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South Korean Banks Accuse Newegg, ASI Of Ponzi Scheme (Updated)

Update, 10/24/17, 6:05am PT: After this story's publication, we received the following statement from Matt Strathman, Newegg Legal Counsel, North America:

Newegg prides itself on conducting business fairly, ethically and honestly.  The company vehemently denies the allegations in the complaint filed last week, and Newegg intends to vigorously defend itself against those unfounded charges. Original article: 10/23/17, 11:00am PT:

Every system builder knows Newegg. The retailer is a popular source of components, peripherals, and other technological goodies. Soon it might be famous for another reason—allegedly helping Moneual fraudulently raise $3 billion in financial backing off the back of "massive" HTPC sales. The Los Angeles Times reported that four South Korean banks have filed a lawsuit against Newegg and ASI claiming they both helped Moneual.

Moneual should be a familiar name to longtime Tom's Hardware readers. We covered the initial claims of fraud against the company in 2014, and we also covered the impact the investigation had on one of its subsidiaries, Zalman. The question with this new lawsuit isn't whether or not Moneual committed fraud; it's whether or not Newegg and ASI knowingly helped the company do so in exchange for a slice of the Ponzi-flavored pie.

According to the Los Angeles Times, the banks alleged in their lawsuit that both Newegg and ASI submitted fraudulent purchase orders for large numbers of HTPCs and that "Moneual priced the computers that were supposedly ordered at 300 times their actual market value." Moneual then used those orders to convince the banks to invest more money. One thing led to another, and then eventually $3 billion in fraud was perpetrated.

The Los Angeles Times excerpted the complaint:

“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 complaint said.

We reached out to Newegg and ASI for comment; neither responded to our requests. We'll update this story if either (or both) gets in touch. If not, well, we expect to learn more about their involvement, or lack thereof, if the case heads to court.

  • JamesSneed
    The old Newegg I would say no way I don't believe it. The Chinese owned Newegg (for about 1 year now) I just wont be giving them the shadow of the doubt like I would have. I have seen there service start to lack since the buyout and all things being equal I will buy from Amazon now.
    Reply
  • cia1413
    How is this a ponzi-scheme? Are they saying that they paid bank loans with borrowed money from other banks?
    Reply
  • JamesSneed
    20302290 said:
    How is this a ponzi-scheme? Are they saying that they paid bank loans with borrowed money from other banks?

    They are saying they had xxx income from the hugely overpriced/over inflated sales and got xxx money from the bank because of how well they were doing. Where it falls apart and makes it a ponzi scheme is if the vendors didn't actually pay that which it sounds like they did not. It's more down to who doctored the purchase orders from Newegg and ASI.

    My vote of who had the most to gain and using occam's razor as guidance is that the purchase orders were doctored by Moneual especially seeing two different companies with "fake" orders.

    Reply
  • Rhinofart
    The way it's being described in the article doesn't sound like a Ponzi scheme at all. It just sounds like plain old fraud.
    Reply
  • cia1413
    "They are saying they had xxx income from the hugely overpriced/over inflated sales and got xxx money from the bank because of how well they were doing. Where it falls apart and makes it a ponzi scheme is if the vendors didn't actually pay that which it sounds like they did not. It's more down to who doctored the purchase orders from Newegg and ASI.

    My vote of who had the most to gain and using occam's razor as guidance is that the purchase orders were doctored by Moneual especially seeing two different companies with "fake" orders.
    0

    "
    That's not a ponzi-scheme.
    Reply
  • bit_user
    I wonder if this is some sort of translation error. I agree with those saying it's not a ponzi scheme, since Newegg had nothing to gain by it (unless there were some kickbacks not mentioned in the article). The only way that Newegg and ASI should be culpable is if they submitted purchase orders knowing they wouldn't (all) be fulfilled. That would be financial fraud.

    Probably the main factor fueling this litigation is the embarrassment of the banks that obviously didn't do their due diligence. I wonder how much of the investment they were able to recover, as a significant shortfall could also be driving them to fill the holes in their balance sheets.
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  • cryoburner
    20302284 said:
    I have seen there service start to lack since the buyout and all things being equal I will buy from Amazon now.
    One thing Newegg really does better though is product search. You can easily narrow down a list of components by just about any specification that might be important. I'm not entirely fond of them including marketplace sellers in the results by default, but at least they are easy to toggle off. Plus, Newegg provides a clear chart covering product specifications in detail for almost every product, and the pages tend to be clean and well sorted.

    On Amazon, searching for many products, especially computer hardware, can be a lot more cumbersome. Not only are there few specifications to sort components by, but third-party sellers clutter the results, and the way results are presented is simply not as good. And unlike Newegg, many products lack a detailed specifications list, so you need to search for that information elsewhere, and overall, the product pages tend to be a cluttered mess. Amazon might be a decent place to buy computer components from, but the actual shopping experience is not particularly good.

    It was also annoying how Amazon kept raising their free shipping limit over the last few years in an effort to push Prime. Thankfully, increasing competition encouraged them to drop it back down again. They first lowered it back down from $50 to $35 last winter, and then back down again to the original $25 this summer.
    Reply
  • mrmez
    20302290 said:
    How is this a ponzi-scheme? Are they saying that they paid bank loans with borrowed money from other banks?

    The investment money could have come from anywhere. Banks, companies, individuals.
    Usually in such schemes, a tiny bit of that money is paid to certain investors or creditors to keep them hooked.
    For example, maybe Bill Gates invests a bunch, so they pay him dividends. When people hear about that it lends credibility to the investment, and loads of people jump on board.

    And if you don't know how a Ponzi scheme works... think of it on a small scale. Imagine going to the bank with a bunch of fake invoices from fake customers showing 10,000 have placed orders for $1,000 each. That's $10 million guaranteed income, but you need a $1 million loan to fill the orders. If the bank trusts you enough, it will grant the loan. You take the money an live like a baller. Eventually the bank comes calling for their money, but it's gone. It's fraud, but on a much larger scale.
    Reply
  • bit_user
    20303018 said:
    Usually in such schemes, a tiny bit of that money is paid to certain investors or creditors to keep them hooked.
    The problem is that the article didn't say the banks' investment was used to pay off earlier-stage investors. I'm not saying it didn't, but that why people are confused.
    Reply
  • mrmez
    20303034 said:
    20303018 said:
    Usually in such schemes, a tiny bit of that money is paid to certain investors or creditors to keep them hooked.
    The problem is that the article didn't say the banks' investment was used to pay off earlier-stage investors. I'm not saying it didn't, but that why people are confused.

    True, but it doesn't change anything IMO.
    If you steal $100M, what's the difference if you pay back $1M.
    Reply