[Why&Next] Korea Capital Market Reveals Its True Colors as Liquidity Shrinks

Financial Crimes Including La Deok-yeon Gang's Stock Manipulation and Ponzi Scheme Allegations Continue
Underlying Issues Exposed Amid Cash Shortages, Declining Returns, and Authorities' Enhanced List Management

As interest rates rise in the United States, the money that had flooded the capital markets since the COVID-19 pandemic is rapidly draining away like a receding tide, leading to a 'money drought.' This has caused illegal and unfair trading practices that had been lurking beneath the surface to come to light one after another. Financial crime groups that had been hiding behind abundant liquidity and anonymity, using methods such as multi-level marketing scams to make quick profits, are now unable to withstand the money drought, declining returns, and regulatory risk management, exposing their true nature.

Organized Financial Crimes Exposed at the Bottom

Before the aftershocks of the Soci?t? G?n?rale (SG)-triggered stock price crash had even subsided, another Ponzi scheme involving billions of won erupted. The head of an advisory firm who had invested in famous films such as "Parasite" and "Hero" is suspected of embezzling large sums of investment funds, prompting police investigations. It is suspected to be a so-called 'Ponzi scheme,' a multi-level investment fraud where returns are paid using new investors' money, and the damage is expected to reach billions of won.

The police have booked several individuals related to the investment advisory firm on charges including fraud for allegedly collecting investment funds from high-net-worth individuals and entrepreneurs under the pretense of investing in unlisted companies and then embezzling the money. The Financial Crime Investigation Unit of the Seoul Metropolitan Police Agency is investigating multiple people from C Investment Advisory Firm, including Mr. A, who is accused of illegal fundraising and fraud. Mr. A is suspected of collecting investment funds of up to 10 billion won per person by promising to return approximately 30% annual profits from investing in unlisted stocks and then embezzling the money. The police have identified damages amounting to 100 billion won so far and have secured testimonies from dozens of victims. They believe there may be more victims.

Mr. A has served as the CEO of C Investment Advisory since 2013 and is known to have generated profits by investing in films such as "Parasite," "Hero," "The Spy Gone North," "Exit," and "Svaha." Later, he acquired real estate-related company P and reportedly raised investment funds from entrepreneurs and asset owners by claiming high returns through unlisted company investments. The police are investigating Mr. A on suspicion that company P conducted unauthorized and unreported investment advisory business. This case is similar to the previously exposed SG-triggered stock price crash. It is a typical financial crime combining scheming by fraudsters and the greed of investors blinded by high returns. Attorney Kim Kwang-jung from Hangyeol said, "Based on the reported facts, there is a high possibility of establishing charges of fraud and embezzlement under the Act on the Aggravated Punishment of Specific Crimes, and also a violation of the Capital Markets Act for conducting investment advisory business without authorization." He added, "The issue is the victims' claims for damages. Although liability for damages due to illegal acts can be pursued, the key is whether forced execution can be carried out on the perpetrators' assets. For this, it is necessary for the prosecution to take seizure and preservation measures on the perpetrators' assets."

Yang Seok-jo, Chief Prosecutor of the Southern District Prosecutors' Office, Lee Bok-hyun, Governor of the Financial Supervisory Service, Kim Ju-hyun, Chairman of the Financial Services Commission, and Son Byung-doo, Chairman of the Korea Exchange (from left), stood side by side on the 23rd at the Korea Exchange in Yeouido, Seoul, at a joint forum of related organizations to eradicate unfair trading. Photo by Yonhap News

Limits of Ponzi Schemes as Market Conditions Worsen

Within the financial investment industry, there is an analysis that the recent series of stock manipulation and financial fraud cases collapsed all at once because the market lost the momentum to boost stock prices, whether listed or unlisted, as liquidity disappeared. A representative from an investment banking firm explained, "It is an abnormal practice similar to a 'gye' (a Korean rotating savings scheme), where money from new investors is used to pay earlier investors. It worked fine when the market was good, but as conditions worsened, the money to pay back disappeared."

In particular, the unlisted market saw a flood of unicorns (unlisted companies valued at over 1 trillion won) based on abundant liquidity after COVID-19. In the unlisted market, which was valued for its potential, liquidity and expectations led to rising corporate valuations. Prices were set by demand, and even ordinary people jumped into unlisted stock investments.

