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

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

FSS Conducts Fact-Finding on German Operator
"Cannot Rule Out Possibility of Fraud"

[Image source=Yonhap News]

[Asia Economy Reporter Lee Jung-yoon] A decision of 'contract cancellation due to mistake' was made regarding 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' mistakes by stating that the German project company's business history, creditworthiness, 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, it recommended canceling the Heritage Fund sales contracts and that Shinhan Investment Corp, NH Investment & Securities, Hyundai Motor Securities, SK Securities, Hana Bank, and Woori Bank return the full principal investment amount.

The FSS plans that if this mediation is established as recommended, other investors will also be subject to voluntary adjustments 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.

With this mediation, if both parties?the applicant and the seller?accept the mediation proposal within 20 days after its receipt, the mediation will be established. The FSS stated, for the remaining general investors, it plans to handle the cases through voluntary adjustments based on the committee's decision.

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 company 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 declarations of intention if there is a mistake in an important part of the legal act, and recognized the victims' claims.

As of the end of September, the number of dispute mediation applications related to the German Heritage trust, fund, and derivative-linked 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, on-site investigations of financial companies, and cooperation with overseas supervisory authorities.

Regarding the feasibility of the German project company's investment plan, the fact-finding revealed that the company, introduced as a local top 5 firm established in 2008 with 52 completed projects and 50 ongoing projects, lacked verified business history and corporate evaluation, and its expertise was unconfirmed.

The realization of the investment recovery structure was also found to be practically difficult. When purchasing real estate, the project company was supposed to invest 20% of the purchase price and repay bank loans if the sales rate was below 65%. Additionally, loans were to be repaid based on the project company's credit regardless of permits or sales, and in case of default, repayment was to be secured through collateral rights on the real estate or pledge rights on the project company's special purpose vehicle (SPV) shares.

However, the safety mechanism for investment recovery relying on the project company's financial strength was practically impossible to implement, and securing collateral and pledge rights was insufficient. The project company's credit rating and financial status made the 20% investment difficult, and actual investment did not occur.

Although it was explained that about a 5.5% fee would be paid over two years, it was revealed that the total fee structure, including hidden fees, amounted to 24.3%. Reducing such fees would make acquiring the planned real estate impossible. Although it was promised that design and permit changes would be completed within one year after acquiring local real estate, no permit applications were made.

An FSS official said, "We cannot exclude the possibility of fraud," adding, "However, since fraud is a crime requiring proof of intent, which is realistically impossible to prove here, we approached this as contract cancellation due to mistake."

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