[1mm Financial Talk] The Never-Ending Nightmare of Private Equity Funds

The ‘private equity fund misfortune’ of Shinhan Financial, which began with the Lime Asset Management scandal, seems far from over. Last year, former Chairman Cho Yong-byeong abruptly resigned, stating that "someone must take overall responsibility for the private equity fund incident," causing turmoil. Now, disputes related to other fund products, such as the Fidelity Trade Finance Fund, are continuing.

According to the financial sector on the 9th, the Financial Crime Investigation Unit of the Seoul Metropolitan Police Agency conducted a search and seizure at Shinhan Bank’s headquarters in Jung-gu, Seoul, that morning. The police reportedly dispatched investigators to Shinhan Bank’s Human Resources Group, Asset Management Group, and Investment Product Services Headquarters to secure materials related to the Fidelity Trade Finance Fund.

The Fidelity Fund is a product that invests in accounts receivable of a Singaporean trading company. Fidelity Asset Management handled the operation, while Shinhan Bank and Korea Investment & Securities, among others, were responsible for sales. Among them, Shinhan Bank sold 12 funds based on this product from 2019 to January 2020. The sales amount was approximately 180 billion KRW, with about 380 customers involved.

The problems with the Fidelity Fund arose after the global COVID-19 pandemic. Due to the deterioration of trade conditions caused by COVID-19, the liquidity of the trading company invested in by this fund dried up, and principal and interest repayments were not made even after the maturity dates (February and June 2021).

The claim that investment recovery could be made through insurance companies if accounts receivable collection became difficult also proved futile. Insurance companies refused to pay the insurance claims. Shinhan Bank later conducted individual private settlements with many victims, but about 20 victims who did not accept these settlements filed lawsuits last year against the operator, Fidelity Asset Management, and the seller, Shinhan Bank, on charges including violation of the Capital Markets Act and fraud. Their damages are reported to be around 9 billion KRW.

The victims claim 100% compensation, arguing that Shinhan Bank engaged in incomplete sales. In their complaint, they stated, “(Shinhan Bank) made false statements regarding key matters related to the fund’s profit structure in the product description and provided definitive judgments suggesting ‘no or extremely low possibility of principal loss’ while recommending the investment.”

Notably, Korea Investment & Securities, which sold the Fidelity Fund, has already provided 100% compensation to the victims. Previously, Korea Investment & Securities decided to fully compensate for 10 private equity fund products, including the Fidelity Fund sales amounting to 23.3 billion KRW (104 accounts) in 2021. Although they did not admit responsibility for incomplete sales, their position at the time was that “restoring customer trust and strengthening long-term business capabilities based on that premise were prioritized.”

Thus, the private equity fund nightmare for Shinhan Financial appears to be ongoing. A financial sector official said, “Shinhan Financial was sensitive to performance due to CEO reappointment issues, which ultimately led to entanglement in various incidents,” adding, “Aside from major private equity fund cases such as Lime, Optimus, Discovery, and Heritage Funds, investigations into small and medium-sized cases have not yet fully begun, so related disputes are likely to continue steadily across the financial sector for the time being.”

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