Discovery Fund Victims: Is There a Way to Receive More Compensation for Losses?

IBK Industrial Bank Begins Reinspection to Resolve Discovery Fund Dispute
Partial Compensation for Incomplete Sales → Full Compensation Expected Due to Contract Cancellation
Additional SEC Data Analysis "Will Conclude Carefully"

The Financial Supervisory Service (FSS) has decided to actively engage in dispute mediation for victims based on newly uncovered criminal allegations related to the 'three major funds with suspended redemptions (Lime, Optimus, Discovery).' There is speculation that if the additional inspections by the FSS and investigations by the prosecution reveal greater responsibility on the part of asset management companies and distributors, a 100% refund could be possible. However, re-inspections for dispute mediation are expected to be limited to the Discovery Fund. This is because Lime and Optimus are considered either fundamentally void or have already undergone substantial dispute mediation.

On the 31st, a senior FSS official stated, "We are conducting inspections for dispute mediation regarding the (Discovery Fund), and based on these results, we will consider additional dispute mediation." He added, "Furthermore, if necessary, we will analyze additional materials from the U.S. Securities and Exchange Commission (SEC) and either provide them to the prosecution or inform the public." The FSS's Consumer Rights Protection Department has directly requested the Bank Inspection Division to re-examine the distributors. Accordingly, next month, the Bank Inspection Division will re-examine IBK Industrial Bank, the largest distributor of the Discovery Fund.

Heightened Attention on 100% Refund for Discovery Fund

Dispute mediation is likely to be limited to the Discovery Fund. The Optimus Fund has already been ordered to provide 100% compensation. For the Lime Fund, full principal refunds have been decided only for trade finance funds sold after November 2018. Other Lime funds have been tentatively concluded to be unrelated to the recent FSS inspection results. Although allegations of Ponzi schemes were found in Lime funds, they were not at the point of sale (investor solicitation). However, the exclusion of Lime funds is not yet finalized.

Previously, on the 24th, Ham Yong-il, Deputy Governor of the FSS, stated during the announcement of the 'Task Force (TF) results on inspections of asset management companies causing major investor damages,' "Lime and Optimus are either fundamentally void or have undergone substantial dispute mediation, so unlike Discovery, there are no additional factors for further mediation." He added, "Discovery is currently undergoing litigation and requires additional inspections."

The FSS's initial inspection target is IBK Industrial Bank, the largest distributor, but there is a possibility that inspections will expand beyond the banking sector to the financial investment sector. The Discovery Fund, reportedly managed by Jang Ha-won, the younger brother of former Blue House Policy Chief Jang Ha-sung, was sold by three banks including IBK Industrial Bank and nine securities firms.

The reason the FSS planned additional inspections is that illegal activities by Discovery Asset Management, such as Ponzi schemes, were revealed during the re-examination of the Discovery Fund. In February 2019, when the A overseas special purpose company (SPC), into which funds were invested, faced a shortage of funds making it difficult to redeem three maturing funds, another B overseas SPC repaid the debt by acquiring A's subordinated bonds through linked transactions. During this process, B SPC raised $3.44 million in new fund money, which was intended to repay the A SPC investment fund, but this was concealed and a false investment proposal was used to misrepresent the investment target. The amount used for the Ponzi scheme was approximately 27.2 billion KRW, and allegations including abuse of insider information for private gain, embezzlement, and breach of trust related to fund money were also confirmed.

Deputy Governor Ham explained, "If investors were told that the Discovery Fund was being redeemed normally while it was actually a Ponzi scheme, the responsibility of the asset management company and distributors could increase." He added, "Since the fund was raised using a falsified investment proposal for the purpose of covering up other Ponzi schemes, it could be considered an incomplete sale."

The FSS holds the position that, depending on the inspection results, the partial compensation judgment for incomplete sales related to the Discovery Fund could be changed to full compensation through contract cancellation. However, the FSS plans to handle this cautiously. They intend to make a careful and comprehensive conclusion after additional re-inspection results from the Asset Management Inspection Division and further analysis of materials obtained from the U.S. SEC.

The Asset Management Inspection Division plans to focus on whether IBK Industrial Bank knew about the falsified investment proposal by Discovery Asset Management and still sold the fund, or if they could have known but failed to verify it. The banking sector is tense as consumer dispute mediation could be reinitiated depending on the FSS inspection results. The FSS Dispute Mediation Committee has already set compensation standards requiring investors to be compensated for 40-80% of losses, but depending on additional inspection results, investors might have to be refunded 100% of their principal. If IBK Industrial Bank directly cited the falsified investment proposal by Discovery Asset Management, this alone could constitute incomplete sales, increasing the compensation rate. If 'contract cancellation due to mistake' is applied, investors could receive a full refund of their principal.

Previously, in April 2021, when the FSS ordered 100% compensation to NH Investment & Securities, which sold the Optimus Fund, the same reasoning was applied. Unlike Shinhan Financial Investment, which sold the Lime Trade Finance Fund, NH Investment & Securities did not recognize the Optimus Fund's insolvency in advance. They recruited investors based on the investment proposal prepared by Optimus Asset Management. However, the FSS Dispute Mediation Committee concluded that NH Investment & Securities was also responsible. They judged that if NH Investment & Securities had properly verified information that could have caused investors to be mistaken, the redemption suspension crisis would not have escalated.

5 Trillion KRW Investor Losses from Suspended Redemption Funds Over 5 Years

Meanwhile, according to data submitted by the FSS to Yoon Joo-kyung, a member of the National Assembly's Political Affairs Committee from the People Power Party, from 2017 to July 2022, the number of investors affected by suspended redemption private funds totaled 13,176, with sales balances amounting to 5.0159 trillion KRW. This includes the Lime Fund suspended in October 2019 (4,473 investors, 1.538 trillion KRW), the Optimus Fund suspended in June 2020 (884 investors, 508.4 billion KRW), the German Heritage Fund suspended in July 2019 (1,695 investors, 477.2 billion KRW), the Discovery Fund suspended in April 2019 (1,278 investors, 261.2 billion KRW), and the Italian Healthcare Fund suspended in December 2019 (590 investors, 175.3 billion KRW).

However, the amount they have recovered as compensation is 2.3838 trillion KRW, only 47.5% of the invested amount. This figure includes compensation amounts decided by the FSS Dispute Mediation Committee and amounts independently calculated by financial companies outside of dispute mediation.

Since June 2020, the FSS has prepared dispute mediation plans through the Dispute Mediation Committee for five funds with significant damages (Lime, Optimus, Discovery, Italian Healthcare, German Heritage). In particular, for the Lime Fund trade finance funds (sold after November 2018), Optimus, and Heritage funds, it was decided to cancel contracts due to 'mistake,' resulting in full principal refunds.

However, for other funds, incomplete sales were judged, and only 40-80% compensation was set. As a result, some victims are still pursuing additional lawsuits and disputes continue. As of the end of March, a total of 2,604 complaints related to suspended redemption funds have been filed with the FSS, but 1,055 of these, about 40%, remain unresolved. An FSS official explained, "Private funds subject to dispute mediation are connected through complex structures involving various domestic and international stakeholders, and many civil and criminal lawsuits are ongoing, so verifying facts requires significant time and effort."

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