South Korean fund operator Lime Asset Management and its seller Shinhan Investment deliberately duped investors by concealing their losses and continuing the sale of the related products, the watchdog Financial Supervisory Service said Friday.

Based on an intermediary inspection and accounting audit, the FSS estimated that two of the disputed parent funds may suffer losses of up to 730 billion won ($617.5 million). Considering other parent funds yet under inspection, the total amount of investor losses could rise as high as 1 trillion won.

“Lime Asset Management and Shinhan Investment are accused of concealing the losses in their trade finance funds, making (investors) believe that operations were under control,” the FSS said in a press briefing.

While Lime Asset was seen as the main culprit behind the massive misselling scandal, Shinhan Investment, one of Lime Asset's prime brokerage service providers, had a 360 billion won worth of total return swap deal with Lime.

At the heart of the estimate was its trade finance fund Pluto TF-1, whose loss has yet to be confirmed in the recent audit. The problematic fund is associated with the New York-based investment adviser International Investment Group.

The two Korean asset managers adjusted the value of one of their trade funds throughout the second half of 2018, even after finding out in June that the IIG was not delivering the required standard price assessment.

Also, they received an email in November that year, notifying them of the upcoming liquidation procedure of the IIG Fund, the FSS said.

Shinhan Investment released a statement to deny intentional deception.

“(Our officials) visited Lime Asset and IIG in January last year to verify the contents of the email sent by IIG trustee in November 2018 but found it hard to figure out the circumstances, due to the death of the IIG operator in charge and the lack of explanation,” it said.

It was only in November last year, when the US Securities and Exchange Commission made the related announcement, that the company became fully aware of the flaw, it claimed.

Along with Pluto TF-1, Lime’s Pluto FI D-1 and Tethys 2, each targeting privately placed bonds and mezzanine products, will likely face losses of 46 percent and 17 percent respectively, according to Lime Asset. 

While market anxiety continued to expand amid the damage assessment, Lime Asset vowed to come up with redemption plans by end-March.

Founded in 2012 as an investment adviser, Lime Asset was granted a license to operate private funds in 2015. In its heyday, Lime Asset was overseeing 5.7 trillion won ($4.8 billion) as of end-June last year, jumping over 50 times compared to end-2016.

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