[Exclusive] Why Did Ra Deok-yeon Send an 8-Page Prison Letter? [War Against Stock Manipulation]

①-⑶Civil Division's 8-Page Prison Letter
"Forced Liquidation of Entire Stocks Due to One Stock's Decline"
Kiwoom "Ra Deok-yeon Distorts Claims to Reduce Own Responsibility"

"Honorable presiding judge, this case concerns the stock price crash caused by Kiwoom Securities, not SG Securities. I will explain the order structure of CFD accounts and the requirements for forced liquidation to clarify this matter."

Ra Deok-yeon, CEO of Hoan Investment Advisory, who was indicted and detained as the main culprit of the 'Soci?t? G?n?rale (SG) Securities incident,' sent a handwritten letter to the civil court handling his lawsuit to express his grievances. He explained to the judge the 'Contract for Difference (CFD) trading structure' and the issue of 'Korea Discount' (undervaluation of the Korean stock market), attributing the responsibility for the stock price crash to Kiwoom Securities and former Dow Kiwoom Group Chairman Kim Ik-rae.

Ra Deok-yeon: "It's like auctioning off all apartments just because the price of apartment No. 1 dropped"

According to a comprehensive report by Asia Economy on the 19th, Ra recently submitted an eight-page handwritten letter to the Seoul Central District Court Civil Division 22 (Presiding Judge Choi Wook-jin), emphasizing that "this ruling will be a cornerstone and turning point for the Korean stock market, which has been distorted by major shareholders for decades, to be properly evaluated."

Ra has been undergoing a criminal trial since his arrest in May last year. In July of the same year, he filed a lawsuit seeking 500 million KRW in damages against former Chairman Kim, Kiwoom Securities, Kim Young-min (Chairman of Seoul City Gas), and Seoul City Gas. The claim was that former Chairman Kim and others engaged in short selling to lower stock prices to reduce inheritance tax, and that forced liquidation of CFDs (mandatory sales to repay loans) caused the stock price crash.

The letter was written five days before the first civil trial date at the Seoul Central District Court on the 8th. Ra stated in the letter, "It is absolutely impossible to forcibly liquidate all stocks in an account just because one stock falls. After reviewing the terms and conditions of Kiwoom Securities' CFD accounts, there is no such provision anywhere," and argued, "It is like taking out loans to buy five apartments from Bank A, and then auctioning off all five apartments in one day just because the price of apartment No. 1 temporarily dropped."

He also wrote, "Dow Data is a company with an annual operating profit exceeding 1 trillion KRW, and the market capitalization at the block deal price was only 1.5 trillion KRW," and "After the crash, Chairman Kim Ik-rae explained it was to pay gift taxes for his children, but even by increasing dividends alone, the amount received by his children and himself would exceed the proceeds from selling the stocks, so this is truly an absurd argument."

Ra also raised the Korea Discount issue. He said, "While the government is introducing various policies, they are blaming major shareholders' inheritance tax as the cause of the Korea Discount," adding, "If Kiwoom Securities' stock price management suppressed the stock price from rising, it would be an act of deceiving 14 million individual investors in Korea, as well as investigative and judicial authorities."

Kiwoom Securities: "The stock price crash is entirely the fault of 'Ra Deok-yeon and his group'"

Kiwoom Securities stated that "Ra Deok-yeon's side is making distorted claims to reduce their responsibility in ongoing civil and criminal lawsuits." A Kiwoom Securities official told Asia Economy, "The responsibility for the stock price crash lies with 'Ra Deok-yeon and his group,' and the stocks artificially supported by Ra and others had low liquidity, making them vulnerable to price drops."

They also denied Ra's claim that the stock price drop of Dow Data triggered the incident. The Kiwoom Securities official said, "On the day of the incident, eight stocks including Dow Data, Sebang, Seoul Gas, and Samchully fell, and these were the stocks targeted by Ra Deok-yeon and others for price manipulation. The prosecution's investigation and court trials regarding Ra's price manipulation are ongoing."

Kiwoom Securities, Yeouido, Seoul. [Image source=Yonhap News]

Regarding Ra's claim that "forced liquidation was arbitrarily executed in Kiwoom Securities' CFD accounts causing Dow Data's stock price to plummet," they rebutted, "There was no forced liquidation volume issued from our CFD accounts during the early trading hours (around 9:20 AM) when Dow Data and others' stock prices sharply dropped," adding, "This fact was also clearly confirmed by the SG Securities representative during the investigation by authorities."

