[Viewpoint]Fighting fraud

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[Viewpoint]Fighting fraud

Every American housewife knows who Martha Stewart is. She is the idol of homemakers in the United States. Stay-at-home moms cook food, decorate their homes and even change their wallpaper according to Martha Stewart’s teachings.

Martha Stewart Living Omnimedia Inc., founded in 1997, went public on the New York Stock Exchange in 1999 and the total market value of its shares went up to $1 billion. She succeeded in instilling pride in the minds of American housewives and a belief that homemakers could also become successful business entrepreneurs if they were first and foremost capable of managing their households successfully.

Everything was going so well for her. She seemed on top of the world until 2001, when she made a grave mistake. In the midst of her investment activities, she happened to get wind of some information that the biotechnology company she was investing in had not taken out a patent for its new invention. Accordingly, she quickly sold her shares in the company before its price plummeted.

She must have felt relieved, thinking, “I could have lost $45,000.” But then, out of the blue she was ordered to appear in court. She was charged with using insider information to get her money out of the firm before its stock crashed. The court case continued until 2004, when she was sentenced to five months in prison and five months of house arrest.

On top of that, she was fined almost $200,000 ? a much higher price to pay than the $45,000 she had initially thought she had saved. On top of this, she had to withdraw from her position as the chairperson and CEO of MSLO.

In November 2006 in Korea, the stock price of UC ICOLS, a Kosdaq-listed company, which was 2,000 won ($1.94) per share, suddenly started to rise. It was after the new management, who were regarded as experts in mergers and acquisitions, took over the company. In April the following year, the stock price of this company rose to 28,800 won, an 11-fold rise in five and a half months. Investors who dreamed of hitting the jackpot naturally rushed to buy the company’s shares. Securities companies that did brisk business lending money to investors of the stock were whistling a happy tune, too.

However, only two months after that, the top two managers of the company were abruptly arrested on charges of swindling hundreds of billion of won from the company. Soon afterwards, it was also revealed that the management had manipulated the company’s stock price in the market. As shareholders began panicking and started to sell off their shares, the price of UC ICOLS set a new record for nose-diving 13 straight days in a row. In the end, the company’s shares were banned from being traded in the market.

Nevertheless, something strange had happened. One of the two managers who was arrested on charges of embezzlement was released from prison on probation at the beginning of this year. Then, he became the CEO of another Kosdaq-listed company that surprisingly was acquired by UC ICOLS. This company was also driven to the verge of closure in April last year, but was revived after making a series of capital increases.

In the United States, if you get caught participating in unlawful transactions, you are sure to financially ruin yourself and your family, and face serious jail time. It is hard to get probation or bail. You have to compensate for not only the money you swindled, but also pay a fine of three to four times that amount.

However, the consequences in Korea are nowhere near as severe. The first time you get caught, you are most likely to only get probation. Even if you get caught again, you can be saved from serving a jail term if you just pay up about half the money you took.

This is the reason why the number of embezzlement and stock price manipulation cases increases every year. This year, there were 44 embezzlement cases at Kosdaq-listed companies. If things go on like this, it will only be a matter of time before that number hits 100.

There were also 62 fraudulent public announcements. Such examples include incidents in which a firm would release a public statement that it was about to land a huge contract, and then simply go back on the statement later on, in an “O.K., maybe not” kind of attitude.

The number of such fraudulent announcements has almost doubled since last year. The people who believed in these public announcements and made investments were made fools of.

What is more pathetic is that companies that are reduced to shells after stock price manipulation still do not liquidate.

After changing their names, the manipulators often reuse these companies for other stock-price manipulation schemes. This is because of a glaring hole in the system that saves companies from liquidation if they gather enough money and increase their capital.

There are even cases in which the capital increase is made in the books only as a result of collaboration between swindlers and loan sharks. This is the reason why the number of public announcements on capital increases has grown rapidly since last year.

There is no way the government does not know about this situation. The Financial Services Commission and the Korea Stock and Futures Exchange recently revealed they would adjust their listing and withdrawal systems so that the companies that had only shells remaining can not escape withdrawal by taking the shortcut of a capital increase.

However, this is a method that has been under review by the Financial Services Commission since the beginning of last year.

While the commission has sat on its hands for over a year, mulling over a report prepared by an outside research institute, many innocent investors were caught in the net of fraud.

If the Financial Services Commission has already sharpened its knife, shouldn’t it now cut something with it?

*The writer is a deputy business news editor of the JoongAng Ilbo.

by Jung Kyung-min
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