[Desk Column] The 'Samo Fund Incident' Should Serve as an Opportunity to Strengthen Financial Fraud Penalties

Bernard Madoff. He was arrested in 2008 on charges of running a Ponzi scheme, where he paid returns to existing investors using funds collected from new investors. The amount of damage was $65 billion (77 trillion won), with actual losses reaching $17.5 billion (20 trillion won). As a former chairman of the Nasdaq Stock Exchange, the shock to the market was even greater. The global financial market faced a crisis due to the subprime mortgage collapse and the largest financial fraud in history, leading to the bankruptcy of financial institutions. In June of the following year, the U.S. Southern District Court of New York sentenced him to 150 years in prison. The court also ruled that all assets he owned or that would be discovered in the future be used to compensate the victims. Now 82 years old, he is incarcerated at a federal prison in North Carolina. He requested early release due to his age and health condition, but the court denied it, considering the ongoing suffering of the victims.

Sholam Weiss, a businessman from New York, was sentenced to 845 years in prison for committing fraud worth $450 million (530 billion won) against National Heritage Life Insurance and is currently serving his sentence at a federal prison in Pennsylvania. Case Pound, who conspired with Weiss, was sentenced to 740 years and died while serving his sentence. This case demonstrates that those who commit financial fraud and receive heavy sentences rarely leave prison alive.

What about South Korea? In 2011, there was the Value Invest Korea incident, where an illegal investment firm raised 700 billion won from about 30,000 people by promoting high returns through crowdfunding techniques. Lee Cheol, CEO of Value Invest Korea, who paid returns by using new investments to cover old ones, was sentenced to 12 years in prison. There was also a scam involving products that promised a 10% interest by investing in currency exchange fluctuations. IDS Holdings embezzled 1.1 trillion won from about 12,000 people using this method from 2011 to 2016. Kim Seong-hoon, CEO of IDS Holdings, was sentenced to only 15 years.

Last year, the Lime incident shook the financial market, with revealed damages amounting to 1.6 trillion won so far. The Lime incident involved Lime Asset Management arbitrarily investing private equity fund money into mezzanine securities such as convertible bonds (CB) or bonds with warrants (BW) of insolvent companies, leading to suspension of redemptions. Former Vice President Lee Jong-pil and others involved are currently detained. The Optimus incident, which surfaced this year, has already seen 520 billion won in investment funds suspended from redemption. Kim Jae-hyun, CEO of Optimus Asset Management, who is in custody, and others deceived sales agents by claiming to invest in public institution accounts receivable to raise funds. It is still unclear where the massive investment funds disappeared. Both the Lime and Optimus incidents are increasingly revealed to be deliberate frauds.

What kind of punishments will they receive in court? Experts agree that under the current legal system, heavy sentences like those in the U.S. are difficult to achieve. Article 347 of the Criminal Act stipulates that fraud crimes are punishable by imprisonment of up to 10 years or a fine of up to 20 million won. Although the Act on the Aggravated Punishment of Specific Crimes allows for up to life imprisonment for fraud, past precedents have rarely exceeded 10 to 20 years in prison. If 12,000 people were victims of financial fraud, the number of affected individuals would increase to 48,000 when considering four family members per victim. Some households lost their retirement funds, others lost their homes. For victims who lost money due to financial fraud, the scars remain lifelong. The economic pain is accompanied by significant psychological distress.

A few days ago, Hong Seong-guk, a member of the Democratic Party of Korea, introduced a representative bill to strengthen penalties for illegal short selling, including naked short selling, titled the "Capital Markets and Financial Investment Business Act Amendment." The amendment raises penalties for illegal short selling from the existing "up to 10 million won fine" to "a surcharge based on the order amount." It also includes provisions for criminal penalties such as imprisonment for more than one year or fines up to five times the illicit gains for illegal short selling. In the U.S., illegal short selling can result in up to 20 years imprisonment. France imposes fines up to ten times the illicit gains. In South Korea, the penalty levels are excessively low, leading to frequent occurrences of naked short selling, with individual investors primarily suffering the losses.

Among fraudsters, there is a saying that "fraud is also a venture." The only way to correct this misguided glorification of fraud is to introduce strong punitive measures. Mercy does not suit fraudsters.