W4.1tr Korean hedge fund Lime Asset faces fraud accusations

The Financial Supervisory Service, South Korea’s financial watchdog, intends to take legal action against Lime Asset Management, a Korean hedge fund that manages 4.1 trillion won ($3.5 billion) worth of assets, on allegations that it concealed losses from its investors.

The news comes as its 600 billion won fund dedicated to trade finance was found to have been associated with a debacle involving New York-based investment adviser International Investment Group, which was accused of running a Ponzi scheme.

Financial authorities here are moving to refer the Lime Asset case to the prosecution, exploring the possibility that Lime Asset hid the fact that it had changed the multi-manager trade finance fund’s investment method, which otherwise could have alerted individual investors who pooled a combined 243.6 billion won.

According to the FSS, Lime Asset signed a contract with an undisclosed Singaporean commodity trader, which took over Lime Asset’s ownership stake in an IIG fund at a discounted price in June this year. In return, the Singaporean entity issued promissory notes to Lime Asset.

This was meant to secure a fixed income for Lime Asset to repay investors in the fund.

Under the plan announced in October, Lime Asset vowed to cash out 60 percent of the trade finance fund within at least two years and eight months, while the remaining 40 percent would be redeemed within four years and eight months.

Lime Asset took action without properly disclosing it to its investors, according to the FSS.

“(The FSS) found that Lime Asset had switched the fund’s investment target from the IIG fund to promissory notes, and failure to notify investors of this could translate into fraud,” a high-ranking FSS official in charge of asset management investigations told The Korea Herald. “(The FSS) has not set a clear deadline as to when to take legal action.”

Legal action by the FSS may nullify Lime Asset’s repayment efforts, leaving the contract subject to a complaint from the Singaporean entity.

This came as the IIG, with $60.9 million in assets, concealed its losses from its investors, including Lime Asset.

In November, the US Securities and Exchange Commission revoked the IIG’s license on allegations that it had “grossly overstated the value of defaulted loans in the fund’s portfolio to conceal losses in its flagship hedge fund” and “doctored the firm’s records to show that the defaulted loans had been repaid.”

Lime Asset invested some 240 billion won in one of the IIG’s funds, called a “Structured Trade Finance Fund,” which targets trade finance portfolios in regions including Southeast Asia and Africa. Lime Asset said in October that the assets had been frozen.

Despite incurring losses from defaulted loans, Lime Asset appears to have misled investors and the public. In a press conference in October, Lime Asset claimed that its structured investment scheme had generated a 17.8 percent return since the fund was created in November 2017.

Investors in the fund run the risk of losing all their money. Shinhan Financial Investment, which extended some 350 billion won leverage to the fund, has higher priority than ordinary investors for payback.

This is the latest revelation surrounding Lime Asset this year. The hedge fund management house in October announced that it would temporarily halt money withdrawals by its investors due to lack of liquidity. Along with the trade finance fund, it had also frozen a mezzanine fund worth 603 billion won, investing either in privately placed bonds, convertible bonds or bond warrants.

Meanwhile, the prosecution is seeking the whereabouts of Lee Jong-pil, chief investment officer of Lime Asset, who is alleged to have embezzled money from Lime Asset portfolio firm Leed and failed to appear in court in November despite being summoned.

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