[Exclusive] Comprehensive Analysis of 162 Criminal Verdicts on 'Coin Pyramid Schemes'... 24% of Defendants Are Investors [Coin Fraud Republic]

Special Project <Coin Fraud Republic - They Were Meticulous>

①-⑴ One-Month 'Full Investigation' of 1st and 2nd Trial Final Verdicts
Total Fraud Damage Amount in Each Court's Deliberation: 2.7 Trillion Won
'Multi-Level Structure' Maximizes Coin Crimes
"Investors, Perpetrators, and Victims Boundaries Mixed"

"The defendant himself was initially a victim who was deceived into investing, believing it was a profitable business. Due to his old age, he could not properly grasp the reality and may have received investments from other victims, which is a mitigating circumstance." (November 16, 2021, Jeonju District Court Gunsan Branch ruling)

"The defendant is a higher-level investor who received investment funds from a total of eight victims. However, it appears that the defendant also participated in the crime after being deceived by the (organization's) chairman and others." (June 14, 2023, Gwangju District Court ruling)

Among the four defendants in South Korea's criminal cases involving 'virtual asset (coin) multi-level marketing (MLM),' one was found to have invested believing in the profit structure presented by the organization and then attracted other new investors, leading to criminal trials. In reality, it was a 'Ponzi scheme' business with no clear profitability, but the characteristic of the MLM structure required continuously generating new investors to pay returns to existing investors. Notably, the MLM organizations actively utilized coins, which have emerged as a new financial transaction area. Although social expectations and speculative sentiment around coins increased, the organizations exploited the still asymmetric information and unstable systems.

Asia Economy collected and analyzed all 162 finalized first and second instance court rulings issued over approximately three and a half years from 2021 to recently, using the keywords 'coin' and 'multi-level marketing' via the Supreme Court's online judgment viewing service. Excluding overlapping content in lower court rulings, the total number of defendants tried by various courts during this period was 297 (including eight corporate defendants), and the total amount of fraud damages reached approximately 2.7 trillion KRW.

"Defendants are also investors"…The blurred boundaries between investors, perpetrators, and victims in coin MLM

The charges applied in coin MLM cases (with multiple charges counted repeatedly) were mainly fraud (102 cases), violation of the Act on the Regulation of Similar Financial Transactions (66 cases), and violation of the Door-to-Door Sales Act (65 cases). There were seven cases where fraud under the Specific Economic Crimes Act, which carries heavier penalties for crimes involving 500 million KRW or more, was applied.

If the business structure was misrepresented and investment funds were taken, it was charged as fraud. The total scale of 'fraud crimes,' including fraud under the Specific Economic Crimes Act, was calculated at 2,669,849,899,999 KRW. When funds are raised from unspecified many people by guaranteeing principal or high returns outside financial institutions, it is judged as a violation of the Act on the Regulation of Similar Financial Transactions, with the total scale of such violations amounting to 2,750,439,427,107 KRW. The total scale of violations of the Door-to-Door Sales Act was 2,741,682,721,500 KRW. In MLM organizations with three or more recruitment levels, where upper-level members recruit lower-level members and receive referral commissions, if actual goods are not traded and only money under the name of investment funds is exchanged, the Door-to-Door Sales Act violation applies.

Analysis showed that among all defendants, 69 (24%) began as investors who directly put their own money into the MLM organization. Since the structure requires exponential growth of later-stage investments for existing investors to receive money, the organization actively encouraged bringing in new investors. Considering that courts often did not directly mention defendants' investment damages in rulings, there are likely more cases where coin MLM perpetrators are also victims.

Previously, A, who worked as a team leader at the Gunsan branch of an MLM organization in Jeonbuk Province, was sentenced to one year in prison in 2021 for fraud after raising 307.5 million KRW from three victims by promising high returns through coin resale using artificial intelligence (AI) robots. The so-called profit indicators were merely numbers, and the business was essentially a Ponzi scheme. However, the court noted that "the defendant also suffered losses after investing money and rising to the team leader position," and "considered that some of the victims' investment funds were returned as profits."

Another group of nine upper-level MLM operators, including B, were acquitted in 2022 after a long trial lasting about four years. The organization's leader claimed to be conducting Bitcoin mining businesses overseas, including Iceland, and B and others traveled across Seoul, Gyeonggi, Incheon, Daejeon, Gwangju, Busan, and Jeju, attracting investments totaling 176.2 billion KRW from unspecified investors. The prosecution charged them with violating the Door-to-Door Sales Act, but the court stated, "Considering the evidence, the defendants were also investors who received limited information," and "it cannot be concluded that they knew they were a 'Ponzi scheme' group paying commissions with Bitcoins invested by lower-level investors."

