Rhyme Scandal, Curtain Rises Before Investment Recovery Battle Begins

[Asia Economy Reporter Park Jihwan] As the loss rates for Lime Fund redemption suspension funds worth around 1.6 trillion KRW are notified to investors, the phase of recovering investment funds is expected to begin.

According to the financial investment industry on the 17th, Lime Asset Management will proceed with the net asset value adjustment for Pluto FI D-1 (Pluto) and Tetis 2 (Tetis), two of the four mother funds that have completed due diligence, by the 21st. On the 14th, Lime announced that it would adjust (write down) the valuation of Pluto and Tetis to 460.6 billion KRW and 165.5 billion KRW respectively as of the 18th. Compared to the end of September last year, the loss rates are 49% and 30%, resulting in a total asset value decrease of about 510 billion KRW in just these two funds. Including other funds such as the Trade Finance Fund, which has not yet completed due diligence, the total loss amount for the four mother funds is expected to reach 1 trillion KRW.

As the loss rates are disclosed to individual investors, their active movements to recover their investments are intensifying. Investors are claiming incomplete sales by banks, securities firms, and other distributors and are taking legal action through law firms. They argue that they were deceived by sales staff into investing without sufficient explanation about the fund structure or risks.

The amount individual investors can recover is expected to vary significantly depending on whether there is a total return swap (TRS) contract and any illegal acts by the distributors. Recovery rates will differ greatly depending on whether the sub-fund only invests in the mother fund and whether securities firms’ TRS were used. If TRS funds are involved in the fund and the fund incurs losses, securities firms have the right to claim money first. From the perspective of individual investors, who have subordinate rights to recover funds, the possibility of losses increases.

However, in the case of the Trade Finance Fund, which was found to have fraud allegations through financial authorities’ investigations, full compensation may be possible depending on the investment timing. The Financial Supervisory Service (FSS) is reportedly reviewing a consumer dispute mediation proposal applying 'fraud allegations' to the Trade Finance Fund. If fraud allegations are established, contracts can be canceled, opening the way for investors to receive 100% of their money back. Financial authorities are focusing on the fact that Lime and Shinhan Financial Investment did not inform investors about the insolvency of the US asset management company IIG (International Investment Group), in which the Trade Finance Fund invested in 2018. Instead of informing customers, they manipulated the fund’s net asset value to appear as if it was increasing by 0.45% monthly.

Investors are also pinning their hopes on compensation through financial authorities’ dispute mediation. Currently, 214 dispute mediation applications related to Lime funds have been submitted to the FSS. The FSS plans to start on-site investigations of distributors from next month, focusing on the incomplete sales applications received first. A financial authority official said, "The principle is clear to minimize consumer damage," adding, "The process is expected to be arduous due to very complex procedural variables."