervisory Service Capital Market Special Judicial Police raided the Korea Exchange in Seoul’s Yeouido district on July 27, launching a compulsory investigation into allegations surrounding secondary battery materials company L&F’s massive supply contract disclosure correction. This marks the first time the FSS special police have raided the Korea Exchange, signaling that scrutiny over allegations undermining capital market disclosure credibility is intensifying.
According to the financial investment industry and financial authorities, the special police began securing disclosure documents, explanatory statements, correspondence exchanged during the disclosure review process, and trading records submitted by L&F to the Korea Exchange from the morning of the raid. The search and seizure reportedly constitutes a reference investigation to verify facts related to L&F, rather than targeting the exchange or its employees as subjects of investigation.
The core of the investigation concerns allegations surrounding L&F’s disclosure correction, in which a 3.83 trillion won (approximately $2.6 billion) high-nickel cathode material supply contract announced as signed with Tesla on February 28, 2023, was revised down to approximately 9.73 million won (approximately $6,621) just before the contract’s expiration — effectively a near-total reduction. The original contract size was a mega-deal representing roughly 395% of the company’s revenue for the preceding fiscal year. However, after market close on December 29 last year, just two days before the supply period (early 2024 to end of 2025) was set to expire, the company lowered the contract amount to 9,730,316 won (approximately $6,621), attributing the change to supply volume adjustments.
The disclosure correction sent shockwaves through the market. The following day, December 30, L&F shares plunged 9.85% amid a flood of panic selling. Investors expressed significant frustration that the execution status of a massive contract spanning nearly two years had barely been disclosed, only for the market to learn at the contract’s expiration that it had essentially gone unfulfilled.
The special police are also intensively examining L&F’s disposal of treasury shares prior to the disclosure correction. On December 2 last year, L&F sold 1 million treasury shares to overseas institutional investors, raising 128.1 billion won (approximately $87.2 million). The special police are reportedly investigating whether the company sold these shares to avoid losses while already aware that fulfilling the Tesla supply contract was effectively impossible, without disclosing this information. This could potentially constitute the use of material non-public information under South Korea’s Capital Markets Act.
The Korea Exchange had previously declined to designate the disclosure correction as an unfaithful disclosure. The exchange explained its decision was based on the company’s explanation that the actual supply amount was confirmed at the contract’s expiration, rather than the contract being terminated mid-term or a separate amendment being signed. However, the special police’s raid is interpreted as a determination to verify, from a judicial perspective, whether illegal acts occurred throughout the disclosure process, independent of the exchange’s judgment.
FSS Governor Lee Chan-jin strongly criticized L&F’s disclosure correction during a parliamentary report to the National Assembly’s Political Affairs Committee in February, emphasizing the need to strengthen the disclosure system. Governor Lee stated that “when material changes occur in long-term supply contracts, relevant information must be communicated to investors in a timely manner.” This investigation can be seen as Governor Lee’s concerns translating into concrete investigative action by the special police.
The investigation is also being interpreted as a warning regarding the broader disclosure practices of secondary battery material companies for large-scale orders. A securities industry source noted, “In the case of long-term supply contracts, there have been many instances where companies failed to make timely correction disclosures even when volume changes occurred mid-contract, citing confidentiality clauses in the agreements.” The source predicted that “depending on the outcome of this investigation, standards regarding disclosure timing and content are highly likely to become significantly stricter.”
Based on materials secured through the raid, the FSS special police plan to conduct a detailed analysis of when L&F’s management became aware of the situation, the decision-making process behind the treasury share sale, and communications with the Korea Exchange. The special police are reportedly prepared to summon relevant parties for questioning if necessary.