[La Deok-yeon Gate] Can People Who Invested in La Deok-yeon Receive Compensation for Damages?

Ladukyeon Group Faces Series of Lawsuits from Securities Firms over CFD Sales
Proving Ladukyeon Group's Market Manipulation Charges Key to Lawsuits
“Investing in Unregistered Investment Advisory Firms Is Problematic,” Critics Point Out

As the prosecution has requested an arrest warrant for Ra Deok-yeon, the CEO of Hoan and a key figure in the Soci?t? G?n?rale (SG)-triggered crash incident, investors who suffered losses are increasingly taking legal action against Ra Deok-yeon’s group and securities firms. With damage estimates potentially reaching trillions of won, legal experts agree that proving CEO Ra’s market manipulation charges will be crucial in the lawsuits.

Successive Lawsuits Against Ra Deok-yeon’s Group and Securities Firms

On the 11th, according to the financial investment industry and legal circles, the law firm Hannuri is accepting damage claims from investors who suffered losses in this incident. Attorney Park Pil-seo of Hannuri explained, “Since the facts of the case have not yet been revealed, it is difficult to immediately file a lawsuit for damages. However, if the financial authorities and investigative agencies confirm the suspicions of market manipulation as true, investors who suffered losses are likely to be recognized as victims, so we are preemptively accepting damage claims.”

On the afternoon of the 9th, Gong Hyung-jin, a lawyer from the law firm Daegeon representing investors related to the Soci?t? G?n?rale (SG) Securities crash incident, held a Q&A session with reporters before submitting a complaint against CEO Ra Deok-yeon and others, who were identified as stock manipulation forces, at the Seoul Southern District Prosecutors' Office in Yangcheon-gu, Seoul. Photo by Yonhap News

The law firm Daegeon, which was recruiting plaintiffs to prepare a civil lawsuit, filed a complaint on the 9th with the Seoul Southern District Prosecutors’ Office against CEO Ra Deok-yeon and others for violations of the Act on the Aggravated Punishment of Specific Economic Crimes (fraud, breach of trust), and the Act on the Regulation and Punishment of Criminal Proceeds Concealment. This was based on the judgment that factual verification is needed on how Ra and his group manipulated stock prices before the civil lawsuit. Daegeon estimated the damage amount at 800 billion to 1 trillion won and expected the number of affected investors to reach about 1,000. Earlier, CEO Ra stated in an interview with Asia Economy that over the past three years, he raised about 1 trillion won from around 1,000 investors and operated funds worth up to 2 trillion won using leverage. The law firm Lee Kang also filed a complaint by mail with the Seoul Southern District Prosecutors’ Office on the 1st, representing about 10 victims, requesting an investigation into the stock price manipulation group for violations of the Capital Markets and Financial Investment Business Act.

The law firm One & Partners is recruiting plaintiffs for lawsuits against securities firms. One & Partners claims, “The act of securities firms opening Contracts for Difference (CFD) accounts that allow risky margin trading without directly confirming the account opening intention is potentially illegal.” According to the financial investment industry, about 13 securities firms operate CFD businesses, including Kiwoom Securities, Korea Investment & Securities, NH Investment & Securities, KB Securities, Samsung Securities, Meritz Securities, Hana Securities, and Shinhan Investment Corp. Among them, about 4 to 5 securities firms, including SG Securities, have CFD contracts.

Proving Charges Is Crucial... Some Victims May Be Classified as Accomplices

While the prosecution is investigating CEO Ra Deok-yeon and his aides regarding the stock price crash, legal experts say that for investors’ damage claims to be valid, market manipulation charges must be proven. Investors are currently preparing damage claims mainly against Ra’s group and securities firms. If investigative agencies fail to prove Ra’s illegal acts such as market manipulation, damage claims will be difficult to succeed.

There is also criticism that entrusting money to them in the first place is problematic regardless of whether Ra’s group committed illegal acts. It is understood that Ra operated an unregistered investment advisory firm to gather investors. A financial investment industry official said, “Since the investment was made in an illegal firm, it seems difficult to receive compensation.”

