Securities Industry: "The Nightmare of Ruthless Private Equity Funds Revives"... From Raids to Fines

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] Signs of a private equity fund nightmare revival have appeared in the securities industry. Following the prosecution's search and seizure of KB Securities and Shinhan Financial Investment, the Financial Services Commission imposed fines on Yuanta Securities and Meritz Securities.

According to the financial investment industry on the 6th, Meritz Securities and Yuanta Securities were recently found to have committed illegal acts such as obtaining unfair monetary benefits from fund stakeholders, resulting in fines of 143 million won and 30 million won respectively from the Securities and Futures Commission.

Meritz Securities was found to have purchased part of a fund they sold when the fund faced a risk of termination due to insufficient investment, receiving several hundred million won in unfair benefits from the fund management company as compensation.

Under the Capital Markets Act and Financial Investment Business Regulations, investment dealers and brokers selling funds must not purchase issued funds to avoid termination. Additionally, securities companies must not receive direct or indirect financial benefits beyond the Financial Services Commission's notification standards from counterparties related to their business, which led to this sanction.

In the case of Yuanta Securities, it was revealed that they sold three funds advised by a parent private equity fund (PEF) management and investment brokerage firm for several hundred million won and received unfair benefits from the advisory firm and other fund stakeholders. The benefits obtained were used by the employee under the pretext of overseas training, covering airfare, golf resort accommodation, and tour expenses.

The Financial Investigation Division 2 of the Seoul Southern District Prosecutors' Office (Chief Prosecutor Chae Hee-man) sent prosecutors and investigators to the headquarters of KB Securities and Shinhan Financial Investment in Yeouido, Seoul, on the morning of the 5th to secure materials related to the Italy Healthcare Fund.

Victims of the fund redemption suspension filed complaints and accusations against Hana Bank, the fund distributor, in July 2020 for fraud and violations of the Capital Markets Act. The investigation began last November when the Seoul Southern District Prosecutors' Office conducted a search and seizure at Hana Bank's headquarters.

KB Securities and Shinhan Financial Investment, which issued derivative-linked securities (DLS) and entered into total return swap (TRS) contracts, were accused alongside Hana Bank. The victim group claimed, "The Italy Healthcare Fund is a fund fraud case where Hana Bank, using an OEM method, had asset management companies and securities firms set up and operate the fund, selling it to investors while making false statements, causing enormous financial losses."

The Italy Healthcare Fund invested in medical fee accounts receivable that Italian hospitals claimed from local governments. Approximately 150 billion won worth was sold from October 2017 to September 2019. Since the end of 2019, repayment delays and early repayment failures occurred, leading to sales suspension in 2020, with damages exceeding 110 billion won.

With the search and seizure of KB Securities and Shinhan Financial Investment on this day, the securities industry showed a generally tense atmosphere. A financial investment industry official said, "I heard that the prosecution is conducting a comprehensive reinvestigation of private equity funds such as Lime Fund."

Meanwhile, on June 8, the day after his inauguration, Financial Supervisory Service Governor Lee Bok-hyun stated that he would review whether there is room to revisit the Lime and Optimus fund incidents through the system.

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