Suspected Preferential Redemptions
The Financial Supervisory Service (FSS) is launching a comprehensive investigation into related securities firms to gather more precise information and evidence regarding the suspected preferential redemption of the “Lime Fund.” Amid allegations that funds were returned only to certain influential figures before suspending fund redemptions, concerns are growing in the financial investment industry that the repercussions of reinvestigation could extend beyond Lime to include other funds such as Optimus and Discovery, associated with the so-called “Three Major Fund Scandal.” These concerns have caused anxiety not only among securities firms but also among banks and other distributors.
According to financial industry sources on Aug. 28, the FSS plans to investigate securities firms, including Mirae Asset Securities, that sold four open-end fund products managed by Lime Asset Management. Specifically, Mirae Asset Securities and others, which are suspected of providing preferential redemptions only to influential figures like a member of the National Assembly surnamed Kim, are the primary targets of the investigation. The FSS said it has been revealed that 29 investors, including Kim, received redemptions just before the large-scale suspension of Lime funds, either avoiding or minimizing their losses. The FSS intends to conduct an initial investigation into the sales agents responsible for the four funds involved in these redemptions. If the need for a formal investigation is established, it will be pursued accordingly.
The FSS, which initially intended to leave the investigation process regarding the suspected preferential redemptions related to Lime Funds to the prosecution, has reportedly considered a comprehensive investigation. This decision comes as suspicions surrounding sales agents like Mirae Asset Securities, which sold fund products to Democratic Party member Kim Sang-hee, escalated.
Kim’s spokesperson issued a statement asserting, “Mirae Asset Securities recommended redemptions to all customers based on market conditions, and he simply carried out the redemptions accordingly.” However, Mirae Asset Securities said, “The allegations of preferential redemptions fell within the purview of Lime Asset Management, the fund manager.” With conflicting stances regarding Kim’s redemption motivations, analysts speculate that the FSS has initiated its investigation in response to this divergence in perspectives.
In particular, the FSS suspects that, in the case of the four funds from which Kim and others received their returns, redemptions were facilitated through the use of illicitly acquired funds, including activities commonly referred to as “fund diversion.” An official from the FSS stated, “Among the 31 funds subject to redemption, 27 utilized their own resources for redemptions, but four funds illicitly accessed 12.5 billion won (US$9.43 million) from other funds and provided unlawful support totaling 450 million won in their own capital.”
In the financial investment industry, the focus of the FSS appears to be on determining whether there were any illicit elements involved in the redemption process facilitated through securities firms and other distributors. Key areas of scrutiny include whether internal information was used to provide redemptions in an attempt to avoid losses or if any compensation was sought in exchange for preferential redemptions. The reason behind the FSS’s investigation into these circumstances lies in the timing and context of the redemptions.
The four funds, with 29 investors, received redemption payments on Sept. 9 and 25, 2019. However, shortly thereafter on Oct. 1, Lime Funds declared a suspension of redemption. The FSS intends to closely examine and confirm the reasonable grounds and evidence behind claims made by individuals such as Kim and sales agents that they “considered market conditions when recommending redemptions and acted accordingly.”
Additionally, at that time, the four funds also contained non-marketable and distressed assets, making it impossible for normal redemptions to occur as per the explanation provided by the FSS. In light of suggestions that redemptions occurred through illicit funding support in this situation and questions regarding external pressures, the FSS intends to conduct an investigation into the circumstances and background surrounding these redemptions.
The FSS has announced that it will promptly notify the prosecution if the investigation reveals that influential individuals or organizations exerted undue pressure during the redemption process. The possibility that entities like Lime Asset Management sought compensation and engaged in preferential redemptions will also be investigated.
While the current investigation by the FSS may seem directed towards the political arena, tension is also running high within the financial and securities sector in Yeouido. This stems from the fact that, even before the existing sanctions and compensation procedures related to the “Three Major Fund Scandal” have concluded, new comprehensive investigations have been initiated. Currently, several fund-selling firms, including Hyundai Motor Securities, Kyobo Securities, SK Securities, Shinhan Securities, Korea Investment & Securities, Daishin Securities, NH Investment & Securities, Shinyoung Securities, and Hi Investment & Securities, are being subject to the FSS’s sanction procedures.
Notably, there is a growing possibility that Lee Bok-hyun, the current head of the FSS, will expand the scope of responsibility, including additional sanctions resulting from incomplete sales practices and other factors, given that he had pledged to conduct a thorough investigation into allegations of fund fraud since his inauguration.
Ham Yong-il, the vice chairman of the FSS, stated, “We will expedite the sanction procedures for violations of the Capital Markets Act,” and added, “For matters reported to law enforcement agencies, we will cooperate closely and handle them sternly.” An FSS official emphasized, “The legality of actions during the redemption process will also be further clarified through FSS inspections.”