Compensation for damages was also difficult. In 40 cases, 244 victims applied for compensation orders, but only four (1.6%) were granted by the courts. The compensation order system allows victims to quickly receive damages from convicted defendants in criminal trials without separate civil lawsuits. However, due to the large number of participants and complex investment structures in coin MLM cases, courts rejected victims' applications citing reasons such as "the scope of compensation liability is unclear," "the claimed amount does not match the prosecution's damage amount," and "the victim received commissions or sold some coins."

One in three rulings also pointed out 'victims' unrealistic greed'

"Although the defendants' criminal acts are the main cause of the case, the victims' greed for profits is also partly responsible." (November 24, 2021, Uijeongbu District Court Goyang Branch ruling)

"The victims also decided to invest with greed for high returns in a short period without properly reviewing the business feasibility and profitability." (September 23, 2022, Suwon District Court ruling)

Many rulings mentioned that victims invested their money without careful consideration of the business. Among all rulings, 53 (32%) regarded victims' responsibility as a favorable sentencing factor for defendants. Sentencing factors refer to conditions courts consider when deciding the severity of punishment. The implication is that victims' reckless investments chasing high returns partly contributed to the expansion of crimes and damages.

What about sentences? Among 297 defendants (excluding duplicates in lower courts), 226 (76%) were sentenced to imprisonment including suspended sentences. Twenty defendants (6%) were acquitted. Fines were imposed on 56 defendants, including those who also received imprisonment. Among those sentenced to imprisonment, 88 (39%) received actual prison terms, and 138 (61%) were released on suspended sentences. Among imprisoned defendants, 24 (11%) received prison terms exceeding three years, which cannot be suspended, and 202 (89%) received prison terms of three years or less.

The heaviest sentence during the analyzed period was given to Lee, the CEO of 'V Global,' indicted for fraud under the Specific Economic Crimes Act, violation of the Door-to-Door Sales Act, and violation of the Act on the Regulation of Similar Financial Transactions. This case involved creating a Ponzi MLM structure by requiring account openings costing hundreds of thousands of KRW as a condition for 'exchange membership' in 2020-2021, raising about 2.25 trillion KRW in investment funds. It was a large-scale crime producing about 52,900 victim members in about nine months.

On September 22, 2022, the Suwon High Court appellate panel sentenced Lee to 25 years in prison, heavier than the 22 years in the first trial. Three other executives indicted together received prison terms of 4 to 14 years, as in the first trial. The court criticized, "Victims invested their hard-earned retirement funds, severance pay, or took loans and suffered significant economic and mental distress," and "Given that victims are demanding severe punishment for the defendants, the responsibility is very heavy and the possibility of recidivism is extremely high."

Among defendants, many had prior convictions for similar crimes such as MLM and committed crimes again using coins as social interest grew. Forty defendants (13% of all) had prior convictions for similar crimes. Among them, three were confirmed to have reoffended during the 'recidivism period' (within three years after sentence completion or exemption).

C, sentenced to one year in prison in 2021 by Seoul Central District Court for violating the Act on the Regulation of Similar Financial Transactions, had two prior prison sentences for similar crimes. He was investigated to have joined an MLM crime led by a Chinese coin mining company just three months after his 2017 release. He raised 1.112 billion KRW from investors in Busan and Gwangju by claiming that investing in linked exchange accounts would yield 180-230% returns per mining machine purchased. The court said, "He committed crimes during the recidivism period, making his guilt severe," and "He recruited investors without properly understanding the business to receive recruitment commissions, causing significant damage."

Meanwhile, a total of 360 lawyers appeared as defense counsel in 167 trials. Among them, 286 (79%) were private attorneys and 74 (20%) were public defenders. Among private attorneys, 28 belonged to the top 10 large domestic law firms, accounting for 7% of the total. The impressive record of lawyer D, who has focused on defending defendants in coin MLM cases for a long time, was also confirmed. Forty defendants (13% of all) were represented by him. Notably, 14 of the 20 acquitted defendants (70%) secured acquittals through lawyer D's defense.

Only the amounts related to the crimes recognized as guilty in the rulings were aggregated.

▲Since 2021, a total of 204 finalized rulings were found using the keywords 'coin & multi-level marketing,' but cases where coins were not used in the MLM crime process were excluded from analysis.

▲From the 162 rulings, the background of each court's judgment was examined, ensuring no duplication in the total crime scale and defendant count when first and second instance rulings were both published.

▲The crime amounts were separately calculated for fraud, violation of the Act on the Regulation of Similar Financial Transactions, and violation of the Door-to-Door Sales Act.

We plan to conduct in-depth investigative reporting on 'virtual asset investment fraud.' We will strive to establish comprehensive countermeasures to eradicate coin crimes. Please send tips to (lsa@asiae.co.kr). We will investigate and report thoroughly.

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