Shinhan Bank is considering taking legal action against Lime Asset Management, claiming the fund operator made a unilateral decision last year to hedge its portfolio with a fund sold through the commercial lender, officials said Thursday.

According to Shinhan, Lime Asset didn’t inform the lender of its plans to use Lime Credit Insurance Trade Fund assets to prevent payment delays from other funds that were facing liquidity issues at the time and that its decision amounted to a breach of trust.
 
Lime Asset eventually froze the funds -- Pluto TF-1 and Pluto FI D-1 -- in October 2019, apparently failing to resolve the liquidity issues via hedging. Its volume of delayed payments to investors came to 1.5 trillion won ($1.3 trillion) at the time.

But the figure recently spiked to nearly 2 trillion won on Lime Asset’s decision to freeze an additional 500 billion won of its funds, including the Credit Insurance Trade Fund. The hedging has apparently increased the fund’s exposure to risk.

The Credit Insurance Trade Fund was tied to insured trade receivables, making it relatively risk-free compared with the fund operator’s other products that faced liquidity issues.

A spokesperson for Shinhan told The Korea Herald that the bank was treading cautiously in regard to the possible lawsuit, as the issue concerns consumer protection.

“The consideration for legal action is part of our efforts to uphold customer protection,” the spokesperson said.

“(The bank) won’t take any legal action if there’s no need for it after reviewing the matter,” the spokesperson added.

Meanwhile, three of the investors involved in the fiasco filed criminal complaints against six officials at Lime Asset, Woori Bank and Shinhan Investment last week, accusing them of fraud and capital market law violations.

Concerns about commercial lenders misselling high-risk financial products, including funds and derivatives, have been growing in South Korea as many of their customers lost significant amounts of their principal through such investments.

A recent report by the nonprofit Korea Financial Investors Protection Foundation showed that Woori Bank ranked 28th, while Shinhan Investment ranked 23rd in an assessment of financial institutions that deal with funds. Shinhan Investment, the securities affiliate of Shinhan Bank, was a key sales channel for Lime Asset funds alongside Woori Bank.

By Jung Min-kyung (mkjung@heraldcorp.com)