Bunjo Committee Rules in Favor of German Heritage Fund Victims... Decision to Return Investment Principal Made

Heritage Fund Dispute Resolution: 6 Contract Cancellations Confirmed
'Contract Cancellation Due to Mistake' Recognized
Financial Authorities Conclude Relief for 5 Major Private Equity Fund Cases
"Remaining General Investors to Be Handled Through Voluntary Adjustment"

[Asia Economy Reporter Lee Jung-yoon] ‘Contract cancellation due to mistake’ has been decided for six dispute mediation cases related to the German Heritage Fund, which experienced a large-scale suspension of redemptions.

According to the Financial Supervisory Service (FSS) on the 22nd, the Financial Dispute Mediation Committee held the day before decided to cancel contracts due to mistake for six dispute mediation applications related to the German Heritage Fund sold by six financial companies including Shinhan Investment Corp.

The committee judged that the overseas asset manager prepared the product proposal with false and exaggerated important parts, and the six sellers induced investors’ mistake by stating that the German project operator’s business history, credit rating, and financial status were excellent and that the project was feasible according to the investment structure when concluding the contracts based on the proposal.

Accordingly, the committee recommended canceling the Heritage Fund sales contracts and returning the full principal investment by Shinhan Investment Corp, NH Investment & Securities, Hyundai Motor Securities, SK Securities, Hana Bank, and Woori Bank.

The FSS plans that if this mediation is established as recommended, other investors will also be subject to voluntary adjustment according to the committee’s decision. If the mediation process proceeds smoothly, it is expected that 430 billion KRW of principal investment will be returned to general investors. Upon completion of this dispute mediation, the financial authorities’ damage relief procedures for the so-called five major private equity fund incidents?Lime, Optimus, Discovery, German Heritage, and Italy Healthcare?will be concluded.

Shinhan Investment Corp and others sold the so-called Heritage Fund from April 2017 to December 2018, which provided bridge loans for remodeling German registered monument preservation real estate into residential buildings. A bridge loan refers to a loan prior to real estate project financing (PF). However, the related project operator went bankrupt, and redemptions were suspended from June 2019.

Victims have claimed contract cancellation due to mistake. The committee applied Article 109 of the Civil Act, which allows cancellation of a declaration of intention if there is a mistake in an important part of the legal act, and recognized the victims’ claims.

[Image source=Yonhap News]

As of the end of September, the number of dispute mediation applications related to the German Heritage trust, fund, and derivative securities totaled 190 cases across six sellers. Shinhan Investment Corp had the most with 153 cases, followed by NH Investment & Securities with 17, Hyundai Motor Securities with 11, Hana Bank with 4, Woori Bank with 4, and SK Securities with 1. The total sales amount was identified as 483.5 billion KRW, with Shinhan Investment Corp accounting for the largest portion at 390.7 billion KRW.

The FSS conducted fact verification through inspections and on-site investigations of financial companies and cooperation with overseas supervisory authorities.

The investigation revealed that the project operator, introduced as a local top 5 company established in 2008 with 52 completed projects and 50 ongoing projects, lacked verified business history and corporate evaluation, and its expertise was unconfirmed.

The feasibility of the investment recovery structure was also found to be practically impossible. When purchasing real estate, the operator was supposed to invest 20% of the purchase price, and if the sales rate was below 65%, repayment would be made through bank loans. Additionally, loans were to be repaid based on the operator’s credit regardless of permits or sales, and in case of default, repayment was possible through exercising collateral rights on the real estate or pledge rights on the operator’s special purpose vehicle (SPV) shares.

However, the safety measures for investment recovery relying on the operator’s financial strength were practically unfeasible, and securing collateral and pledge rights was insufficient. The operator’s credit rating and financial status made the 20% investment difficult, and actual investment was not made.

Also, although it was explained that about 5.5% fees would be paid over two years, the actual fee structure including hidden fees amounted to 24.3%. It was confirmed that reducing such fees would make acquiring the planned real estate impossible. Although it was promised that design and change permits would be completed within one year after acquiring local real estate, no permit applications were made.

An FSS official stated, “If both parties, the applicant and the seller, accept the mediation proposal within 20 days after its receipt, the mediation is established,” and added, “For the remaining general investors, we plan to handle the cases through voluntary adjustment or other methods according to the committee’s decision.”

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