[La Deok-yeon Gate] Three Differences in the Evolved Tactics of La Deok-yeon’s Gang Compared to Past Operation Forces

Investor Mobile Phones Used to Disable Authorities' Surveillance System
Attracting Numerous Investors and Leveraging with CFDs
Collecting Fees through Golf Practice Ranges, Restaurants, and Equestrian Resorts

On the late afternoon of the 10th, the prosecution requested an arrest warrant for CEO Ra Deok-yeon of Hoan, a key figure in the Soci?t? G?n?rale (SG) Securities crash incident, signaling that the investigation is entering its main phase. Victims hoping to recover even part of their losses through litigation are eager for a detailed revelation of the stock price fluctuations of eight listed companies, including Samchully, Dow Data, and Seoul Gas. Market regulators and capital market industry insiders also expect the investigation to uncover how CEO Ra recruited investors, accumulated stocks, and planned his exit (investment recovery).

Placing Orders Using Investors' Mobile Phones to Evade Surveillance

Security experts are focusing on the fact that CEO Ra raised stock prices by gathering investors for at least three years without being caught by the monitoring systems of the Financial Supervisory Service (FSS) and Korea Exchange (KRX).

The joint investigation team comprising the Seoul Southern District Prosecutors' Office, Financial Services Commission, and Financial Supervisory Service is concentrating its efforts on CEO Ra for violations of the Capital Markets Act, including market manipulation, unregistered investment advisory business, and the Act on Reporting and Using Specified Financial Transaction Information (anti-money laundering). Even if CEO Ra claims he did not intervene in the sharp price drops of the eight companies involved, such as Dow Data and Seoul Urban Gas, he can still be punished if he illegally accumulated stocks.

According to testimonies from some investors who invested with CEO Ra, a notable difference from past stock manipulation groups is that he secured smartphones under the names of investors during the stock accumulation process spanning over three years. By allowing investors to freely access the Mobile Trading System (MTS), the regulatory authorities' surveillance systems became ineffective. Orders were placed nationwide via smartphones, making IP address tracking impossible. This successfully created the appearance of numerous unrelated individuals trading legitimately. Attorney Kim Kwang-jung of the law firm Hangyeol explained, "To open an account remotely, one must send an ID and verify with a mobile phone under their own name. Although systems exist to prevent identity theft, they were nullified because the actual owners permitted access."

IP tracking has long been one of the regulatory authorities' surveillance techniques. In the past, stock manipulation groups, even when using multiple accounts, usually gathered in specific locations to trade stocks. Trading with a few accounts makes it easy for securities firms or the KRX monitoring system to detect suspicious activity. The KRX Market Surveillance Committee publicly announces stocks under investment caution if there is a likelihood of speculative or unfair trading according to market surveillance regulations. The monitoring system can filter out stocks with ▲concentrated trading at a few branches, ▲concentrated trading by a few accounts, and ▲top stocks by single-account trading volume. This is why manipulators secure many accounts during the planning stage.

However, only a few are directly involved in trading to prevent mistakes or betrayal during the buying and selling process. Although various internet services are applied for, the IP addresses are limited. The authorities have built systems to monitor accounts with different names but identical IP addresses.

When authorities improve systems to catch manipulators, the groups learn and evolve. In 2018, the FSS uncovered a group that recruited part-time workers nationwide and used macro (automated input repetition) programs to manipulate stock prices on a large scale. These part-time workers operated individually in places like Eunpyeong-gu in Seoul, Nam-gu in Incheon, and Yongin-si in Gyeonggi Province, running macro programs under the manipulators' instructions. This was intended to make IP tracking difficult. They developed their own macro program and manipulated prices for five years.

CEO Ra's group used MTS to accumulate stocks in low-volume sectors that existing monitoring systems could not detect. Prosecutors seized around 200 investors' mobile phones from Ra's office, believed to have been used for stock trading. Trading stocks with 200 or more mobile phones likely helped disguise orders as non-malicious, avoiding detection of fictitious orders, collusive or disguised trading, which are key targets of regulatory surveillance.

The current system issues warnings in stages?phone warnings, written warnings, notice of refusal to accept orders, and refusal to accept orders?to accounts repeatedly submitting suspicious orders. Ra's group avoided this surveillance by obtaining MTS accounts opened with mobile phones from various investors, including professionals, wealthy individuals, and celebrities.

Gathering Personal Investor Funds Instead of Myeongdong Private Loans

In several interviews, CEO Ra showed his own account and said he "incurred losses." Although he invested his own funds, the majority of the money used to purchase stocks of Samchully, Dow Data, Seoul Gas, and others came from investors' accounts.

In past stock manipulation cases, private loans were raised in Myeongdong or Gangnam to acquire management rights of listed companies, inflate stock prices, and generate capital gains or embezzle company funds. This is known as a so-called no-capital merger and acquisition (M&A).

