Looking into a major hedge fund misselling fiasco involving Lime Asset Management, South Korea’s financial watchdog is likely to narrow its focus on three major vendors -- Shinhan Investment, Woori Bank and KEB Hana Bank -- officials said Tuesday.

Shinhan Investment is facing additional allegations that it sold the disputed financial products with full awareness of their flaws.

The Financial Supervisory Service is slated to kick off its first on-site investigation of the country’s largest hedge fund, Lime Asset Management, early next month.

Faced by a liquidity crunch, the asset manager halted cash withdrawals from one of its trade financing funds in October, freezing some 244 billion won ($205 million) and triggering intense backlash from investors.

While the Lime scandal has been unraveling since July last year, Shinhan Investment recently emerged as the priority in the FSS probe.

As of the end of last year, a total of 38 feeder funds worth 243.8 billion won had been invested in Lime’s problematic trade financing umbrella funds. Retail investment accounted for 168.7 billion won, of which Woori Bank sold 56.1 billion won and Shinhan 45.4 billion won.

Shinhan is also suspected of fraudulently concealing the investment risks of Lime’s Pluto TF-1.

Meanwhile, Woori Bank and KEB Hana Bank, though widely expected to face a lower level of liability than Shinhan, are weighed down as they have received heavy sanctions for misselling derivative-linked financial products in a separate case. The regulator, the Financial Services Commission, is set to review the FSS-imposed sanctions and make a final announcement by next month.

The FSS is also getting ready to conduct an investigation of Daishin Securities’ wealth management center in Seoul’s wealthy Banpo-dong. It is the first brokerage to be targeted as part of the Lime case.

By Bae Hyun-jung (tellme@heraldcorp.com)