Stock Scandal May Help Open Taiwan Market : Securities: A few big players dominate the action now. Changes could bring more foreign participation.

TAIPEI, Taiwan —  A drama involving shady tycoons, political intrigue, sickbed appeals and millions of dollars has gripped Taiwan’s financial and political world for the last month, and the outcome seems sure to change this island’s roller-coaster stock market, which has long been manipulated by a group of major players known as “Big Hands.”

No one has bigger hands than Oung Ta-ming, the 42-year-old head of one of Taiwan’s largest conglomerates, Hualon Group. Oung has ties to powerful figures among the ruling Nationalist Party, but nevertheless was sentenced to prison this month for breach of trust in a complex stock-transfer case that last year forced the resignation of Taiwan’s transportation minister.

Underlying this drama is a government effort to end the isolation of Taiwan’s tiny market by encouraging foreign investment. The initiative’s chances of success, however, are hampered by the market’s vulnerability to manipulation by a few players.

“This has been great for foreign institutional investors,” says Christopher Galati, an analyst at Jardine Fleming Taiwan Ltd. “The government is finally taking definite steps to clear the playing field for foreign institutional investors.”

A few days after Oung’s arrest in September, another major stock figure with close ties to Hualon, Lei Po-lung, defaulted on $63 million in stock obligations, setting off a chain reaction that led to the arrest of Lei and others on insider-trading charges.

The market responded to the double blows by plunging nearly 10% to its lowest levels since the Gulf War.

In the days before his conviction, Oung was rushed to a hospital after suffering a mild stroke. Politicians from both the Nationalist Party and the opposition Democratic Progressive Party visited him, as did the court judge, who refused to release Oung on health reasons.

While Oung is appealing his conviction to Taiwan’s high court, analysts say the arrests indicate that the days of the Big Hands may be numbered.

“The market will now be able to return to its original function as a channel for financial resources, not a place for gambling,” says Liu Shou-shang, a research fellow at the Chung Institution for Economic Research in Taipei. Gamblers found a home in Taiwan’s stock exchange during the bull market of the late 1980s, when the stock index soared and Big Hands like Oung and Lei made fortunes. Through skillful use of the market, Oung and his brothers built Hualon into a far-flung group involved in textiles, insurance, electronics and even Taiwan’s fledgling aerospace industry.

Hualon is one of the stockholders in Taiwan Aerospace Corp., the government-supported firm that earlier this year backed away from a proposal to purchase up to 40% of Douglas Aircraft, the Long Beach-based division of McDonnell Douglas Corp.

The heady days of the bull market ended abruptly for most Taiwanese in 1990, when the index crashed from 12,000 to around 2,500 in a matter of months.

Bad times really started for Oung, however, in 1991, when Taipei prosecutors began investigating a transfer of shares in one of Hualon’s companies to Oung and several others, including the daughter of Transportation Minister Clement Chang. Prosecutors alleged that the transfer prices were far below market value. They arrested Oung after he refused to answer questions in the case.

In recent days, the government has taken further steps to reassure the jittery market, with the Central Bank announcing a cut in the interest rate. Taiwan’s newspapers have reported that even President Lee Teng-hui supports a proposal to reduce the 0.6% stock transaction tax.

Yet some analysts remain skeptical. The crackdown on the Big Hands may leave the stock market stable but stagnant, of little use to listed companies. “It will be more difficult to raise funds,” says Chiang Tung-feng, a research fellow at the Taiwan Institute of Economic Research. He estimates that Oung and his associates accounted for about 33% of the market’s volume before Oung’s run-in with the law.

Chiang worries that the crackdown may have the unintended effect of strengthening Taiwan’s widespread underground capital markets, which charge interest rates up to 30%.

These markets--part of a traditional Chinese way of borrowing money that avoids legitimate financial institutions--already account for as much as 40% of companies’ resources, he says. For the most part, Chiang says, they are not controlled by organized crime, as are similar operations in other countries.

“If the stock market keeps going like this, these underground markets will grow very quickly in the next one to two years,” Chiang says.

An official of one of Taiwan’s largest business organizations seems unconcerned, however. Kuo Yung-hsiung, deputy secretary general of the Chinese National Federation of Industries, says the crackdown won’t hurt the economy.

“This will make the market more normal,” he says. “Stock markets are for investing, not for speculating.”

That may be, but the stock market has not seen the last of Oung. The biggest of the Big Hands may still have some cards left to play, says Liu Shou-shang of the Chung-Hua Institution. “He is now appealing the sentence,” says Liu. “We may still have another crisis if Oung feels uncomfortable with the outcome.”

Local media reported last week that Oung is considering running for a seat in the legislature.