A civic group is holding a protest to urge financial authorities to order NH Investment & Securities to pay full compensation to the victims of the Optimus Asset Management hedge fund scam outside the Financial Supervisory Department’s headquarters in Seoul on Monday, a day before the FSS the order was announced to the public. (Yonhap)

South Korea’s financial watchdog said on April 6 that it held NH Investment & Securities, the country’s second-largest brokerage firm by net assets, fully responsible for the predatory selling practices associated with fraud. deemed to be from Optimus Asset Management’s hedge funds.

The Financial Supervisory Service ordered NH Investment to compensate end investors for losses of around 300 billion won ($ 267 million) suffered in 326 cases they brought before the Financial Dispute Conciliation Committee, a special arbitrator placed under the aegis of the FSS. Qualified professional investors were excluded.

The two contracts between NH Investment and the fund’s end investors were “entered into in error” and are therefore “voidable,” the FSS said, citing civil law. This means that financial consumers did not understand what they were signing.

“Optimus was virtually unable to invest in trade receivables from companies dedicated to state-led construction projects when he signed fund sales contracts with NH Investment, but the fund seller relied on on the presentation of the hedge fund and caused the fund’s investors to make a mistake in its own marketing process, ”the FSS said in a statement.

The referee’s recommendation is applicable to the rest of the cases, he added.

Korean fund sellers have rarely been held responsible for misleading financial consumers. The Supreme Court ruled in 2016 that the sellers of a private fund of Pine Asia Asset Management, then known as Phoenix Asset Management, were to blame for the losses of investors. This was the only case so far where a court had recognized mistaken beliefs about investments as a valid reason for canceling contracts.

Tuesday’s announcement is the latest development in the hedge fund scandal involving Optimus, which managed some 500 billion won in assets last year when it was revealed the fund had duped fund sellers and end investors. in a scam.

After disguising his hedge funds as funds investing in trade receivables – generally seen as a safe destination to park money – Optimus violated his contracts by using the pooled money to finance real estate development projects, acquire assets. listed companies which were subsequently delisted or suspended from trading, invest in private securities or grant loans.

Meanwhile, Optimus is accused of deliberately deceiving fund sellers through embezzlement and embezzlement.

NH Investment, the biggest seller of Optimus, sold combined feeder funds worth a total of 697.4 billion won from June 2019 to May 2020. Among them, funds worth 432.7 billion won of won have been frozen since last June.

Of the total, 300 billion won was money from ordinary investors, while the remainder came from qualified professional investors.

Korea Investment & Securities, another fund seller, privately compensated clients for 90 percent of the 28.7 billion won lost.

“We can hardly expect ordinary investors to consider the viability of (Optimus’ investment process),” the FSS also said.

The watchdog added that for qualified professional investors, legal action would be a more appropriate route.

The move apparently upset NH Investment, a brokerage arm of the NongHyup Financial Group cooperative, as the company stressed that the Optimus fund’s custodian, Hana Bank, and the fund’s administrator, the Korea Securities Depository, should share the burden. investor compensation.

The recommendation is not binding and NH Investment may refuse to accept it. In this case, his clients would have to bring a civil action.

The Optimus case is one of two high-profile hedge fund scandals that have sparked public suspicion of investing in private funds. The other is Lime Asset Management’s 1.7 trillion won fiasco.

In February, the FSS arbitrator ordered fund vendors Lime, Woori Bank and Industrial Bank of Korea to compensate investors for at least half of the damage suffered.

By Son Ji-hyoung ([email protected])