Authorities tighten grip on PEFs as Lime case shows sign of progress

South Korea’s financial authorities on Sunday unveiled plans to tighten regulations on privately pooled funds to protect investors, as an embezzlement case surrounding disgraced Lime Asset Management, which drew 1.6 trillion won ($1.3 billion) from investors, shows signs of progress with key suspects being arrested.

Under the plans finalized Sunday, a private fund -- which comprises money from no more than 49 investors here -- will be subject to external audits if its assets exceed 50 billion won. Those with assets worth between 30 billion and 50 billion won that seek to carry out additional fundraising within six months will also be under scrutiny. The cost of audit procedures will be borne by the fund investors.

Moreover, asset management firms will be provided with a standardized checklist for internal control by the Korea Financial Investment Association and required to report the actions taken to authorities -- for example, the watchdog, the Financial Supervisory Service. Firms will also be obliged to compose a prospectus in a standardized format.

Stress tests will be mandatory for such companies in order to gauge a fund’s liquidity at least once a year, while retail funds cannot be open-end unless more than half of their assets can be readily sold or exchanged for cash.

Related revisions to the laws will be proposed by the authorities in the second quarter.

The news comes as the ex-chief investment officer of disgraced Korean hedge fund Lime Asset Lee Jong-pil was arrested Saturday on charges of orchestrating an embezzlement scheme amid a mounting scandal surrounding the frozen fund.

Prosecutors spent five months tracking the whereabouts of Lee, whom they suspected of serving as the middleman in an embezzlement case. They were also pursuing a backer of the fund, Kim Bong-hyun, who is accused of carrying out a series of corporate raids while misappropriating corporate funds. Both Lee and Kim were nabbed in Seoul’s Seongbuk-gu on Thursday. Kim was awaiting a court decision Sunday afternoon to determine whether he should be detained.

Lee is alleged to have mediated an 83.58 billion won embezzlement from display equipment maker Leed, one of Lime Asset’s investment targets via mezzanine instrument, by six people including Leed Vice Chairman Park Han-kyu.

When the prosecution summoned Lee in November, he failed to appear in court. The prosecutors requested an Interpol red notice for Lee in March.

Lime Asset holds a 14.17 percent stake in Leed, as it converted 5.1 billion worth of convertible bonds into stocks. While the valuation of Lime Asset’s investment in Leed was just about cut in half, Leed is awaiting a court decision to go ahead with a delisting procedure from the Kosdaq bourse, following an order from the market operator, the Korea Exchange.

A Korean Canadian, Lee was formerly an analyst at securities firms such as Daishin Securities, IBK Securities and the HongKong and Shanghai Banking Corp.

Lee joined Lime Asset as chief investment officer in 2015 and has allegedly colluded with so-called corporate raiders since that time. One of the alleged raiders was Kim, who formerly chaired printed circuit board equipment maker Star Mobility. 

Kim was accused of embezzling money from his investment targets, including Star Mobility and funeral service provider Korvafamily. The police zeroed in on Kim in January connection with a 16.1 billion won embezzlement from a bus service operator based in Suwon, but could not find him. Kim and Lee were also suspected of conspiring to take over the company from its shareholder Striker Capital Management in 2018, only to fail.

Kim was also accused of bribing a Cheong Wa Dae official, allegedly in an attempt to dodge criminal charges. The official, also surnamed Kim, was arrested earlier in April.

Authorities are also in pursuit of another key suspected backer, the chairman of local real estate developer Metropolitan, who is also surnamed Kim. Prosecutors also raided authorities including an office of the Financial Services Commission, the nation’s top regulator.

These were revealed as major pillars of the Lime Asset scandal that surfaced last year. The hedge fund, once considered the nation’s largest in terms of the valuation of its assets, drew a combined 1.6 trillion won through 173 feeder funds.

These were designed to back four master funds that invested in mezzanine instruments, privately placed bonds and trade finance funds.

While the majority of assets were illiquid, the fund manager decided to freeze withdrawals from what were meant to be open-end funds, as the company failed to meet investors’ demands for redemption.

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