They further stated, "Ra Deok-yeon's claim that 'if one stock falls, the entire account's stocks are forcibly liquidated' deliberately distorts the forced liquidation system and is factually incorrect." Former Chairman Kim and Kiwoom Securities filed a defamation suit against Ra in May last year.

Investigation and trial progress... Ra Deok-yeon's first trial expected to conclude in September

The investigation and trial are ongoing. On the 7th, the Seoul Southern District Prosecutors' Office Financial and Securities Crime Joint Investigation Unit (Chief Prosecutor Ha Dong-woo) announced in an 'interim investigation result' that 41 people involved in unregistered investment advisory and stock price manipulation over about three years were additionally indicted for violating the Capital Markets Act. Including the 15 people, such as Ra, who are already indicted and undergoing first trial, a total of 56 people have been prosecuted in connection with this case.

Ra's first criminal trial, which began in June last year, is currently in the witness examination phase for key figures. Ra, charged with violating the Capital Markets Act (price manipulation, unregistered investment advisory) and the Act on the Aggravated Punishment of Specific Economic Crimes (concealment of criminal proceeds), denies most charges, stating, "I had no intention to manipulate prices and did not manipulate prices."

At the 16th hearing held on the 14th at the Seoul Southern District Court Criminal Division 11 (Presiding Judge Jeong Do-seong), the judge said, "(We) will examine witnesses such as Kim and others from the prosecution side, as well as employees of the Financial Supervisory Service, tax experts, investors, and employees, and expect to conclude around September," adding, "Ra's detention expires on May 25. Witness examinations for Ra are expected before then."

He also said, "It is difficult to decide how to relate and consolidate the additionally indicted cases with this case and how to proceed with witness examinations," adding, "(Currently) the main courtroom is full with 15 defendants. Consolidation seems necessary, but no good solution has been found yet."

Kim, a business partner known as the whistleblower in the case, also did not appear for witness examination. The judge asked, "What is unusual is that Kim is a business partner who greatly helped Ra, but he was not indicted in the additional indictment," and asked, "Has it been decided whether to indict Kim?" The prosecutor replied, "There are accomplices, so investigation on Kim is ongoing," and Ra's side pointed out, "Since Kim is a prosecution witness, we expected him to be brought to court. Ra also sued Kim, but related investigations have not been conducted."

Meanwhile, former Dow Kiwoom Group Chairman Kim Ik-rae has not announced any concrete plans for social contribution after announcing a plan to donate about 60 billion KRW. After the stock price crash, Chairman Kim said he would donate the proceeds from selling Dow Data stocks to society amid ongoing controversy despite continuous explanations. Kiwoom Securities stated, "The foundation establishment will proceed once the supervisory authority or investigation results are somewhat finalized."

Editor's NoteThe 'Ra Deok-yeon Gate,' the largest stock manipulation crime in history with a total illicit gain of 730.5 billion KRW, is approaching its one-year anniversary (April 24, 2023), yet the victims' nightmares have not ended. There are no effective victim relief measures in the Korean capital market. Litigation is the only option, but due to cost burdens and difficulties in proving damages, many cannot even attempt it. The amendment of the Capital Markets Act, which supplements the limitations of criminal punishment and introduces effective financial sanctions due to the 'Ra Deok-yeon Gate,' is significant. However, to eradicate the continuously increasing securities crimes in various forms, it is necessary to establish a system that can efficiently detect and investigate such crimes and to improve additional systems for swift and strict sanctions. The Asia Economy Securities and Capital Markets Department Special Investigation Team examines advanced systems in overseas capital markets and reviews the challenges and directions for our market to suppress securities crimes. As intelligent and organized criminal acts occur, we also seek effective measures for investor relief.

We plan to intensively report from various perspectives on unfair trading such as insider trading, fraudulent transactions, price manipulation, and reporting violations. We will strive to establish comprehensive countermeasures to eradicate capital market crimes. Please send tips to lsa@asiae.co.kr. We will investigate and report thoroughly.

▲Team Leader Lee Seon-ae, Manager △Reporters Kim Min-young, Hwang Yoon-joo, Cha Min-young, Kim Dae-hyun