Prosecutors Arrest and Indict KB Securities Team Leader in 'Lime Scandal'

"Fund Insolvency Awareness" Suspicion Also
Shinhan Investment Corp Prosecuted Under Joint Liability Rule

[Image source=Yonhap News]

[Asia Economy Reporter Yoo Byung-don] A KB Securities employee accused of participating in the incomplete sale of funds in the Lime Asset Management scandal, which caused damage worth about 1.6 trillion won, has been brought to trial.

The Criminal Division 6 of the Seoul Southern District Prosecutors' Office (Chief Prosecutor Kim Rak-hyun) announced on the 30th that on the 25th, Kim, team leader of the Delta Solutions Department at KB Securities, was arrested and indicted on charges including violation of the Act on Capital Market and Financial Investment Business (Capital Market Act).

Kim is suspected of continuing to sell Lime funds without informing customers despite knowing that the Lime fund assets had become impaired. KB Securities went beyond simple sales of Lime funds and entered into total return swap (TRS) contracts with Lime, providing funds.

TRS is a de facto loan where a securities company purchases assets on behalf of others and receives fees from the asset management company; the securities company recovers funds with priority at the fund's maturity, and investors receive the remaining proceeds.

Asset management companies can leverage through TRS to increase returns, but if losses occur, the scale of losses also grows larger.

Kim, who played a key role in the TRS contract as team leader, is also suspected of obtaining illicit gains by receiving kickbacks from Lime or collecting excessive sales commissions. With Kim being brought to trial, attention is also focused on whether KB Securities as a sales company will be indicted.

Previously, prosecutors indicted Im, former head of the PBS division at Shinhan Financial Investment, for involvement in fraud related to Lime's overseas trade finance fund, and also brought Shinhan Financial Investment Corporation to trial.

Prosecutors applied the corporate punishment provision under the Capital Market Act, recognizing that Shinhan Financial Investment neglected supervision and caution regarding Im’s fund rollovers and incomplete sales activities.

There are also allegations that KB Securities was aware at the corporate level that Lime funds had become impaired.

In an internal report prepared in early 2019, KB Securities analyzed that "in case of unfavorable external conditions such as a recession, the loss rate of Lime funds could reach up to 52%."

The report also included content that increasing the collateral ratio of TRS loans to Lime could minimize company losses and transfer them to customers.

In response, KB Securities explained, "At the time of sale, Lime funds were not in a distressed state, and under relevant laws and transaction structures, it was impossible for us as the sales company to recognize fund impairment in advance."

They added, "The company, as a TRS provider, executed transactions legally according to Lime’s management instructions," and "The arrested employee’s alleged acts are personal deviations unrelated to company duties."

However, some argue that in addition to corporate punishment under the corporate punishment provision, further investigations into the preparation and reporting process of internal documents should be conducted.

Kim Deuk-ui, head of the Financial Justice Solidarity, stated, "Documents prepared at KB Securities show that the company knew about the fund’s impairment and even established countermeasures," and "This is not just an individual problem of Kim but misconduct at the company level."

He added, "It is necessary to investigate who prepared and received these documents and how accurately they understood the fund’s situation," and "If they recognized serious asset impairment and still responded this way, all involved could be punished for fraud."

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