Lime conflict deepens among brokerages
Headquarters of Lime Asset Management are seen in this captured image from the company's official website, Sunday. Korea Times file
By Lee Kyung-min
Conflict is escalating among Korea's four brokerages over their varying interests and roles played in the ongoing Lime fiasco, a mismanaged hedge fund that incurred for many people a substantial ― or entire in worst cases ― loss of their initial investment, industry sources said Sunday.
A coalition of three securities firms that engaged in a combined 670 billion won ($553 million) a total return swap (TRS) agreement with Lime Asset Management ― Shinhan Investment, KB Securities and Korea Investment & Securities ― said it decided not to respond to an earlier request by Daishin Securities, citing a lack of merit.
This came less than two weeks after Daishin, the seller of 107.6 billion won in Lime-managed funds, asked the three Feb.12 not to pull money from the pooled investment before its customers.
“It is understandable that Daishin is under enormous pressure from customers whose redemption requests were not processed, but we have concerns over a possible breach of trust,” an official from one of the three brokerages said. “We engaged in a TRS deal with Lime, not with product sellers such as Daishin.”
A TRS is an agreement on exchanging the return of reference assets. Hedge funds use it to obtain leverage on reference assets seeking greater returns.
The three brokerages that provided leverage to Lime in return for a fee are able to claim their share over other investors. The TRS deal is worth 500 billion for Shihan, 100 billion won for KB and 70 billion won for Korea.
The dismissive stance puts Daishin under further pressure to compensate investors amid a number of suits filed by a group of victims seeking up to 2.6 billion won in damages.
In a suit represented by Wooree, a law firm, four claimants said Daishin failed to fully explain the risks associated with the funds including what TRS would entail, only stressing that they were “as safe as regular bank savings.”
They also claim the firm further hurt them by failing to process their redemption requests after Lime's mismanagement scandal broke in August 2019.
“We ask that fund sales contract be cancelled followed by a full refund of our initial investment,” the claimants said. “Not only that, the firm should duly compensate investors the amount that is similar to our initial investment.”
Apart from this, the group filed a criminal suit against a man surnamed Jang, the former chief of the firm's wealth management center in Banpo, Gangnam, southern Seoul, for fraud and violation of laws governing capital markets. He is reportedly responsible for the sales of over half, or 16, of 29 TRS-tied funds sold by the securities.
According to the Financial Supervisory Service, the net value of 262 Lime-related funds, plummeted to 2.81 trillion won as of Feb. 23, a loss of over 1.22 trillion won from its initial investment of 4.3 trillion won. The FSS expects the loss will be greater in the coming months.
Following the scandal, Lime reported a net loss of 1.4 billion won last year, a marked fall from 8.4 billion won in net profit in 2018.