Banks face suit over fraudulent Lime funds

Korea Times file

By Kim Bo-eun

Major banks that were hit by the "DLF fiasco" last year involving the mis-selling of financial derivative options now face the same allegations over the sale of options-based funds of the troubled hedge fund Lime Asset Management.

Investors of Lime's troubled funds that are set to cause them losses contend that the banks did not properly notify them of the associated risks. They are preparing for a suit against the banks.

The exact amount of losses to be incurred have yet to be confirmed. Financial authorities have been conducting a months-long inspection into Lime.

Investors are likely to take action when results of the inspection are unveiled, which is expected to be within this month.

Authorities may launch a separate investigation of banks if investors file a complaint, which appears likely.

Banks contend that they were only involved in selling the options, and were not aware of irregularities of Lime.

Banks sold 34.5 percent or 2 trillion won of Lime's options-based funds amounting to 5.7 trillion won as of July last year. This was when the sale of Lime's funds reached its peak, and when the suspicions over the firm's irregularities began to grow.

The percentage of Lime's options-based funds sold at banks is about five times the average percentage of private equity funds sold by banks, which is around 7 percent.

Among the banks, Woori topped the list, selling 1.06 trillion won worth of the troubled funds. It was followed by Shinhan, KEB Hana, Busan, KB Kookmin, NH NongHyup, Kyongnam Bank, Industrial Bank of Korea and Korea Development Bank.

The rest were brokerages including Daishin Securities and Shinhan Investment.

Among the banks that sold Lime's funds, Woori and KEB Hana face sanctions by authorities over the DLF case. Sanctions are likely to be imposed on the CEOs as well as the bank.

They are also set to proceed with compensation for the victims of the fraud, after the Financial Supervisory Service directed the banks to compensate as much as 80 percent of investors' losses.

Banks have drawn up taskforces to deal with the Lime case and are reviewing legal action against Lime.

Concerning allegations of mis-selling, an official of a financial firm said, "This is what some customers claim, but investigations will determine whether (or not) this is true."

An official of another bank said, "We are waiting for results of the investigation into Lime to be unveiled. We will decide on what to do afterward."

"We have found, however, some differences in the structure of options that Lime initially proposed and the options that were actually sold. We are seeking legal advice on the matter and may take legal action in the case this is deemed necessary."

Lime is suspected to have sold certain options-based funds to clients despite being aware of the fact that the options invested involved a U.S. hedge fund that engaged in fraud. It is also seen to have engaged in the practice of paying investors returns with funds from new investors.

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