The state auditor plans to launch a special inspection of the nation's financial watchdog next week in connection with its oversight of a family-controlled conglomerate accused of fraud and malpractice in issuing bonds, a source said Sunday.

Tong Yang Group, the 38th-largest conglomerate in South Korea, is suspected of selling debts worth around 2 trillion won ($1.89 billion) to investors without fully informing them of its repayment conditions and default risks.

"The Board of Audit and Inspection plans to carry out an on-spot inspection of the financial oversight bodies from Jan. 20 for more than 10 days," said the source on condition of anonymity.

The probe into the Financial Services Commission and its executive body Financial Supervisory Service will focus on why the regulators allowed the conglomerate to sell bonds and commercial papers below investment grade, he said.

The inspection comes months after investors in Tong Yang debts and civic groups filed a petition with the state inspector.

Last week, the FSC brought a criminal charge against Chairman Hyun Jae-hyun of the conglomerate, accusing him of instructing the group's brokerage arm to sell financial products tied to the group's distressed assets without informing investors of their risks.

Prosecutors sought an arrest warrant for Hyun for fraud and malpractice on Tuesday, with a local court set to determine whether to accept the request on Monday. 

In September last year, Tong Yang Group sought court receivership for five of its subsidiaries after failing to repay debts worth 110 billion won on cash shortages. So far, Tong Yang's liquidity crisis has put more than 40,000 individual investors on the brink of losing an estimated 2 trillion won. (Yonhap News)