The Fraud Examiner

How a Cryptocurrency Tied to a Shipwreck Launched a Steel Company’s Stock Through the Roof
 

Mason Wilder, CFE                       
Research Specialist, Association of Certified Fraud Examiners                                 



On July 15, a South Korean treasure hunting company called the Shinil Group claimed it found the wreck of a Russian warship, the Dmitrii Donskoi. The ship sank east of the Korean Peninsula more than 100 years prior during a 1905 battle with the Japanese while carrying a cargo of 200 tons of gold bullion, according to Shinil’s claim. The Shinil Group announced the find in a full-page newspaper ad, and also claimed that in 2019 they would distribute dividends worth 10% of the sunken treasure’s value to holders of the Shinil Gold Coin cryptocurrency — available on the newly launched Donskoi International Exchange. The company released a statement two days later that featured photos and video of the shipwreck, including what appeared to be confirmation of the ship’s name painted on the hull.

Following these initial announcements, the story drew international attention — as did the announcement that the co-owner of the Shinil Group agreed to become the majority shareholder of Jeil Steel, another South Korean firm. With fantasies of sunken treasure fueling presales of the Shinil Gold Coin, Jeil Steel stock soared — increasing more than 200% after being mentioned in connection with Shinil.

All the attention and excitement surrounding the shipwreck find also drew scrutiny. It was soon discovered that the Shinil Group was formed only about a month earlier in June, and other marine salvage and treasure hunting firms indicated that they’d never heard of the group. BBC Korea reported that the company had not applied for salvage rights with the South Korean government to be able to raise the treasure. The South Korean financial regulator advised investors to be cautious about investing based on rumors without concrete facts regarding the discovery of a treasure ship, without specifically naming the Shinil Group.

Experts began analyzing the claim of more than $130 billion in gold aboard the ship, questioning not only why a warship on the Donskoi’s course would be carrying gold in bulk during an armed conflict (especially when there was a safer land route to the ship’s destination of Vladivostok), but also where the $130 billion figure even came from. The math didn’t make sense; South Korea’s gold reserves, totaling 104 tons, were valued at approximately $4.8 billion, not even close to half of the value originally postulated by Shinil Group for the 200 tons supposedly on board the sunken ship. Critics pointed out that another company once claimed they found the Donskoi shipwreck, causing a stock bubble in 2003. Shinil’s shine began to wear off a bit.

On July 26, a Shinil Group company representative named Choi Yong-seok gave a news conference to try and clear things up. According to Choi, who indicated that he was just promoted to CEO following his predecessor’s withdrawal earlier in the day with other board members, Shinil Group was confident that the ship it discovered was, in fact, the Donskoi. However, he also stated that there was no way to determine whether gold coins or bars were on the ship, and that the company apologized for the misleading claims, which were based on speculative materials and media reports regarding the ship. Choi went on to also explain that the Korean Shinil Group had nothing to do with the Shinil Gold cryptocurrency, the Singaporean Shinil Group issuing it, or Jeil Steel. He did acknowledge, however, that the majority shareholders of both Shinil Groups were siblings.  

 

Fraud



Since then, Jeil Steel’s stock price dropped all the way back to where it was before the announcement, Korean authorities launched an investigation into Shinil Group for potential securities fraud, raided the company’s headquarters, banned Choi from leaving the country and issued an arrest warrant for former Shinil Group CEO and majority shareholder Ryu Seong-jin. An Interpol arrest warrant was also requested for Ryu, who reportedly fled South Korea in 2014 to escape another fraud charge. Estimates of investment into Shinil Gold Coins, backed by shares of a treasure that probably never existed and certainly won’t ever be brought to the surface by the Korean Shinil Group, range from $8 to $53 million.

That the entire Shinil saga could even occur, much less ramp up and implode within a two-month time frame, serves as a reminder that the mostly unregulated realm of cryptocurrencies and ICOs is susceptible to variants of traditional frauds, such as pump and dump schemes, exit schemes, Ponzi schemes and multilevel marketing schemes adapted to take advantage of interest in a trendy, buzzword technology. Until governments determine how to define and then regulate virtual currencies to prevent frauds like this Shinil shipwreck scheme, investors and consumers should exercise caution in dealing with them, and fraud examiners should stay aware of how emerging technologies are being used to perpetuate fraud schemes.