It is uncertain whether all investors who suffered losses will be recognized as victims. Victims can be categorized as ▲ investors fully aware of the CFD investment process ▲ investors claiming they did not know it was a CFD investment ▲ general investors who suffered from the stock price crash. Among these, investors fully aware of the CFD investment process are likely to be classified as criminal accomplices. Courts may interpret that such investors were aware of Ra’s criminal acts and participated with indirect intent.

Attorney Park Pil-seo said, “If it is revealed that investment funds were used for fraud or market manipulation, or that leverage was applied to CFDs without consent contrary to the contract, claims for damages due to breach of contract and illegal acts may be made. However, all this will be concretized after some facts are revealed through investigations by authorities.”

However, innocent individual investors who suffered losses unrelated to this market manipulation incident are expected to find it difficult to claim damages. A thorough investigation is needed to determine whether the stock price crash was caused by forced liquidation during CFD settlement or by other external factors.

Legal experts believe that compensation claims against securities firms will be even more difficult. Some investors argue that they incurred huge debts due to illegal transactions and that securities firms should stop debt collection. In response, securities firms involved in this incident claim, “CFD-related non-face-to-face account openings were conducted properly, and risk disclosures were all agreed upon.” Attorney Kim Kwang-jung of Hangyeol explained, “Providing mobile phones and IDs to Ra’s group and allowing their use means investors threw away the primary identity verification system set up by financial authorities, i.e., their own protection. Currently, securities firms’ debt collection is a normal business activity under the contract.”

Warning Signs for Securities Firms’ Q2 Earnings Due to Uncollected Claims

CFDs are products that allow investment without owning actual stocks. By holding a certain margin (40% of the settlement amount), investors can leverage up to 2.5 times. The difference is settled entirely by the securities firm. If stock prices rise, there is no problem, but if they fall, losses are recorded in the individual account. At this point, individuals must add funds to meet margin requirements. If they fail to meet the margin and a ‘margin call’ occurs, the securities firm executes forced liquidation.

However, if there is still an outstanding balance after forced liquidation, the securities firm that provided leverage may also incur losses. Under the CFD contract structure, domestic securities firms enter into total return swap (TRS) contracts with foreign securities firms that actually trade stocks. Domestic firms first compensate foreign firms for losses and then claim the amount from individuals. If the investor does not deposit the loss amount by the deadline, the securities firm initiates debt collection, including asset tracking and provisional seizure.

Uncollected claims from investors by domestic securities firms are estimated to be up to 1 trillion won. Especially this year, as securities firms intensified CFD marketing, the transaction balance has increased significantly, suggesting that the damage scale could be larger. According to data submitted by the Financial Supervisory Service to Assemblywoman Yang Jeong-sook of the National Assembly’s Political Affairs Committee, as of the end of March, the CFD transaction balance of 13 securities firms was 2.77 trillion won, up about 440 billion won from 2.3254 trillion won at the end of last year. Adding forced liquidation amounts from margin trading could further increase the uncollected amounts.

Financial investment industry insiders expect securities firms’ Q2 earnings to be weaker than anticipated due to this incident. Although debt collection may reduce outstanding amounts by year-end, confirmed losses must be reflected in the accounts receivable section of the half-year report as of the end of June. Credit rating agencies are also paying attention to the ripple effects of this incident. Researcher Lim Hee-yeon of Shinhan Financial Investment said, “There is a possibility that CFD-related profits and losses may shrink due to the suspension of new CFD subscriptions and the Financial Services Commission’s CFD system improvements.”

In particular, Kiwoom Securities is believed to have suffered significant damage to its corporate image due to suspicions that its major shareholder, former Dow Kiwoom Group Chairman Kim Ik-rae, was involved in a stock manipulation case. Researcher Park Hye-jin of Daishin Securities analyzed, “Concerns include a decline in overseas stock market share, a decrease in deposits, and a reduction in active accounts. We should keep in mind that this could lead to a fundamental decline in corporate value.”

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