Recently, the prosecution indicted the management of semiconductor-specialized KOSDAQ-listed Company A on charges of securing management rights through no-capital M&A and embezzling 15.5 billion KRW of company funds. They used construction payments received from contractors for personal debt repayment. In 2017, a group was sentenced to 10 years in prison and fined 300 million KRW for fabricating the acquisition of KOSDAQ-listed YD Online shares with capital from refrigerator seller Cloud Magic, gaining illicit profits worth 20 billion KRW. It was revealed that the actual purchase funds came from private lenders.

When acquiring management rights using private loans, the stock manipulation period is usually short due to high interest rates. They mainly spread false information to raise stock prices, gain capital gains, and then repay debts. Some repay debts immediately after securing management rights using company funds.

No-capital M&A often causes rapid short-term stock price surges, making it difficult to evade regulatory surveillance. Individual investors who suffer losses during the price correction phase often file complaints with regulators. Even if the manipulation succeeds, someone is eventually held accountable.

CEO Ra chose a different path from typical 'pot' financing. He recruited investors who did not require interest payments and could receive commissions when profits were made. As will be revealed in the investigation, considering the scale of the listed companies involved in the stock manipulation, the number of investors who entrusted funds to CEO Ra is expected to exceed several hundred. These include mid-sized group owners, high-net-worth individuals, professionals such as doctors, and celebrities.

How CEO Ra persuaded investors has not yet been disclosed. A video was released showing singer Lim Chang-jung attending an investor meeting and encouraging investment. Former Ananti Group Chairman Lee Joong-myung and Huons Group Chairman Yoon Sung-tae also invested with CEO Ra. Until about five to six years ago, Ra was known simply as a stock expert, so it is unlikely he initially contacted famous figures to secure investments. However, as time passed and stock prices rose, allowing verification of returns through accounts, investment funds likely increased rapidly.

A financial investment industry insider speculated, "There was probably a connection that introduced wealthy individuals early on. As the stock prices of Seonkwang and Sebang steadily rose over three years, CEO Ra's claim of investing in undervalued asset stocks and generating high returns gained credibility."

Evolved Methods of Receiving Various Corporate Commissions

Receiving investments from numerous unspecified individuals can cause issues in commission settlements and confidentiality. If commissions are not properly collected, it benefits investors disproportionately. CEO Ra accumulated cash by steadily purchasing stocks with investment funds and collecting commissions from investors. However, considering potential problems if commissions were received through his investment-related corporations, he used unrelated businesses such as golf practice ranges, restaurants, hospitals, galleries, fitness centers, and equestrian resorts. Investors who suffered huge losses after investing with Ra unanimously stated, "Ra used various business establishments to collect commissions."

A golf academy in Gangnam-gu, Seoul, operated by Mr. An, a former professional golfer and aide to CEO Ra Deok-yeon. Photo by Yonhap News

CEO Ra is also suspected of employing a so-called 'card kkang' method by receiving part of the profits as commissions through various corporations, and of attempting to embezzle profits and commissions realized from stock manipulation by purchasing overseas real estate such as golf courses.

The joint investigation team also arrested former professional golfer Mr. A, who is known to have served as a channel for CEO Ra to collect commissions from investors through a golf academy. He also operated a cable channel and an equestrian resort. Prosecutors plan to focus on Ra's overseas investments in golf courses and other real estate, investigating suspicions of laundering criminal proceeds abroad.

Despite a considerable number of investors, regulators failed to detect abnormalities until the stock price crash last month. There may have been exaggerations during investment solicitations, and disputes could arise between Ra and investors if expectations were unmet. Moreover, investors who made significant profits might have boasted, causing Ra's name to circulate in Yeouido's securities circles. By the end of last year, stocks like Daesung Holdings, Seoul Gas, and Samchully were called 'Stairway to Heaven' and attracted attention among investors on various stock forums.

Stocks that steadily generated profits but had low growth rates rose without significant corrections, with no clear cause. No specific group's accumulation was visible on stock forums. Even among full-time investors, shareholders of Sebang and Seonkwang were envied. One full-time investor said, "I watched the New York stock market overnight and did daily short-term trading, but couldn't keep up with Seonkwang's rise. Without a single investment warning or disclosure request due to price increases, there was no way to verify the reason for the rise."

Given that singer Lim Chang-jung attended events hosted by CEO Ra, it appears investor meetings were held regularly. Market experts speculate these gatherings were not only for encouraging investment but also for conveying cautionary advice to investors. Although Ra managed to maintain stock price increases and collect commissions well for at least three years, gaps appeared earlier this year. Media outlets began investigations following tips, and regulators belatedly started to scrutinize the matter.

※This SG Securities-induced stock price crash has sounded an alarm for the capital market order. Readers' tips will be a great help in uncovering the truth. We welcome any information regarding investment damage cases, suspicions of stock manipulation and asset concealment by Ra Deok-yeon, details about large-scale sales by major shareholders of Dow Data and Seoul Gas, or any other related content (jebo1@asiae.co.kr). Asia Economy is committed to establishing a transparent capital market order.