Multiple-term Lawmaker Caught in Preferential Buyback
"Additional Verification to Actively Conduct Dispute Mediation"
The Financial Supervisory Service (FSS) announced on the 24th that additional inspections of Lime, Optimus, and Discovery Asset Management revealed new allegations of violations. Regarding Lime Asset Management, which experienced a large-scale redemption suspension crisis, it was also found that preferential redemptions were granted to members of the National Assembly and others.
The main allegations identified so far include Lime Asset Management engaging in fund recycling and embezzlement by five invested companies; Optimus Asset Management involved in bribery related to investments, embezzlement of fund money, and conspiracy in fraudulent transactions; and Discovery Asset Management caught in fund recycling, misuse of insider information, and embezzlement of fund money. The FSS has notified the prosecution several times since May about the newly uncovered details.
First, regarding Lime Asset Management, fund recycling for specific fund beneficiaries was detected. In August to September 2019, just before the large-scale redemption suspension declaration, when asset deterioration and liquidity shortages occurred in four Lime funds, 12.5 billion KRW from other fund monies and 450 million KRW of the management company's proprietary funds were used to provide preferential redemptions to certain investors. These included 200 million KRW to a multi-term member of the National Assembly, 5 billion KRW to Company A listed on the stock exchange, and 20 billion KRW to Central Association B.
It was also revealed that about 200 billion KRW was embezzled from five companies that invested in convertible bonds (CB), bonds with warrants (BW), and private bonds. In December 2018, Lime funds invested 30 billion KRW in private bonds issued by unlisted Company C. The FSS found that during this process, the chairman of Company C and others withdrew the funds under the name of executive loans and misappropriated 27.6 billion KRW to acquire a resort in the Philippines, totaling 29.9 billion KRW in misuse. Additionally, in five other companies, cases were identified where investment funds were deposited into personal accounts, company money was embezzled under the false pretext of a Cambodian development project, and false sales contracts were created to embezzle the difference from actual contract terms.
Regarding Optimus Asset Management, bribery related to investments was uncovered. A fund management director of a public institution invested a total of 106 billion KRW, about 37% of the entire fund, into Optimus funds from June 2017 to March 2018. During this process, the fund management director received 10 million KRW from the head of Optimus Asset Management and also accepted payments for his child’s salary from a company where the head of Optimus Asset Management serves as chairman.
It was also revealed that the CEO of a special purpose company (SPC) invested with Optimus fund money used the funds for personal purposes and, despite knowing that former Optimus executives deceived investors to raise fund money, instructed investments into unlisted private bonds rather than the accounts receivable purchases stated in the investment proposal.
In Discovery Asset Management, fund recycling through linked transactions was detected. Discovery Asset Management operated by investing fund money into overseas SPCs, which then purchased U.S. loan receivables. However, in February 2019, when three funds matured and repayment became difficult due to a shortage of funds in the overseas SPC, another overseas SPC supported the troubled SPC by acquiring its subordinated bonds. As a result, about 27.2 billion KRW was repaid for the three funds, but the SPC that acquired the subordinated bonds failed to recover principal and interest. It was also investigated that investment proposals contained false information about investment targets. Illegal acts such as insider trading and fund misappropriation were also uncovered.
In July 2019, suspicions arose that Lime Asset Management was manipulating returns through illicit trading of CBs of KOSDAQ companies. Subsequently, stock prices in funds managed by Lime plummeted, causing a large-scale redemption suspension. The Optimus incident involved public institutions and local governments attracting investors by claiming to invest in safe accounts receivable guaranteed by payment, but instead investing in private bonds of insolvent companies with no real business, causing massive damage. Discovery funds were sold through commercial banks such as Industrial Bank of Korea and Hana Bank and securities firms between 2017 and April 2019, but due to incomplete sales and poor management by the management company, redemptions were suspended, resulting in losses for individual and corporate investors.
Regarding these incidents, suspicions of involvement by key figures in the Moon Jae-in administration and ruling party also spread. FSS Governor Lee Bok-hyun mentioned the possibility of re-investigating Lime and Optimus last year.
Regarding the preferential redemptions received by the multi-term member of the National Assembly, Ham Yong-il, Deputy Governor of the Financial Supervisory Service, stated, "It was not intentional to seek out influential figures, but such issues emerged during the inspection process looking into problems with the relevant employees." On the embezzlement of about 200 billion KRW related to the Lime incident, he said, "Most of the funds were not used for legitimate purposes in the invested companies but were diverted elsewhere," adding, "There appeared to be certain relationships between the representatives of each company and Lime, and since details about the use of funds have mostly been reported to the prosecution, it is expected to enter the investigative phase."
The FSS plans to swiftly complete disciplinary procedures regarding violations of the Capital Markets Act and respond strictly in cooperation with investigative agencies. Additionally, if further allegations are identified through analysis of materials obtained from non-supervisory authorities, the FSS will notify investigative agencies and take appropriate measures.
Following the additional inspections revealing new facts such as violations by management companies affecting dispute mediation, the FSS judged that dispute mediation is necessary for the relevant funds. In the case of Discovery’s SPC investment funds, which experienced a shortage of funds, if investors were led to believe they would receive normal repayments while the management company was purchasing distressed assets and recycling funds, the responsibility of the management or sales companies could increase. Furthermore, the new fund of Discovery SPC that acquired subordinated bonds raised fund money using falsified investment proposals for other fund recycling, and if sales companies used the same proposals, it could constitute incomplete sales.
An FSS official emphasized, "We will actively conduct dispute mediation after additional verification, including inspections of financial institutions such as Industrial Bank of Korea and detailed investigations into the status at the time of fund subscription by complainants," adding, "We will also make further efforts to remedy damages to private fund investors and protect the rights and interests of financial consumers."
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