South Korea’s financial watchdog on Wednesday ordered two Korean commercial banks -- Woori Bank and the Industrial Bank of Korea -- to compensate end-investors for at least half of the damages they incurred in a 1.7 trillion won ($1.5 billion) misselling scandal involving now-defunct hedge fund Lime Asset Management.

The authorities held the banks accountable for “poor efforts in the exercise of their duties to protect investors” when they sold nearly 300 billion won worth of Lime funds that were later frozen, the Financial Supervisory Service said.

On Tuesday the Financial Dispute Conciliation Committee, a separate arbitrator under the umbrella of the FSS, ordered the fund distribution channels to reimburse a majority of the investments made by three investors -- two individuals and an enterprise.

The committee ordered Woori Bank to compensate an 82-year-old man who had sought to protect his principal for 78 percent of his total investment, which had been frozen since 2019. Woori Bank, Korea’s fourth-largest commercial lender by total assets, was also ordered to repay 68 percent of the investment principal to a corporate investor dedicated to asphalt manufacturing.

IBK was ordered to compensate a retiree who had zero investing experience upon seeking a time deposit. The bank must repay 65 percent of the investor’s losses.

According to the committee, the banks’ misselling practices ranged from manipulation of a client’s risk tolerance to failure to explain the risks that financial products carried.

In line with the committee’s decision, Woori will be held responsible for at least 55 percent of investor losses, while IBK will have to reimburse at least 50 percent. These ratios will vary depending on factors such as the victim’s age and investment experience, and whether the bank was lax about documenting the fund sales.

Woori sold 270.3 billion won worth of Lime funds, while 28.6 billion won worth were offered by IBK.

The FSS’ conciliation committee has handled over 670 cases between victims and sellers of Lime funds.

Earlier in December, the same committee under the FSS had ordered KB Securities, which sold a combined 58 billion won worth of Lime funds, to compensate clients for 40 percent to 80 percent of their investment principal. 

Woori Bank, IBK and KB Securities are among 19 sellers of Lime funds. The three companies had agreed to offer compensation under the authorities’ final conciliation, before the hedge fund’s entire losses are defined.

Since 2019, Lime froze all its assets citing their illiquidity, and it refused requests from over 4,000 individuals and over 580 enterprises to redeem their investments.

In the meantime, Lime was found to have run a Ponzi scheme, misrepresented its asset performance and colluded with fund sellers to conceal its financial losses.

Before the revelation, Lime was considered one of the fastest-growing hedge funds in Korea. It invested in private placement bonds, trade finance funds and mezzanine products.

Lime’s license was revoked in December by the financial authorities here. Its key culprit, ex-Chief Investment Officer Lee Jong-pil, was sentenced in January to 15 years’ imprisonment and fined 4 billion won for financial fraud.

By Son Ji-hyoung (consnow@heraldcorp.com)