300 Million Won Return on 50 Million Won Investment in Six Months

“Invest 50 million won and in six months, you’ll get 300 million won in returns. Invest right now. The stock prices of the items that we invested in are doubling every week, so trust us and take a chance.”

When a reporter of the Dong-A Ilbo called A, a pseudo-investment consulting company, this is what the employee said, trying to get the reporter to invest. An official of A even gave their bank account number, saying, “The prices of some items double once every one or two weeks, and some others have risen five to six-fold in three to four months. You should invest immediately.”

With the securities boom, pseudo-investment consulting companies are on the rise, and illegal operations are rampant. According to the Financial Supervisory Service on August 31, the number of pseudo-investment consulting companies is estimated at 138 as of July 2007, up 37 from 101 in June 2005.

High return guarantees and one-on-one consulting-

Pseudo-investment consulting companies charge membership fees and provide investors with information on securities through the Internet, automatic reply systems (ARS), or text messages.

To establish a company, licensed investment consulting companies need to meet a certain set of conditions in terms of capital and number of employees to get a license. They are also under the supervision of the financial authorities. However, pseudo-investment consulting companies, which do not need a license, only need to report the authorities.

It is illegal for pseudo-investment consulting companies to consult one-on-one, manage entrusted funds, and guarantee returns.

However, when the reporter called 60 pseudo-investment consulting companies, 16 answered that one-on-one consulting or trust management was possible.

A company claimed that their consulting fee was three million won for three months, and five million won for six months, but you cannot call this expensive because a 10% return in a month is guaranteed.

Another tried to lure the reporter, saying, “One customer trusted us with 58 million won and received 82 million won return in 2.5 months. We will recommend KOSDAQ items with 30 to 50% price increases in two or three months.”

Another company said that they only accept funds more than 100 million won, and that their annual ROI (return on investment) is 50%.

The buck stops at the investors-

If a loss is incurred in funds entrusted to pseudo-investment consulting companies, only the investor is damaged. There are many companies that hire so-called freelance investment professionals as contract workers, and this makes it difficult to see where the responsibility lies.

K, an office worker, entrusted a free-lance professional at a pseudo-investment consulting company with 25 million won in 2005. After five months, he lost 16 million won.

K said, “He first told me that a double or 300% return is possible. But when the losses got bigger, he cleared out and stock prices plunged further. So in the end, I was left with only 2.9 million won. I reported this to the authorities, but they told me that punishment was impossible because there is no material evidence.”

The FSS requests the police or the prosecution for an investigation after being reported through the Asset Management Supervision Department (Tel. 02-3786-8328) under the Direct Investment Asset Management Act.

However, many of the companies cover their tracks or dispose of contract documents that could be used as evidence once a problem arises. This makes it difficult to punish them. Moreover, even though many start their businesses without reporting them, there is no law to punish them, so the FSS estimates that there will be a lot of such companies in the future.

An official of the FSS said, “Actually there is nothing we can do except for banning them from using phrases such as ‘100% guarantee of the principal’ on advertisements and uploading the names of these companies monthly. Currently, the only way to avoid losses is to be cautious.”

aryssong@donga.com