Lime investors face tough compensation fight

Investors in beleaguered hedge fund Lime Asset Management are facing a bumpy road to get compensation for their losses.

By no later than Friday, every investor in the hedge fund is expected to find out their confirmed individual losses in their combined 1.7 trillion-won ($1.4 billion) investment made under the convoluted master-feeder fund structure -- involving four master funds and 173 feeder funds as of end-2019.

The losses of Lime Asset’s feeder funds may vary, but in some cases be up to 100 percent.

Entities that attracted investments into the fund -- commercial banks and securities brokerages -- are likely to compete fiercely for seniority in Lime Asset’s fund redemption.

Daishin Securities, a brokerage house, argued in a letter Monday that its investment had seniority in fund redemption over Lime’s prime brokerage service providers -- Shinhan Investment, KB Securities and Korea Investment & Securities -- which extended leverage to the hedge fund in a total return swap agreement.

Daishin Securities was accused of deliberately dissuading investors from withdrawing money from Lime Asset despite warning signs that things were going badly late last year. Along with Shinhan Investment, which is accused of manipulating fund information given to investors, Daishin is likely to investigated by the FSS.

Meanwhile, some individual investors have opted for Financial Supervisory Service arbitration in hopes of receiving extra compensation. Arbitration in the latest case resulted in Woori Bank and Hana Bank being ordered to cover investor losses by up to 80 percent, after irregularities were uncovered in selling derivatives-linked securities to individual investors. Woori was ordered to cover the losses with its own capital.

Through Friday, the FSS had received 214 applications for arbitration related to Lime.

The FSS is looking to beef up its scrutiny of the Lime Asset case and explore the possibility that firms that sold the products had misinformed investors about the ongoing losses. It unveiled plans to launch a special team to begin investigating the case by March. Its decision is poised to be released in the first half of 2020.

However, the arbitration process is likely to face hurdles if the firms refuse to accept the results of the FSS investigation.

Banks and securities firms are said to be in the process of taking legal action against Lime Asset for breach of contract.

Of the 1.7 trillion won in assets frozen by Lime Asset, 1 trillion won came from individual investors and high-net-worth-individuals.

The assets went to Pluto FI D-1, dedicated to privately placed bonds; Tethys 2, targeting mezzanine instruments; Pluto TF-1, devoted to a trade finance fund that was allegedly a Ponzi scheme; and Credit Insured 1.

Of the 17 entities, Woori Bank arranged the largest amount of investment in the troubled hedge fund house with 357.7 billion won, followed by Shinhan Investment’s 324.8 billion won and Shinhan Bank’s 276.9 billion won.

Uncertainties surrounding the debacle are expected to affect the profitability of banks and securities firms, analysts said.

“Entities that misinformed investors of the Lime Asset’s fund are likely to reflect further losses,” Jun Bae-seung, an analyst at eBest Investment & Securities, wrote to investors.

NICE Investors Service, a credit ratings agency, wrote Monday the unraveling Lime fiasco is credit negative to securities firms here, saying their possible compensation to investors might “undermine their foundation of business,” while having a limited impact on commercial banks.

By Son Ji-hyoung (consnow@heraldcorp.com)