Confused About 'Samo Fund Compensation', What Now?

NH Investment & Securities, Shinhan Financial Investment, and other distributors delay decisions due to 'breach of trust' issues
Concerns over precedent of distributors bearing asset manager's losses
Focus on whether 100% compensation recommendation for Optimus Fund will be issued

[Asia Economy Reporters Kum Boryeong, Lee Minwoo, Ko Hyungkwang] Sales companies are struggling over compensation plans amid the ongoing private equity fund scandals involving Lime and Optimus. As fund distributors, they must actively protect customers, but hasty decisions could lead to new controversies such as breach of fiduciary duty.

According to NH Investment & Securities on the 24th, the board meeting held the previous day postponed the decision on the "advance support agenda for emergency liquidity supply" for Optimus fund investors. NH Investment & Securities is the largest distributor of Optimus Asset Management's private equity funds, having sold 432.7 billion KRW worth. The number of individual investor accounts was confirmed to be 884.

The board explained on the surface that the Optimus fund issue "requires more thorough review and thus the decision is postponed." However, the underlying reason for the hesitation is the potential breach of fiduciary duty issue. If the full amount of damages is refunded, board members could be seen as causing unnecessary losses to NH Investment & Securities. Matching the 70% advance payment level announced earlier by Korea Investment & Securities would amount to over 300 billion KRW. Last year, NH Investment & Securities reported a pre-tax profit of 633.2 billion KRW and a net profit of 474.6 billion KRW.

Differences in stance with NH Investment & Securities’ management are also delaying the decision. The management worries that the longer the compensation plan decision is delayed, the more customers might leave for other firms. After news of the postponement spread, victims reacted with statements like "We need to move to another securities firm" and "We must reduce our balance to zero."

Shinhan Financial Investment is also struggling to find direction. Initially, it planned to hold a board meeting this week to decide whether to accept the Financial Supervisory Service (FSS) Dispute Mediation Committee’s recommendation for 100% compensation on the Lime trade finance fund, but as of the previous day, the board schedule had not been finalized. A Shinhan Financial Investment official said, "We are internally deciding on the response direction," withholding further comments. Since the response deadline for the recommendation is June 27, it is highly likely they will request an extension. Already, Hana Bank held a board meeting on the 21st and decided to request an extension from the FSS, so Shinhan Financial Investment is expected to avoid rushing a decision.

Accepting the FSS compensation plan could raise breach of fiduciary duty issues, similar to NH Investment & Securities’ situation. Another problem is that the scope of compensation could snowball in the future. The FSS Dispute Mediation Committee recommended 100% compensation only for the Lime trade finance fund, which accounts for 42.5 billion KRW out of the total 324.8 billion KRW of Lime funds sold by Shinhan Financial Investment. If 100% compensation is accepted this time, it could set a precedent obligating compensation for other fund sales in the future.

It is also burdensome as it sets a precedent where distributors fully bear the losses caused by the asset management company’s insolvency. A financial investment industry insider said, "Since distributors cannot closely scrutinize the asset manager’s policies and strategies, they are also victims to some extent," adding, "However, if distributors bear all compensation, it could create a bad precedent where only distributors are held responsible in the future."

On the other hand, outright rejecting the FSS recommendation is difficult. Although the Dispute Mediation Committee’s decision is advisory and not legally binding, opposing the supervisory authority could become a future burden. This could increase critical public opinion and further narrow the distributors’ room for maneuver.

Attention is also focused on the financial authorities’ next moves. It is being watched whether the FSS will issue a "100% compensation recommendation" for the Optimus fund following Lime. On May 30, the FSS Dispute Mediation Committee held a meeting and decided to cancel contracts for the Lime trade finance fund sold since November 2018 due to "contract cancellation by mistake," recommending 100% compensation of the principal to investors. This was based on the judgment that there was a clear "mistake" at the time of contract due to concealment of the fund’s insolvency, which was beyond recovery.

The Optimus fund is increasingly likely to be viewed as a "contract by mistake." The FSS’s interim inspection announcement the previous day revealed that Optimus, the asset manager, misled investors into believing the fund invested in stable assets to attract investment. They raised funds by falsely claiming to invest in public institution sales receivables but actually used most of the funds to purchase high-risk bonds of unlisted companies. Moreover, the asset manager’s CEO embezzled hundreds of billions of KRW for personal use.

Kim Cheolwoong, Director of the Dispute Mediation Division 2, said, "It is difficult to definitively say 100% since the inspection results are not out yet," adding, "We will proceed with dispute mediation based on various options, including asset due diligence and damage confirmation conditions."

The Dispute Mediation Committee has currently started a preliminary investigation related to this. After fact-finding, dispute mediation options will be reviewed, and a final decision will be made based on asset due diligence or confirmation conditions. However, even if the committee decides on 100% compensation, it remains advisory without legal enforcement. If the distributor does not accept it, compensation mediation will not proceed, and the matter will be resolved through litigation later.

This content was produced with the assistance of AI translation services.