Controversy over Huge Loss
Those who invested in Euro Asset’s derivatives through the Galleria WM Center of Mirae Asset Daewoo are making strong protest against its incomplete sales of derivatives.
Mirae Asset Daewoo was caught in a controversy over selling incomplete derivatives. In particular, it is shocking to hear some people say that the company made profit for old investors with new investors’ funds. Financial authorities became aware of the danger of Mirae Asset Daewoo’s sales activities and ordered the company to stop the sales. But Mirae Asset Daewoo ignored the order. The Financial Supervisory Service (FSS) exceptionally judges that the seller, not the management company, is responsible for more than 70% of the loss.
On June 29, the FSS looked into Euro Asset which caused losses of 70 billion won (US$63 million) on May 10 due to a derivative investment failure and Mirae Asset Daewoo, a seller of the derivatives. The investigation which was conducted simultaneously by the Financial Investment Investigation Bureau and the Consumer Protection Bureau will be concluded after applying the results of a civil litigation filed by investors which will come out on July 7. The FSS concluded that Mirae Asset Daewoo made a mess of its risk management even after Daewoo Securities became Mirae Asset Daewoo through a merger. The FSS recommended that Mirae Asset Daewoo stop the sale of the product after the first damage in 2015, but Mirae Asset Daewoo did not follow the recommendation and the second damage occurred in one and a half years. The FSS is paying attention to this fact.
The majority of the victims were elderly people aged between 60 and 80, and the first damage hit them when the KOSPI 200 index surged on the option expiration date of October 8, 2015. Euro Asset, an asset manager, failed to hedge properly, resulting in a loss of 20%. Investors insisted that they fell victim to incomplete sales, saying that they joined due to a phrase, “a guarantee of principal” in an investment recommendation document. The FSS ordered Financial Consumer Department at Daewoo Securities to suspend sales, sign investment advisory entrustment contracts with investors, and make a definite announcement on a possibility of loss. However, this past May, a year and six months later, the company still continued to sell and operate the product, which led to bigger losses.
It is said that private banker “A” at the Galleria WM Center of Mirae Asset Daewoo, which sold the product of Euro Asset, collected about 120 billion won in investment funds while recommending re-management and the payment of additional investment funds to investors who said that they would repurchase after the first loss. The private banker not only made product marketing materials on behalf of Euro Asset, but also actively involved in product operation and sales, such as sending text messages with returns and account information to customers every month. Investors also claimed that the private banker also conducted a sales method via which the private banker gave profit to some old investors with funds from new investors.
Mirae Asset Daewoo explained that its own audit found no problems in the work process or the membership guide process and called the case the private banker’s personal issue. A senior official of the financial investment industry pointed out that Mirae Asset Daewoo's business is "evil transaction" for making profit. "It is an unscrupulous deal to make money for Mirae Asset Daewoo to recommend high-risk derivatives to senior citizens who planned to invest their retirement assets without properly telling them about the risk of the product,” he said, harshly criticizing Mirae Asset Daewoo.
Controversy over Mirae Asset Daewoo's incomplete sales can affect the approval of very large investment banks (IBs). According to the Enforcement Regulations of the Capital Market Act, the occurrence of a problem subject to a warning against a financial institution or stronger punishments during the approval process for the issuance of bills issued by a large-scale IB, the approval examination may be suspended until the punishment is confirmed. Some industry watchers say that a delay itself in the examination process can deal a blow even if a company does not receive a warning against a financial institution or stronger punishments. "Even if approval is slightly delayed, a company will leave behind that much due to competition to preoccupy limited investment assets,” said an executive at a securities firm preparing for turning into a large IB
"In the past, there were many cases where a possibility of a punishment delayed examination or affected final approval," an official of the Financial Market Bureau at the Financial Supervisory Commission said. “However, as Mirae Asset Daewoo's own application has not yet been received, we cannot measure the impact."
"Some investors were aware of a possibility of a loss with the product, so not all investors suffered from incomplete sales," an FSS official said.