Lime retailers to create new company to manage suspended funds

Retailers of Lime Asset Management’s now-suspended funds have agreed to a "bad bank" scheme to recover assets and compensate investors.

A group of 20 Lime funds retailers including banks and brokerages said Wednesday that they will set up an asset management company by the end of August. Management of all suspended funds from Lime will be transferred to the new entity, which will manage them for the next five to six years.

While a "bad bank" — a temporary financial institution that removes illiquid assets from an insolvent financier — acquires the assets directly, the new asset management company will only manage the funds, with ownership still held by the respective trust companies.

The transferred funds are worth 1.6 trillion won ($1.3 billion), including Pluto TF-1, Tethys 2, Pluto FI D-1 and Credit Insured trade funds, which encompass a total of 143 sub-funds.

“After the funds got suspended, there were doubts over whether Lime is still capable of and also willing to manage the assets with its continuous credibility issue and the possibility of it shutting down its business,” said Kim Dong-hoe, deputy governor at the Financial Supervisory Service (FSS) in charge of financial investments at a press briefing Wednesday.

“As it is expected to be a long-term process to recover the assets, there was a call for a swift change in the organization in charge of the funds and the banks agreed on establishing a credible asset management company to prevent further illegal acts.”

Transferring them to an existing asset management company raised the issue of damaging its reputation and financial status.

Regarding the 5 billion won fund needed to establish the new asset management firm, each retailer has agreed to invest 50 million won each. The remaining amount will be proportionally paid by retailers depending on the size of their commitment to the Lime funds.

As a result, affiliates of Shinhan Financial Group will jointly be the new entity’s biggest shareholders, with Shinhan Investment accounting for 17.6 percent and Shinhan Bank 6.4 percent. Woori Bank's share will be 20 percent.

The FSS also said it will continue to roll out investigations into Lime Asset Management as well as the retailers to see if there were any illegal acts involved in the process of selling the risky funds.

Lime Asset Management is likely to face heavy sanctions for structuring abnormally high-risk funds using a total return swap leverage scheme, according to the financial watchdog Wednesday. The FSS also pointed out there were management risks as well, including the recent arrest of key figures such as Lime’s chief investment officer Lee Jong-pil and Kim Bong-hyun, believed to be a major financial backer of the fund, on charges of embezzlement and other business malpractices.

The FSS said it has submitted the necessary report to the prosecutors after completing an investigation on brokerages which sold Lime funds including Shinhan Investment, Daishin Securities and KB Securities where evidence of mis-selling, or not fully informing retailers of the funds’ risks, have been found.

Banks, on the other hand, are expected to submit the result of their internal investigations on mis-selling to the FSS by June 12, the watchdog said. Starting with Woori Bank and Shinhan Bank, the FSS will dispatch an on-site investigation team from June 15. The Industrial Bank of Korea will also be investigated on that day in regards to a separate case of selling suspended Discovery funds.

BY JIN EUN-SOO [jin.eunsoo@joongang.co.kr]