FSS Korea Orders Woori, IBK to Compensate Lime Investors

The FSS will encourage banks and securities firms that sold frozen Lime funds to voluntarily settle disputes with other investors based rates set at the ruling.

Korea’s FSS (Financial Supervisory Service) has ordered Woori Bank and IBK (Industrial Bank of Korea) to make restitution to customers for up to 78 percent of some of their investments in Lime Asset Management funds.

The ruling was delivered by the FSS’ Financial Dispute Settlement Committee on Tuesday (23 February), in response to the freezing of about KRW 1.6 trillion in investor money invested in funds managed by what was once the largest hedge fund in Korea.

Lime Asset fund managers are alleged to have been engaged in a Ponzi scheme, misrepresenting fund performance and colluding with fund sellers to conceal losses. The firm’s licence was revoked in December.

In January, former Lime Asset chief investment officer Lee Jong-pil was sentenced to 15 years’ imprisonment, a KRW 4 billion fine, and ordered to forfeit KRW 1.4 billion – after a Seoul court found him guilty of deceiving investors by concealing losses in fraudulent fund products, and for accepting bribes from an investee company.

Lime CEO Won Jong-jun was also sentenced to three years in prison and ordered to pay a fine of KRW 300 million. Another former Lime executive, surnamed Lee, was given a suspended sentence of three years.

According to local reports, the FSS said Woori Bank and IBK displayed “poor efforts in the exercise of their duties to protect investors” when they sold nearly KRW 300 billion worth of Lime funds that were later frozen.

Woori is understood to have sold KRW 270.3 billion worth of the frozen funds, while IBK sold KRW 28.6 billion worth.

The FSS has been mediating disputes between fund sellers and investors. The Financial Dispute Settlement Committee on Wednesday ruled on the reimbursement rate for three investors who bought Lime funds through Woori Bank and IBK.

Woori Bank will have to reimburse 78 percent of investments to an 82-year old man for offering a risky fund product without enough explanation, and 68 percent to a small company that had been seeking safe options,

IBK will have to compensate 65 percent of investments to a retiree with no investment experience after the bank failed to explain the risks of the funds. The retiree is said to have initially asked IBK to recommend fixed deposit products.

The FSS committee said the banks’ mis-selling practices ranged from manipulation of clients’ risk tolerance to failures to explain the risks that financial products carried.

The FSS reportedly said it will encourage banks and securities firms that sold Lime funds to voluntarily settle disputes with other investors, based on the reimbursement rates set at Tuesday’s ruling.

The recommended rate is between 40 and 80 percent for individual investors and between 30 and 80 percent for corporate investors. The rates will vary depending on factors such as the investors’ age and investment experience and how well the banks documented their fund sales.

So far there have been 182 complaints registered against Woori Bank regarding the sales of Lime funds and 20 complaints against IBK.

In December, KB Securities was ordered to make restitution between 40 and 80 percent of the principal invested into Lime funds by its clients. The brokerage sold a combined KRW 58 billion worth of Lime funds.

Woori Bank, IBK and KB Securities are among 19 sellers of the Lime funds. The FSS committee is said to have handled over 670 cases between investors and sellers of Lime funds so far.

A total of about 4000 individual investors and over 580 companies are believed to have impacted.

Separately, Daishin Securities is reportedly under fire for allegedly manipulating its computer system to illegally cancel investors’ orders for the firm to repurchase Lime funds, despite it telling them it would accept repurchase applications.

While the prosecution decided in January…