[Unresolved Cases Lime·Optimus]② Investors Frustrated by Evasion of Responsibility... The Issue Is 'Contract Cancellation'

"Boramsangjo demanded a high return rate of 6-7%. Therefore, we recommended the Lime fund with a high return rate but fully explained the risks of the product."

Recently, in a civil court at the Seoul Central District Court, the then KB Securities center head who sold the Lime fund to Boramsangjo, a major domestic funeral service company, in 2019, testified with this claim. Boramsangjo's affiliate, Boramsangjo People, invested the money (advance payments) paid by funeral customers and suffered hundreds of billions of won in operational losses due to the redemption suspension incident. Boramsangjo People filed a lawsuit against KB Securities, the fund seller, demanding the return of unfair profits amounting to 7.8 billion won, claiming "we did not receive a proper explanation about the product." They also appealed, "KB Securities explained it as a 'stable product.' We had no choice but to trust the information provided by a large financial company." A financial officer A from Boramsangjo People also appeared in court and argued that "I never checked any items on the 'Investor Profile Confirmation Form.' It differs from my usual markings," implying that the confirmation form was arbitrarily prepared.

On November 2, 2020, victims of the Lime Fund held a rally in front of the Financial Supervisory Service in Yeouido, Seoul, urging dispute resolution to protect victims of the Lime Fund. Photo by Jinhyung Kang aymsdream@

Investors filing individual lawsuits demanding 'full compensation' worry over prolonged litigation

It is estimated that private equity fund redemption suspension incidents such as Lime and Optimus caused damage amounting to 5 trillion won from 2017 to July 2022. However, the restoration of investors' damages is still ongoing. Previously, the Financial Supervisory Service (FSS) recommended compensation ratios of 'full principal' or '40-80%' depending on the product type and degree of incomplete sales for Lime funds from 2020 to 2021. For Optimus fund sellers, they ordered the return of the principal to general investors. Subsequently, some investors filed individual lawsuits against financial companies demanding full refund of their investments. Four investors, including comedian Kim Han-seok and announcer Lee Jae-yong, who suffered losses from Lime fund investments, filed lawsuits totaling about 2.5 billion won against Daishin Securities, the seller, separately from dispute mediation. In the case of Optimus funds, unlike general investors, professional investors such as dozens of investment corporations were not included in the refund target and individually filed lawsuits against sellers such as NH Investment & Securities.

However, due to the complex fund structure and financial institutions evading responsibility, the lawsuits are prolonged. Furthermore, sellers such as Mirae Asset Securities, Woori Bank, and Hana Bank, which compensated the full principal of Lime funds as recommended by the FSS, filed a 110 billion won damage claim lawsuit against Shinhan Financial Investment and Lime Asset Management, claiming they played a leading role from the fund setup stage. NH Securities also filed a 10 billion won civil lawsuit demanding joint responsibility against Hana Bank, the custodian, and Korea Securities Depository, the administrative agent. Although some first-instance rulings favored investors against sellers, second-instance trials are ongoing due to appeals by sellers. In the lawsuit between KB Securities and Boramsangjo People, the court asked A, "Isn't it awkward to now demand 'seller responsibility' after suffering losses without even knowing where the investment was made?" and "Was there a separate internal discussion process for such a large-scale investment that accounted for half of the annual net new funds?"

Full refund of investment... Contract cancellation due to mistake or fraud must be recognized

For investors to win lawsuits, they must obtain the court's judgment on 'contract cancellation due to mistake or fraud.' According to civil law, if the other party caused a mistake or there was fraud or coercion, the investor can cancel the contract. Financial authorities also recognized 'contract cancellation' for some funds on the grounds that false information was provided or important matters were not disclosed during the fund sales process, causing mistakes.

In fact, in individual lawsuits where professional investors Ottogi and JYP Entertainment claimed 15 billion won and 3 billion won respectively from NH Securities, the first trial recognized NH Securities caused a mistake and ruled in favor of the investors in July. During the trial, NH Securities argued, "We only played a brokerage or mediation role for each Optimus fund. The seller is not a party to the sales contract and does not bear the duty of explanation at the investment solicitation stage," but this was not accepted. The court stated, "It is difficult to perfectly explain the legal relationship between the seller and the investor. It may seem inconsistent that under the Capital Markets Act, the seller bears the obligation to restore the contract cancellation," but also judged, "From the perspective of investor protection and the nature of financial investment product transactions under the Capital Markets Act, a contract between the seller and investor should be considered established through the sale of beneficiary certificates." Especially, in the first trial ruling last April where Kim and others won against Daishin Securities regarding the Lime fund, 'contract cancellation due to fraud' was exceptionally recognized. The court said, "The actual transaction structure, profitability, and risks of the fund are important matters of the transaction," and "Daishin Securities employees knowingly provided false information or caused misunderstandings about important matters."

Meanwhile, the FSS, which recently re-investigated the private equity fund incident, discovered new illegal acts such as preferential redemption suspicions and plans to actively engage in dispute mediation for victims related to the private equity fund incident based on this. The Industrial Bank of Korea Discovery Fund Fraud Victim Countermeasure Committee, Financial Justice Solidarity, and the National Private Equity Fund Fraud Victim Joint Countermeasure Committee also urged the FSS on the 6th to mediate disputes and provide victim relief. They appealed, "The FSS must hold both the Discovery asset manager and sellers, who conspired to shift investment risks to victims and engaged in rollover schemes, strictly accountable," and "Decide on contract cancellation due to mistake or fraud." They also emphasized, "Among Lime-related funds, Pluto and Saturn have not undergone dispute mediation, and many small funds without scheduled inspections or sanctions remain," and "Inspections and sanctions for the remaining funds must be conducted promptly." The FSS also stated that regarding the existing Discovery fund dispute mediation, it will consider applying the 'contract cancellation' method rather than 'compensation for damages due to incomplete sales.'