S. Korean Prosecutors Raid Fund Operator on Fraud Allegations

Source: Regulation Asia Editors, Regulation Asia 2020-06-28

Accused of fabricating depository statements, Optimus Asset Management has suspended withdrawals from six feeder funds since last week, locking up 90bn won in investor money.

South Korean prosecutors have raided the office of private fund operator Optimus Asset Management and 13 of its other locations, amid an ongoing probe into alleged financial fraud, reports Pulse.

Last Wednesday (17 June), Optimus froze KRW 38.4 billion (USD 32 million) in two feeder funds one day before they reached maturity, citing “legal trouble”.

The feeder funds were meant to have invested 95 percent of their portfolios in trade receivables of companies dedicated to state-led construction projects. However, Optimus is said to have invested in unlisted companies, real estate and private loans issued by an unnamed savings bank, without notifying investors.

The FSS (Financial Supervisory Service) launched an investigation into the company last Friday (19 June) over allegations that it breached contracts with fund investors in its portfolio construction. The FSS had said it would refer the case to prosecution if it found evidence of fraud.

On Monday (22 June), brokerage firm NH Securities initiated legal proceedings against Optimus and its executives, alleging the company committed fraud by fabricating depository statements sent to brokers. NH had distributed the majority of the Optimus funds, amounting to KRW 440 billion in total investment from about 800 retail clients.

Optimus has claimed that its law firm fabricated the documents.

FSC (Financial Services Commission) chairman Eun Sung-soo said on Tuesday (23 June) that the regulator would initiate an industry-wide probe covering some 10,000 private fund operators, though questions have been raised about whether it has adequate resources to do so.

On Wednesday (24 June), Optimus suspended withdrawals from two additional funds, followed by two more funds on Thursday (25 June), bringing the total amount of investor money locked up to KRW 90.6 billion between six funds.

The Seoul Prosecutors’ Office began investigating the case on Wednesday (24 June), placing travel bans on key Optimus figures, raiding the company’s 14 locations, and confiscating computer hard discs and documents. A law firm headed by a registered Optimus director was also included in the raids.

The FSS is expected to announced the results of its initial probe next week, following which prosecutors plan to issue summonses against the key executives.

The Optimus debacle is the latest in a series of cases in Korea where investors face losses due to poor management of private equity funds, highlighting the need for better regulation. The government had eased rules for private funds in 2015, prompting a sharp rise in the number of individual funds operating in Korea over the past five years.

in April, the FSC unveiled tighter rules for private equity funds, requiring mandatory external audits for larger funds, the adoption of new valuation guidelines, regular liquidity stress testing, and 400% leverage cap, among other measures.

The new rules are expected to take effect in coming months.

Additional reporting from Korea Herald, Korea JoongAng Daily, Korea Times.

S. Korean Prosecutors Raid Fund Operator on Fraud Allegations

Subscribe to Our Newsletter!

Subscribe to Our Newsletter!