The court has ruled that the early investors in the IDS Holdings 1 trillion won investment fraud case, dubbed the "second Jo Hee-pal incident," must return the large sums of dividends they received from former IDS Holdings CEO Kim Seong-hoon.
Victims of the trillion-won financial fraud case involving the multi-level marketing organization IDS Holdings held a press conference on February 17, 2020, at the three-way intersection in front of the Seoul Central District Court in Seocho-gu, Seoul. Photo by Hyunmin Kim kimhyun81@
According to the legal community on the 7th, the Seoul High Court Civil Division 12-1 (Presiding Judge Yoon Jong-gu) recently ruled in favor of the bankruptcy trustee in the appeal trial of a civil lawsuit filed by early investors A and B against other investors who suffered damages due to former CEO Kim, i.e., Kim’s bankruptcy trustee.
The court stated, "Former CEO Kim intended to provide additional dividends beyond the usual payouts to key early investors such as A," adding, "Simply having vague expectations of receiving high returns on his investment without properly verifying the existence of a high-risk, high-return investment source that could not be obtained through ordinary financial transactions or investment activities, does not suffice to conclude that the plaintiffs were unaware of the fact that this caused harm to other creditors (investment victims)."
Previously, former CEO Kim was sentenced to 15 years in prison by the Supreme Court in 2017 for defrauding about 12,000 investors of approximately 1.7 trillion won between 2011 and 2016 by falsely promising monthly dividends of 1-10% and principal repayment through FX margin trading and other investments. FX margin trading is a speculative product involving simultaneous over-the-counter buying and selling of multiple foreign currencies to gain exchange rate profits, but IDS Holdings operated a pyramid scheme that repaid principal and interest on earlier investments using new investment funds.
In 2019, the court declared Kim bankrupt, opening a path for victims to receive partial compensation. The bankruptcy trustee appointed by the court located and sold Kim’s assets and proceeded to distribute the funds fairly through the bankruptcy estate. The more assets recovered, the greater the compensation returned to the victims.
During this process, the bankruptcy trustee obtained IDS Holdings’ electronic data and discovered that A and B had each received dividends of about 5 billion won and 800 million won respectively from former CEO Kim at high interest rates, and filed a claim of 'avoidance' regarding their receipt of these dividends.
Avoidance refers to the bankruptcy trustee’s refusal to recognize the validity of acts performed by the debtor before the bankruptcy declaration that harmed the bankruptcy creditors. Assets recovered through avoidance become property of the bankruptcy estate. However, for the trustee to exercise avoidance rights, the person who benefited from such acts must have been aware at the time that the acts harmed the bankruptcy creditors. The court accepted the avoidance claim, ordering the return of assets transferred only to specific creditors such as A.
A and B filed this lawsuit requesting the cancellation of the court’s decision to accept the avoidance claim. They argued, "We only lent money to or invested in IDS Holdings and received interest and dividends," and claimed, "We are also victims and were unaware that receiving dividends caused harm to other victims."
The first trial rejected their claims, stating, "The act of paying dividends to senior investors through so-called 'rolling over' is a 'biased act' subject to avoidance."
It further pointed out, "Although the plaintiffs did not directly engage in investment solicitation activities, they were major investors who invested large sums from the early stages of the business," and "They received an early monthly return of 8%, which was significantly higher than the 2-5% monthly returns of other general investors, and appeared to have received special consideration to obtain higher dividends."
Having lost again in the appeal trial, party A expressed their intention to seek a ruling from the Supreme Court.
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