However, as global tightening policies froze investor sentiment, investors became more cautious. Unexpected rises in raw material prices and high interest rates froze the market, causing the value of promising companies to plummet. At the end of the liquidity party, domestic institutional investors such as pension funds, mutual aid associations, insurance companies, and securities firms significantly reduced their investment funds. It became difficult to generate profits in the stock market, and in the bond sector, rising interest rates increased valuation losses, making it challenging even for large institutions to protect their own coffers.

Amid this instability in the capital market and high interest rate environment, financial authorities' entry into risk management of bad assets is also one of the reasons recent incidents have surfaced. After the project financing (PF) securitization default incident triggered by Legoland in Gangwon Province, authorities have focused on crisis management in the financial capital market. The consecutive bankruptcies of U.S. Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank have made the market atmosphere tense, leading authorities to intensify risk management daily. They have launched extensive investigations into abnormal and unfair trading, starting with stress tests to respond to financial institution insolvency crises.

Heads of Institutions United in Calling for Strict Punishment of Capital Market Order Violations

On the 23rd, the heads of four institutions?Kim Ju-hyun, Chairman of the Financial Services Commission; Lee Bok-hyun, Governor of the Financial Supervisory Service; Son Byung-doo, Chairman of the Korea Exchange; and Yang Seok-jo, Chief Prosecutor of the Seoul Southern District Prosecutors' Office?expressed their determination to eradicate unfair trading in the capital market by significantly strengthening inter-agency cooperation systems for detecting and responding to unfair trading. Chairman Kim Ju-hyun said, "Unfair trading in the capital market is a serious crime that robs honest ordinary investors and the future of young people," adding, "This year, we plan to operate an emergency response system with related agencies to focus on eradicating unfair trading." He also stated, "If the amendment to the Capital Markets Act currently under discussion in the National Assembly passes, penalties for stock manipulation crimes and recovery of unjust profits will be significantly strengthened. We will actively consider and promote additional sanction enhancement measures and soon finalize and announce institutional improvement plans regarding the recently raised issues of Contracts for Difference (CFD)."

Governor Lee Bok-hyun said, "It is crucial to establish market order through strict monitoring, investigation, and punishment by consistently applying a zero-tolerance policy toward illegal acts," and added, "We will take this incident as an opportunity for reflection and promote strengthening preventive market surveillance functions, reorganizing investigative organizational structures to improve work efficiency, and enhancing cooperation with related agencies."

Son Byung-doo, Chairman of the Korea Exchange, emphasized, "In light of the recent stock price crash, we are re-examining all the shortcomings in the unfair trading detection system and striving to build a surveillance system that can flexibly respond to rapidly changing market environments by actively supporting investigations and inquiries by related agencies, advancing market surveillance standards and psychological techniques, and expanding information used for market surveillance."

Yang Seok-jo, Chief Prosecutor of the Seoul Southern District Prosecutors' Office, stated, "There is definitely a 'golden time' for responding to capital market crimes," adding, "We will work to establish systematic information sharing and rapid response systems among related agencies to meet this golden time, and beyond strict law enforcement corresponding to unfair trading, we will do our utmost to track and recover illegal profits so that criminals can no longer set foot in the capital market."

"Selective Supervision Needed in Overheated Areas"

Amid repeated financial accidents and the authorities' rigid atmosphere to strictly manage them, the domestic capital market is tightly contracted. Due to stricter supervision and the difficulty in predicting the scale of future insolvencies, securities firms and capital companies are postponing planned investments one after another. However, from a broader perspective, the situation is not entirely bad. Jerome Powell, Chairman of the U.S. Federal Reserve, hinted at a possible pause in rate hikes due to the banking crisis, and the atmosphere in the capital and real estate markets is beginning to stir again. A representative from A Mutual Aid Association said, "The market atmosphere seems to be improving again, so I instructed employees to execute investments boldly," adding, "Real estate prices are also moving slightly, so it doesn't look bad."

Although the global market atmosphere, which had stiffened after U.S. bank failures, is gradually easing, the necessity to properly curb illegal investment behaviors in the capital market, which rapidly expanded and then shrank after COVID-19, remains clear. A representative from the financial investment industry emphasized, "Wise risk management by authorities is necessary for the normal functioning of the market," and stressed, "Selective supervision is needed in overheated areas rather than all-out crackdowns."

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