CEO John Lee's Spouse Also Subject to Conflict of Interest...Possibility of '6-Month Prior Transaction' Exception Clause

Financial Supervisory Service Investigates Meritz Asset Management CEO John Lee for Illegal Investment Allegations
Capital Markets Act Article 84 Restricts Transactions with Interested Parties
Exception for Contracts Concluded More Than 6 Months Prior
12% Annual Return... Favorable Transactions for Collective Investment Schemes

[Asia Economy Reporter Ji Yeon-jin] John Lee, CEO of Meritz Asset Management and a pioneer of the Donghak Ant Movement, was investigated by the Financial Supervisory Service over allegations of illegal investment, with the core issue being a 'conflict of interest.' Whether Meritz Asset Management’s investment through its fund in a company operated by an acquaintance of CEO John Lee and in which his spouse is a shareholder constitutes a conflict of interest will determine the legality of the case.

According to the financial investment industry on the 20th, John Lee’s spouse invested 200 million KRW (6.57% stake) in P Company, a real estate-related P2P firm established in 2016. In 2018, Meritz Asset Management set up the ‘Meritz Marketplace Landing Specialized Private Investment Trust’ fund and invested the entire 6 billion KRW fund amount into P Company’s real estate P2P products.

Article 84 of the Act on Capital Markets and Financial Investment Business (Capital Markets Act) stipulates that collective investment business operators (such as asset management companies) must not engage in transactions with interested parties when managing fund products. The enforcement decree of this law defines interested parties as employees and spouses of the fund management company, major shareholders of the fund management company and their spouses, affiliates of the fund company and their employees, and their spouses.

According to this provision, John Lee’s spouse qualifies as an interested party, thus violating the Capital Markets Act. However, the law includes exceptions (grounds for exemption from illegality) allowing transactions with interested parties under certain conditions: ▲transactions based on contracts concluded more than six months before becoming an interested party ▲transactions conducted through public markets such as securities markets where unspecified many participants are involved ▲transactions favorable to the collective investment scheme compared to general transaction conditions.

Since John Lee’s spouse invested in P Company more than six months (two years) before Meritz Asset Management’s investment, and the fund managed by Meritz Asset Management yielded an annual return of about 12%, which is favorable to the company, there is a possibility that the exemption grounds will be recognized.

Industry insiders believe that the focus will be less on the ‘conflict of interest between the P2P company and John Lee’ and more on whether ‘John Lee invested in a company owned by an acquaintance through his spouse’s name, and whether he benefited by subsequently injecting fund money.’ If, as John Lee explained, the amount was about 10 million KRW over five years, or about 2 million KRW annually, the exemption is likely to be accepted.

However, the asset management industry generally establishes internal control regulations to prevent conflicts of interest, requiring employees to report all stock trading transactions in advance and restricting private investments. Therefore, there is a possibility of violating internal control regulations. A conflict of interest refers to a situation where an individual’s private interests conflict with the organization’s interests through fair work, raising concerns that private interests may interfere with fair job performance. An asset management industry official said, "Employees investing in stocks included in the managed fund can cause unnecessary misunderstandings, and compliance is strict, so it is generally avoided."

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