internet fraud ppt

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Case Study : Internet Fraud May 2002 Eunsoo Ha Financial Supervisory Service The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Directors or the governments they represent. ADB makes no representation concerning and does not guarantee the source, originality, accuracy, completeness or reliability of any statement, information, data, finding, interpretation, advice, opinion, or view presented.

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Case Study : Internet FraudMay 2002 Eunsoo Ha Financial Supervisory ServiceThe views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Directors or the governments they represent. ADB makes no representation concerning and does not guarantee the source, originality, accuracy, completeness or reliability of any statement, information, data, finding, interpretation, advice, opinion, or view presented.

OverviewCyber Development in KoreaNumber of Internet Users Trend of Internet Stock Trading Details of Internet Traders Internet Cafes

Case StudyCase 1 Case 2 Case 3

Conclusion

Cyber Development in KoreaNumber of Internet Users25,000 20,000 15,000 10,000 5,000 -

(unit : 1,000)

1994 Users 138

1995 366

1996 731

1997 1,634

1998

1999

2000

2001

3,103 10,860 19,040 24,380

Trend of Internet Stock Trading100% 80% 60% 40% 20% 0% 1998 1999 Internet 2000 2001

Year Off-line

Details of Internet TradersKSE(March, 2002)KOSDAQ(March, 2002)

Institution 27%

Institution 8%

Individual 73%

Individual 92%

Internet CafesPlaces for computer games, chatting and stock trading on the Internet High-speed internet network equipped with the latest computers Number of Internet Cafes : 21,500 (as of Feb. 2002)

Case StudyCase 1 : Company AKey PointCommitted fraud over the internet by making material misrepresentation about the companys financial information

OverviewSmall, liquor producing company (founded in April, 2000) Registered with the FSS (June 15, 2000) Advertised Public offering on the Internet (900 million won, approximately 700,000 USD) Misrepresented material financial information about the company Only two individual investors subscribed (3 million Won, approximately 2000 USD)

Contents of MisrepresentationValue of Facilities Internet 15 billion won Advertised (approx. 11.5 million USD) Actual 9.7 billion won (approx. 7 million USD) Debts of the Company 0

1.6 billion won (approx. 1.2 million USD)

- These facts were verified through the FSS investigation.

ResultsReported to the prosecutor SEA (Securities Exchange Act) prohibits individuals or institutions to profit by falsely leading investors with incomplete or inaccurate material facts.

Case 2 : Company BKey pointDuring the state of bankruptcy, the company subscribed from the investors via the Internet

OverviewA small company which manufactures and sells communication equipment (founded in March, 1997) Paid-in capital : 200 million won (approx. 150,000 USD) Went bankrupt (on June 26, 2000) Public offering (990 million won, approx. 750,000 USD) on the Internet (on June 19th 29th, 2000) 38 investors offered (32 million won, approx. 20,000 USD) The CEO withdrew the money through PC banking and disappeared.

Content of MisrepresentationEBIT(Earnings Before Interest and Taxes) Internet Advertised Actual 62 million won (approx. 45,000 USD) - 62 million won

Hadnt told the investors that the company is going through bankruptcy during the public offering period

ResultsReported to the prosecutor

Lessons from the Two CasesThe two companies took advantage of loopholes in the public offering rulesAn issuer is not required to file a registration statement with the FSS, unless the offering value exceeds 1 billion won (changed to 2 billion won approx. 1.5 million USD, in Sep. 2001) * As of Sep. 2000, although the value of public offering is under the 1 billion won threshold, the small public offering disclosure documents must be filed. Company A : 900 million won Company B : 990 million won

Some small sized companies take advantage of waiver of the registration statement. Needs careful monitoring.

Case 3Key PointPrice manipulation by Internet trading

OverviewWhen : Jan. 2001 Where : KSE (Korea Stock Exchange) Who : Mr. Kim What : Stock price manipulation How :Using the Internet Chose preferred stocks with a small number of outstanding shares due to their easiness to manipulate price

Why : To profit

Mr. Kim (The leader of the club) Recommend stock investment via E-mail Legendary Fortunes (Stock Investment Club)

Contents of RecommendationOpen stock investment account Suggested delegation of the account management to Mr. Kim Guaranteed the principal Told the club members that the earnings will be divided according to the contributed capital

Mr. Kim

Correspond, Order Internet Chatting(www.humanbelt.com)

Club Members (10 people, 25 accounts) Deposit or Withdraw Money

Office4 Internet lines

Home1 Internet line

HTS Transaction Order Securities Companies

Price Manipulation ProcessMr. Kims Tactics1. Chose preferred stocks with small number of outstanding sharesThe details of the selected company for price manipulation; Total outstanding shares : 661,514 Total market price : 344 million won (approx. 250,000 USD)

2. Bought stock with his own account first 3. Bought stock with his members accounts 4. After the share price went up 5. Sold stock his own account first 6. Sold stock his members account 7. Divided the earnings

Transaction DetailsAccounts Time Buy No. of Shares Time Sell No. of Shares Mr. Kim Members Jan. 3- 8, 2001 Jan. 8-26, 2001 102,180 (15.4%) 279,250 (42.2%) Jan. 26-30, 2001 Jan. 30-31, 2001 102,180 279,250Change of Price2000 1500 Price 1000 500 0

01/12/00

08/12/00

15/12/00

22/12/00

29/12/00

05/01/01

12/01/01

19/01/01

26/01/01

02/02/01

09/02/01

16/02/01

Date

23/02/01

Volume

350,000 300,000 250,000 200,000 150,000 100,000 50,000 0

Trans act i on Vol um Trend e

Date

01 /1 2/ 00 08 /1 2/ 15 00 /1 2/ 00 22 /1 2/ 29 00 /1 2/ 00 05 /0 1/ 12 01 /0 1/ 01 19 /0 1/ 01 26 /0 1/ 02 01 /0 2/ 01 09 /0 2/ 16 01 /0 2/ 01 23 /0 2/ 01

Price and (Volume/100)

5,000 4,000 3,000 2,000 1,000 0

Price and Volume Correlation

Date

01 /1 2 08 /00 /1 2 15 /00 /1 2 22 /00 /1 2 29 /00 /1 2 05 /00 /0 1 12 /01 /0 1 19 /01 /0 1 26 /01 /0 1 02 /01 /0 2 09 /01 /0 2 16 /01 /0 2 23 /01 /0 2/ 01

Price

Volume

Earning DistributionUnit : 1,000 Won

Account Owner Mr. Kim

Invested Money 104,289

Earnings

Rate of Return 78.8%

Earning The Last Rate Distribution of Return -35,190 45.1%

82,221

Members

172,662

-24,476

-14.1%

10,713

6.2%

Total

276,951

57,745

20.8%

ResultsMr. Kim attempted 7 other cases with the same tactics until November 2001 and earned approximately 5.9 billion won (approx. 4.5 million USD) Mr. Kims members didnt realize that Mr. Kim had deceived them when he divide the earnings The FSS reported Mr. Kims case to the prosecutor

ConclusionWith the advancement of communication channels, Internet Frauds have begun to prevail in securities markets The need for special team(s) to deal with Internet Fraud more effectively has risen. International Cooperation is urgently neededMOU

Investor Education