Korean Prosecutors Raid Brokerage Firms Over Lime Asset Mis-selling

Investigators from Seoul’s prosecution office raided the headquarters of Shinhan Investment Corp, Korea Investment & Securities, and KB Securities last week.

South Korean prosecutors have raided two brokerage firms in connection with a growing financial fraud scandal involving hedge fund Lime Asset Management, according to local media reports.

Lime Asset is accused of providing inaccurate information about fund products sold to customers through banks and securities firms. Almost 4000 investors are said to have been mislead into investing approximately KRW 1.7 trillion (USD 1.5 billion) in an alleged Ponzi scheme.

Last month, the FSS (Financial Supervisory Service) decided that Lime Asset’s business registration certificate should be revoked, citing “numerous grave violations of law”.

On Friday (30 October 2020), investigators from Seoul’s prosecution office raided the headquarters of Shinhan Investment Corp and Korea Investment & Securities Co to obtain materials related to Lime Asset, which followed a separate raid at KB Securities earlier in the week. All three brokers distributed Lime Asset funds.

Shinhan, KB Securities and Daishin Securities – along with their CEOs – are said to be facing disciplinary action from the FSS for mis-selling Lime Asset’s funds. The sanctions may include broker licence revocations and up to five year bans on the CEOs for failing to ‘establish internal control standards’ as required under Korea’s Act on Governance of Financial Institutions.

The brokerage firms believe the penalties to be excessive, claiming the CEOs are not responsible for the actions of every employee. They also say it is unfair for the distributors to take on the full burden of compensating investors while the investment firms who mismanaged the Lime Asset funds are let off the hook.

“If the FSS decides to impose the highest level of punishment on the CEOs, it is pretty much putting an end to their career, as a CEO’s term normally lasts only a year,” a KOFIA (Korea Financial Investment Association) spokesperson reportedly said. “Brokerage firms are skeptical about the efficacy of such harsh sanctions. We just don’t say it out loud, because of all the investors that suffered losses.”

KB Securities is said to have submitted a petition to lawmakers asking for a reconsideration of any sanctions recommended by the FSS, arguing that regulators should be partially responsible for the Lime losses. KOFIA is believed to be working with other brokerage firms to prepare a petition requesting reduced penalties for the CEOs.

> ALSO READ: KOFIA Chair Vows to Restore Trust in Hedge Fund Industry (17 Jul 2020)

The sanctions review for the three brokerage firms will resume on 5 November. Once the FSS reaches a decision, the view will be forwarded to the FSC (Financial Services Commission) to be finalised. The brokerage CEOs are expected to filed administrative lawsuits against the FSS once the punishments are decided.

Separately, the FSS is drawing criticism over one of its employees and a former official, who are said to have handed over documents containing the regulator’s inspection plans to a key suspect in the Lime scandal. The employee received a three-month pay cut, while the former official has been dismissed and is currently on trial facing multiple allegations.

In early October, a former Lime Asset executive was sentenced by a local court to five years in prison and a fine of KRW 3.5 billion for illegally investing about KRW 20 billion.


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