NH Investment “fully responsible” for W300b Optimus bad sale: FSS

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On Monday, the day before the FSS order was announced to the public. (Yonhap)

South Korea’s financial regulator said on April 6th that NH Investment & Securities, the country’s second largest brokerage firm by net worth, is being wholly held responsible for improper sales practices related to the alleged hedge fund fraud by Optimus Asset Management.

The Financial Regulatory Service directed NH Investment to compensate end investors for losses of approximately 300 billion won ($ 267 million) in 326 cases brought before the Financial Dispute Arbitration Board, a special arbitration tribunal under the umbrella of the FSS. Qualified professional investors were excluded.

The two contracts between NH Investment and the end investors of the funds were “concluded by mistake” and are therefore “contestable”, said the FSS, citing civil law. This means that the financial consumers did not understand what they signed.

“Optimus was virtually unable to invest in trade receivables from companies involved in government construction projects in signing fund sales agreements with NH Investment in their own marketing process,” the FSS said in a statement.

The referee’s recommendation applies to the rest of the cases, he added.

Korean fund sellers have rarely been held accountable for misleading financial consumers. The Supreme Court ruled in 2016 that the sellers of a private fund owned by Pine Asia Asset Management, then known as Phoenix Asset Management, were responsible for investor losses. This was the only case so far in which a court had recognized misconceptions about investments as a viable reason for contract annulment.

Tuesday’s announcement is the latest development in the hedge fund scandal involving Optimus, who managed approximately won 500 billion worth of assets last year when it was revealed that the fund had betrayed fund sellers and end investors into a scam.

After Optimus disguised its hedge funds as funds that invest in trade accounts receivable – which are generally viewed as a safe target for parking cash – Optimus breached its contracts by using the pooled money to fund real estate development projects, buying public companies that were later taken off the stock exchange or suspended from trading, invest in privately held securities or provide loans.

Meanwhile, Optimus is accused of deliberately misleading fund sellers through embezzlement and embezzlement.

NH Investment, Optimus’ largest seller, sold combined feeder funds totaling Won 697.4 billion from June 2019 to May 2020. Funds worth 432.7 billion won have been frozen since last June.

Of that, won 300 billion was ordinary investor money, while the rest came from skilled professional investors.

Another fund seller, Korea Investment & Securities, had privately reimbursed its clients 90 percent of the 28.7 billion won they lost.

“We can hardly expect normal investors to pay attention to the profitability of (Optimus’ investment process),” said the FSS.

The watchdog added that legal proceedings would be the more appropriate route for qualified professional investors.

The decision apparently upset NH Investment, a broker arm of the cooperative NongHyup Financial Group, as the company has stressed that the Optimus Fund custodian, Hana Bank and the fund administrator, Korea Securities Depository, share the burden of compensating investors should.

The recommendation is not binding and NH Investment could refuse to accept it. In this case, his customers would have to file a civil lawsuit.

The Optimus case is one of two high profile hedge fund scandals that have aroused public distrust of private fund investments. The other is Lime Asset Management’s 1.7 trillion won mis-selling fiasco.

In February, the FSS arbitrator ordered Lime fund sellers Woori Bank and Industrial Bank of Korea to reimburse investors for at least half of the damage they suffered.

By Son Ji-hyoung ([email protected])

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