[La Deok-yeon Gate] Attracting Investors by Balancing Between Illegal and Legal Advisors... Compensation for Damages Likely to Vary

Ra Deok-yeon Repeatedly Opens and Closes Investment Advisory, Similar Advisory, and Unregistered Firms
If Found Guilty of Market Manipulation, Chances of Compensation Increase
Outcomes May Vary Depending on Type of Invested Firm

Ra Deok-yeon, the CEO of Hoan and a key figure in the stock price crash incident triggered by Societe Generale (SG) Securities, also utilized an 'investment advisory firm' as a channel to attract investors. CEO Ra possessed business cards not only from quasi-investment advisory firms but also from investment advisory companies authorized by the Financial Services Commission. He cleverly exploited the lax registration system for investment advisory firms by repeatedly registering and closing quasi-investment advisory and investment advisory businesses to recruit investors.

For this reason, it is understood that illegal operations corresponding to discretionary investment and investment advisory through unregistered investment advisory firms were relatively easy. The core channel for investor recruitment will be revealed after the investigation results, which will also influence whether investors receive compensation for damages.

Establishing an Investment Advisory Firm After Voluntary Closure of Quasi-Investment Advisory Business

According to the financial investment industry on the 16th, CEO Ra established, registered, and closed several companies such as Money Science Invest (quasi-investment advisory), Everest Partners (unregistered), Hoan (unregistered), and R&K Investment Advisory (investment advisory), engaging in discretionary investment and investment advisory activities throughout the process.

Quasi-investment advisory firms, which can provide investment advice on financial investment products to unspecified many, can be established by simply reporting to the Financial Supervisory Service (FSS). Due to the reporting system, there are virtually no entry requirements. Investment advisory businesses must gain investor trust and therefore must undergo registration and screening by financial authorities. Requirements include ▲a corporation under commercial law ▲meeting the statutory minimum capital of 250 million KRW ▲fulfilling major shareholder requirements ▲having at least one full-time investment advisory personnel. The Financial Services Commission conducts the screening process based on these and announces registration or rejection.

In July 2014, CEO Ra reported a quasi-investment advisory business under the name Money Science Invest to the FSS. Subsequently, he launched a website under the name 'Hoan Stock' offering paid broadcasts on stock, futures, and options investments. In February 2017, he opened a YouTube channel called Hoan Stock and uploaded investment lecture videos. Known as a stock and futures expert, he held several offline investment seminars since 2015. In February 2018, he lectured at Kyobo Securities and included in his self-introduction on the website and various offline seminar announcements that he was active as an investment solicitation agent for KB Securities.

In August 2019, the FSS took ex officio deletion action against Money Science Invest due to closure. The ex officio deletion system was introduced by the FSS in July of the same year to swiftly remove unqualified quasi-investment advisory businesses and prevent investor damage. This was triggered by the case of Lee Hee-jin, known as the 'Cheongdam-dong stock millionaire,' who was criminally punished in 2016 for setting up a quasi-investment advisory firm and embezzling large sums through unregistered securities trading.

Following this case, financial authorities established a system allowing ex officio deletion if violations of related laws were detected to prevent a 'second Cheongdam-dong stock millionaire incident.' Grounds for ex officio deletion include ▲closure reported to the National Tax Service or business registration cancellation ▲three or more fines for failure to report or submit documents ▲failure to complete mandatory education or fines for violations of financial laws. After ex officio deletion, the business cannot operate as a quasi-investment advisory firm for five years. Continuing operations after deletion results in criminal penalties of up to one year imprisonment or fines up to 30 million KRW for unregistered business. A financial investment industry official said, "Although the financial authorities introduced ex officio deletion to swiftly remove unqualified quasi-investment advisory businesses, most cases were voluntary closures. Money Science Invest by Ra Deok-yeon was also deleted due to closure," he pointed out.

Later, in March 2020, CEO Ra established R&K Investment Advisory and registered it as an investment advisory firm with the Financial Services Commission. This is why many investors who invested with Ra said, "There was no reason to doubt since it was a company registered with financial authorities." The question is how he could so easily register as an investment advisory firm after closing a quasi-investment advisory business.

Quasi-investment advisory businesses cannot re-register as the same type within one year after closure, but registration as an investment advisory business is allowed. This explains why CEO Ra could register as an investment advisory business. He exploited a loophole in the system. A financial authority official explained, "While re-entry into quasi-investment advisory business requires a one-year wait after closure, voluntary closure of quasi-investment advisory business is not a disqualification for registering as an investment advisory business."

