Korean Banks Sue Newegg, Allege Massive Fraud, ‘Classic Ponzi Scheme’
The online computer component and electronics giant Newegg has been sued by four Korean banks for its alleged role in a massive, Ponzi-scheme like fraud. This is an extension of an earlier case that sent the former CEO of Moneual Inc, Park Hong-seok, to jail for 23 years. In that case, Park was jailed for forging export contracts and using said contracts to secure bank loans. A similar method of action is alleged to have been used here as well.
The case alleges that Newegg and wholesale computer distributor ASI Corp made fraudulent orders for home theater PCs (HTPCs) from Moneual, a South Korean manufacturer of computers and small electronics. The value of these machines was then dramatically inflated out of any proportion with reality and used to secure bank loans. Newegg and ASI then received kickbacks for their willingness to participate in the scheme. The complaint dubs this a “classic Ponzi scheme” and it involved a series of circular transactions, in which cash was flowing from A to B to C and back to A.
Supposedly the PCs involved were being sold for up to 300x their actual value, with a list price of $2,530 and $2,980. It’s not clear, however, if this is somehow a typo — an HTPC billed as being worth 30x its listed value would sell for $85 – $100, which could barely make sense, while a 300x value differential would mean HTPCs worth just $8-$9. Even an ARM SoC from a vendor like Allwinner will set you back $10, which implies there was an error in the brief or these PCs were based on really terrible equipment. Trying to come up with the components of an HTPC you could plausibly purchase for $10 raises the specter of an original Pentium with a hardware media capture card for MPEG-1 processing, or possibly a used first-generation Raspberry Pi (not actually a media system, but seriously, $10?)
“No such business would have bought the products at such an inflated price, unless it intended to create the illusion of extensive, profitable, high-value commerce between it and its supplier for the purpose of defrauding lenders into supporting the transactions,” the complaintsaid.
The plaintiffs want a jury trial with monetary damages and allege they are still owed $230 million by Monseual. If Newegg or ASI were involved in this, it could pose a severe financial problem with both companies and be a significant blow to Newegg’s public standing.