Bank weighs legal action against Lime Asset fund

Shinhan Bank is weighing possible legal action against Lime Asset Management following revelations the troubled hedge fund may have misused funds.

The bank claims that the investment company violated the trust agreement between the two financial entities in which the fund operator is required to notify the investor of major changes in the fund’s portfolio.

Last April, Shinhan Bank started selling shares of Lime’s credit insured trade finance fund, which was largely considered a safe investment, with mid-risk and mid-return evaluation, a 4 percent interest rate and one-year maturity.

Shinhan Bank sold 271.3 billion won ($234 million) worth of shares last year and BNK’s Kyongnam Bank sold about 20 billion won. The fund’s earliest maturity date comes in April.

But assets that were supposed to be invested in Europe’s trade receivables were spent elsewhere, according to an official document that Lime sent to the banks on Jan. 6.

A portion of the credit insured the trade finance fund’s payment would likely be delayed due to liquidity problems with two other funds Lime invested in, the document stated. Both funds were considered unhealthy, and their assets had been frozen in October due to liquidity issues.

Shinhan claims that those investment plans were not included in the CI Fund’s proposal in the first place.

“Sixteen sub-funds under the credit insured trade finance fund have liquidity problems, and they might have to delay its payment,” Lime Asset Management acknowledged in a Wednesday press release. “A total of 294.9 billion won worth of Lime’s credit insured trade finance fund has been sold, and of that, some 120 billion won will be delayed of its payment.”

Industry sources say the change of investment portfolio by Lime goes against Article 85 in the Korea’s capital market law, which prohibits unsound business activities, and Article 79, which obliges the operator’s due care and duty of good faith on fiduciary. Violations of Article 85 are punishable by jail terms of up to five years in jail and a fines of up to 200 million won.

“We are willing to take legal action against Lime Asset Management to protect the bank’s customers,” said an official from Shinhan Bank Thursday.

The bank will have a more detailed road map to any possible legal action, the official added, once an outside review of the fund’s activities is completed. That review, being carried out by accounting firm Samil PwC, is expected to be completed in February.

The latest liquidity problem at Lime Asset Management adds to the already 1.5 trillion won of delayed payment from its Pluto TF-1 and Pluto FI D-1 funds from last October, coming to nearly 2 trillion won in total.

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