R&K Investment Advisory changed its name to R&K Holdings in April 2021. In June of the same year, the Financial Services Commission announced the cessation of its investment advisory business, and it closed in July last year. Hoan, which became known due to this incident, was established by CEO Ra in September 2016. Hoan is an unregistered investment advisory firm. Everest Partners, established in November 2021, is also an unregistered investment advisory firm primarily engaged in management consulting. Currently, prosecutors and financial authorities are investigating allegations that CEO Ra repeatedly established and closed companies while conducting discretionary investment business without registration.

A Financial Services Commission official stated, "Hoan is an unregistered company, but R&K Investment Advisory was a legitimately registered investment advisory firm." An FSS official also said, "There has never been registration, reporting, or licensing under the name Hoan. However, R&K Investment Advisory was registered as an investment advisory firm in August 2020 and voluntarily applied for business cessation in June 2021, which was approved."

Higher Probability of Compensation for Victims Who Invested in Registered Investment Advisory Firms

The outcome of individual investors' claims for damages is expected to vary depending on whether they invested in quasi-investment advisory, investment advisory, or unregistered firms. First, for investors' claims for damages to be valid, allegations of market manipulation must be proven. Attorney Park Pil-seo of Hannuri Law Firm noted, "If financial authorities and investigative agencies confirm suspicions of market manipulation as facts, investors who suffered losses are likely to be recognized as victims." Hannuri is currently accepting damage reports from investors who suffered losses in this incident.

If investors invested in illegal firms, it will be difficult to receive compensation. Attorney Kim Kwang-jung of Hangyeol Law Firm said, "If an unregistered firm acted like a general investment advisory firm, it constitutes an administrative law violation and falls under civil law damages." However, he added, "If investors knowingly used a high-risk firm not subject to supervision, it means they recognized the high risk of potential damage. While this does not preclude compensation, it may act as a disadvantageous factor such as limiting the defendant's liability or reducing the compensation amount."

Investing through a registered investment advisory firm increases the likelihood of receiving compensation. Attorney Kim explained, "Quasi-investment advisory targets unspecified many, but investment advisory can provide one-on-one advice, so there is a difference in responsibility. If Ra Deok-yeon recruited investors through an investment advisory firm, investors are more likely to receive compensation." He added, "If investors knew the firm's name but were unaware of its registration status, this is a positive factor for compensation."

Ultimately, the most important factor is which firm served as the main hub for investor recruitment. The Financial Services Commission and FSS stated, "The main firms involved in investor recruitment are under investigation, so we cannot disclose this information currently." However, the legal community expects that investigative agencies will clarify the facts to some extent during the investigation.

However, investors who suffered losses must be recognized as victims. Whether investors will be acknowledged as victims in this incident is a key point to watch, as they could potentially be classified as accomplices depending on the circumstances.

Raising the Bar for Investment Advisory

Meanwhile, voices calling for the abolition of the quasi-investment advisory system and raising the bar for investment advisory have grown louder following this incident. Currently, quasi-investment advisory businesses can be established by simply entering the company name, representative's name, capital, investment amount, and major shareholder information. Due to the low threshold, the number of quasi-investment advisory firms increased from 959 at the end of 2015 to 1,912 at the end of 2021. Park Hye-jin, a research fellow at the Korea Capital Market Institute's Fund and Pension Research Division, and Professor Cheon Chang-min of Seoul National University of Science and Technology argued, "In countries like the U.S. and Japan, there is no separate concept of quasi-investment advisory; instead, the concept of investment advisory is broadly interpreted to regulate all cases of individualized advice as investment advisory business. It is desirable to abolish the quasi-investment advisory system."

However, side effects are also mentioned. A financial investment industry official said, "Many firms do not meet the requirements to be absorbed into the investment advisory market, so abolishing quasi-investment advisory at once may lead to the formation of a shadow market underground." He added, "It should be pursued long-term rather than immediate abolition, with short-term measures focusing on raising the threshold first." An FSS official also said, "We must consider side effects such as underground activities. If firms operate outside the supervisory framework, it will be more difficult to regulate illegal activities."

※This SG Securities-triggered stock price crash incident has sounded an alarm for the capital market order. Readers' reports will greatly aid in uncovering the truth. We welcome any reports regarding investment damage cases, suspicions of stock manipulation and asset concealment by Ra Deok-yeon, insider details on large-scale sales by major shareholders of Dow Data and Seoul Gas, or any other relevant information (jebo1@asiae.co.kr). Asia Economy will do its best to establish a transparent capital market order.

This content was produced with the assistance of AI translation services.