Case Study : Internet Fraud
May 2002 Eunsoo Ha Financial Supervisory Service
The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Directors or the governments they represent. ADB makes no representation concerning and does not guarantee the source, originality, accuracy, completeness or reliability of any statement, information, data, finding, interpretation, advice, opinion, or view presented.
Overview
Cyber Development in Korea
Number of Internet Users Trend of Internet Stock Trading Details of Internet Traders Internet Cafes
Case Study
Case 1 Case 2 Case 3
Conclusion
Cyber Development in Korea
Number of Internet Users
25,000 20,000 15,000 10,000 5,000 -
(unit : 1,000)
1994 Users 138
1995 366
1996 731
1997 1,634
1998
1999
2000
2001
3,103 10,860 19,040 24,380
Trend of Internet Stock Trading
100% 80% 60% 40% 20% 0% 1998 1999 Internet 2000 2001
Year Off-line
Details of Internet Traders
KSE(March, 2002)
KOSDAQ(March, 2002)
Institution 27%
Institution 8%
Individual 73%
Individual 92%
Internet Cafes
Places for computer games, chatting and stock trading on the Internet High-speed internet network equipped with the latest computers Number of Internet Cafes : 21,500 (as of Feb. 2002)
Case Study
Case 1 : Company A
Key Point
Committed fraud over the internet by making material misrepresentation about the companys financial information
Overview
Small, liquor producing company (founded in April, 2000) Registered with the FSS (June 15, 2000) Advertised Public offering on the Internet (900 million won, approximately 700,000 USD) Misrepresented material financial information about the company Only two individual investors subscribed (3 million Won, approximately 2000 USD)
Contents of Misrepresentation
Value of Facilities Internet 15 billion won Advertised (approx. 11.5 million USD) Actual 9.7 billion won (approx. 7 million USD) Debts of the Company 0
1.6 billion won (approx. 1.2 million USD)
- These facts were verified through the FSS investigation.
Results
Reported to the prosecutor SEA (Securities Exchange Act) prohibits individuals or institutions to profit by falsely leading investors with incomplete or inaccurate material facts.
Case 2 : Company B
Key point
During the state of bankruptcy, the company subscribed from the investors via the Internet
Overview
A small company which manufactures and sells communication equipment (founded in March, 1997) Paid-in capital : 200 million won (approx. 150,000 USD) Went bankrupt (on June 26, 2000) Public offering (990 million won, approx. 750,000 USD) on the Internet (on June 19th 29th, 2000) 38 investors offered (32 million won, approx. 20,000 USD) The CEO withdrew the money through PC banking and disappeared.
Content of Misrepresentation
EBIT(Earnings Before Interest and Taxes) Internet Advertised Actual 62 million won (approx. 45,000 USD) - 62 million won
Hadnt told the investors that the company is going through bankruptcy during the public offering period
Results
Reported to the prosecutor
Lessons from the Two Cases
The two companies took advantage of loopholes in the public offering rules
An issuer is not required to file a registration statement with the FSS, unless the offering value exceeds 1 billion won (changed to 2 billion won approx. 1.5 million USD, in Sep. 2001) * As of Sep. 2000, although the value of public offering is under the 1 billion won threshold, the small public offering disclosure documents must be filed. Company A : 900 million won Company B : 990 million won
Some small sized companies take advantage of waiver of the registration statement. Needs careful monitoring.
Case 3
Key Point
Price manipulation by Internet trading
Overview
When : Jan. 2001 Where : KSE (Korea Stock Exchange) Who : Mr. Kim What : Stock price manipulation How :
Using the Internet Chose preferred stocks with a small number of outstanding shares due to their easiness to manipulate price
Why : To profit
Mr. Kim (The leader of the club) Recommend stock investment via E-mail Legendary Fortunes (Stock Investment Club)
Contents of Recommendation
Open stock investment account Suggested delegation of the account management to Mr. Kim Guaranteed the principal Told the club members that the earnings will be divided according to the contributed capital
Mr. Kim
Correspond, Order Internet Chatting
(www.humanbelt.com)
Club Members (10 people, 25 accounts) Deposit or Withdraw Money
Office
4 Internet lines
Home
1 Internet line
HTS Transaction Order Securities Companies
Price Manipulation Process
Mr. Kims Tactics
1. Chose preferred stocks with small number of outstanding shares
The details of the selected company for price manipulation; Total outstanding shares : 661,514 Total market price : 344 million won (approx. 250,000 USD)
2. Bought stock with his own account first 3. Bought stock with his members accounts 4. After the share price went up 5. Sold stock his own account first 6. Sold stock his members account 7. Divided the earnings
Transaction Details
Accounts Time Buy No. of Shares Time Sell No. of Shares Mr. Kim Members Jan. 3- 8, 2001 Jan. 8-26, 2001 102,180 (15.4%) 279,250 (42.2%) Jan. 26-30, 2001 Jan. 30-31, 2001 102,180 279,250
Change of Price
2000 1500 Price 1000 500 0
01/12/00
08/12/00
15/12/00
22/12/00
29/12/00
05/01/01
12/01/01
19/01/01
26/01/01
02/02/01
09/02/01
16/02/01
Date
23/02/01
Volume
350,000 300,000 250,000 200,000 150,000 100,000 50,000 0
Trans act i on Vol um Trend e
Date
01 /1 2/ 00 08 /1 2/ 15 00 /1 2/ 00 22 /1 2/ 29 00 /1 2/ 00 05 /0 1/ 12 01 /0 1/ 01 19 /0 1/ 01 26 /0 1/ 02 01 /0 2/ 01 09 /0 2/ 16 01 /0 2/ 01 23 /0 2/ 01
Price and (Volume/100)
5,000 4,000 3,000 2,000 1,000 0
Price and Volume Correlation
Date
01 /1 2 08 /00 /1 2 15 /00 /1 2 22 /00 /1 2 29 /00 /1 2 05 /00 /0 1 12 /01 /0 1 19 /01 /0 1 26 /01 /0 1 02 /01 /0 2 09 /01 /0 2 16 /01 /0 2 23 /01 /0 2/ 01
Price
Volume
Earning Distribution
Unit : 1,000 Won
Account Owner Mr. Kim
Invested Money 104,289
Earnings
Rate of Return 78.8%
Earning The Last Rate Distribution of Return -35,190 45.1%
82,221
Members
172,662
-24,476
-14.1%
10,713
6.2%
Total
276,951
57,745
20.8%
Results
Mr. Kim attempted 7 other cases with the same tactics until November 2001 and earned approximately 5.9 billion won (approx. 4.5 million USD) Mr. Kims members didnt realize that Mr. Kim had deceived them when he divide the earnings The FSS reported Mr. Kims case to the prosecutor
Conclusion
With the advancement of communication channels, Internet Frauds have begun to prevail in securities markets The need for special team(s) to deal with Internet Fraud more effectively has risen. International Cooperation is urgently needed
MOU
Investor Education
