(LEAD) Watchdog to target operator, sellers in hedge fund probe

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SEOUL, Feb. 18 (Yonhap) -- South Korea's financial watchdog will likely focus its first on-site probe into a major hedge fund fiasco on its operator and three major sales agents, industry sources said Tuesday.

The Financial Supervisory Service (FSS) is scheduled to launch the inspection into South Korea's largest hedge fund Lime Asset Management Co.'s suspension of fund redemption early next month.

Citing a cash crunch, Lime froze withdrawals from a trade financing fund worth an estimated 244 billion won (US$206 million) in October, sparking an outcry from angry investors.

The Lime scandal began to unfold in July last year when the FSS began probing Lime's suspected irregularities, forcing spooked investors to scramble to withdraw their money.

The watchdog's upcoming inquiry is widely expected to center on suspected fraud and misselling by Lime and Shinhan Investment Corp., a major sales agent.

Lime, the top hedge fund by assets under management, is suspected of having concealed investment losses and inflated investment returns in a bid to keep its customer base.

In addition, the hedge fund was allegedly involved in a Ponzi scheme to cover losses and engaged in misselling or selling products to customers without providing adequate information or explaining the high risks involved.

According to the sources, FSS investigators will scrutinize whether Shinhan Investment was involved in fraudulent practices or misselling while serving as a sales representative.

Also subject to the field inspection are two major lenders, Woori and Hana banks, which are suspected of misselling in the investment scandal.

Depending on the results of the field inspection aimed at finding ways to help victims, the financial watchdog can launch a formal probe that may result in disciplinary action against those institutions and top executives.

Meanwhile, the FSS is slated to conduct a formal investigation into Daeshin Securities Co. over its suspected misselling concerning the Lime fiasco. Daeshin will be the first brokerage house to be probed.

Market watchers said Lime customers and banks stand to lose big from the hedge fund's botched investments. Lime has halted withdrawals of funds worth an estimated 1.7 trillion won, including the trade financing fund in question.

Hana Financial Investment estimated the local banking sector could suffer up to 270 billion won in losses from the Lime scandal with Shinhan Bank alone likely to lose some 228 billion won.

In a separate report, eBEST Investment & Securities Co. warned the Lime fiasco will likely escalate investor jitters and lead to tougher rules on hedge funds, having a negative impact on the whole financial sector.

The FSS has pledged to reform the way local hedge funds manage investment risks in the wake of the Lime episode.
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