03.12.2020 Author: Konstantin Asmolov

South Korea’s Financial Pyramid Schemes: Is its Leadership Complicit?


Only just recently, this author wrote about a high-profile scandal that involved the South Korean Minister of Justice. Up until now, they have generally managed to be “sweep it under the rug”, since it did not entail direct lobbying, but rather a situation that could have been interpreted as a bureaucratic error: due to some delays in processing documents, everything was drawn up retroactively.

However, without even having managed to first get out of one conflict, Mrs Minister finds herself in another one.

In the spring and summer of 2020, the Supreme Prosecutors’ Office of the Republic of Korea investigated the activities performed by two hedge funds, Lime Asset and Optimus Asset, which abused the trust placed in them by investors by channeling their money into dubious projects, or overtly setting up pyramid schemes. These activities could not take place without a cover provided by high-ranking security service officials, and politicians from the ruling party.

And here it is worth taking note of the personage of Yoon Seok-youl, the Prosecutor General of South Korea: back in the day, he made a name for himself in the case of “trolls in uniform”, exposing cases involving the previous presidential administration, and earning a reputation as an honest investigator willing to take a beating for an idea. That is why President Moon appointed him as the prosecutor general, hoping that Yoon would wage a fight with conservative politicians, and would help him crush his opponents by having a key person in office.

However, it turned out that Yoon Seok-youl is in fact an honest prosecutor, who incarcerates all those who break the law, and not those pointed to by top leadership – and lately, since power corrupts, the majority of corrupt officials belong to the ruling party. Consequently, for about 2 years in the Republic of Korea there has been a very tough standoff between the Supreme Prosecutors’ Office and the Minister of Justice, who is the one who chiefly supervises the judicial and investigative authorities in the bounds of this political system.

Since the topic is quite extensive, first the author will talk about the scandals themselves, and the investigations done on them, and then about how the government is trying to shut down this investigation.

Let’s start with Lime Asset Management Co. Founded in 2012 as an investment advisory company, this organization was issued a private fund management license in 2015. As of June 2019, the company managed a record-setting 5.7 trillion wons, and was the country’s largest hedge fund.

However, in October 2019, the company froze withdrawals, citing its inability to liquidate enough assets to satisfy the calls for redemption, prompting an investigation to conclude that the company defrauded investors by concealing its losses, and continued to sell ancillary banking products.

In March 2020, Lime Asset investors filed criminal complaints against Won Jung-jun, director of the Seoul-based fund operator Lime Asset, and a senior manager named Lee, alleging that they had incurred tremendous losses in the amount of about 1.6 trillion wons (1.3 billion USD), which took the form of funds that they were not able to withdraw.

On April 23, 2020, former Lime Asset vice-president Lee Jong-phil and financier Kim Bong-hyun, the director of the company Star Mobility and a prominent consultant for the fund – and who had been on the wanted list since December 2019 and was detained with 530 million wons in cash – were both arrested.

Later, it came to light that he was also a leading lobbyist, who paid bribes to government officials at the Blue House and the Financial Supervision Service to help conceal the fund’s plight.

According to investigators, Lime Asset invested tens of billions of wons in Star Mobility, which were then wasted or embezzled.

On May 6, the police discovered billions of wons that Kim Bong-hyun had hidden in a private safe.

On July 31, the Seoul Southern District Prosecutors’ Office indicted Won and Lee for fraud and breaching the laws governing capital markets and financial investments. They allegedly defrauded investors by investing a total of 200 billion wons in 18 funds that were managed by Lime Asset, when in fact the money was earmarked to pay off the company’s existing assets. In addition, the hedge fund was allegedly involved in a so-called Ponzi scheme (an investment scam that pays money collected from new investors to earlier investors; in the Russian Federation this is called a “financial pyramid”) to cover its losses, and was selling products to customers without providing adequate information, or any explanations that high risks associated with them.

On September 25, a Seoul court sentenced the former director of Shinhan Investment Corp., one of the largest South Korean financial investment companies, to eight years in prison for defrauding investors to buy unsound products offered by the funds that were associated with Lime Asset. He also mixed 17 underperforming Lime Asset funds with 17 more profitable funds to conceal the losses involved.

On October 7, the former executive director of Lime Asset Management Co. was sentenced to five years in prison for illegally investing about 20 billion wons in Star Mobility, and for helping to misuse invested funds exchange for membership in an elite golf club.

On October 8, at the trial of Star Mobility CEO Lee Kang-se, Kim Bong-hyun delivered testimony that on July 27, 2019, he provided Lee 50 million wons to be handed over to Kang Ki-jung, then-President Moon Jae-in’s senior political secretary. This was confirmed by CCTV footage of Lee receiving a bag full of cash from Kim at a hotel in Seoul.

In response, Kang filed a lawsuit against Kim on charges of libel and perjury. But at the same time yet another story with Kim Bong-hyun and bribes emerged. One employee at the Financial Control Service met with an official from the Blue House in a bar in Seoul, and gave him the inside plan detailing the investigation into the Lime Asset scandal. The plan was immediately delivered to Kim Bong-hyun, who was waiting in the next room right then. Later, Kim Bong-hyun kept sparking one sensation after another – for example, on October 16, he announced that in 2019 he spent 10 million wons (8,726 USD) to throw a party with drinks for former and current prosecutors, one of whom subsequently took part in investigating the scandal.

On November 3, prosecutors demanded a 10-year sentence for a former executive director of a leading securities firm named Chan, who was accused of selling products issued by Lime Asset Management. In addition, he used unsubstantiated annual rates of return for investors, and hid potential losses from them. And it went even farther – he sent text messages to all of his clients, stating that he had zero problems with Lime Asset products, even after he learned about the problems with the investment company.

Now let’s talk about the case involving Optimus Asset Management, whose fiasco resulted in 500 billion wons in losses for over 1,000 investors. This joint-stock company fleeced about 1.2 trillion wons in funds from about 2,900 investors to invest in government institutions, but in fact funneled most of the money into risky assets, causing huge losses for investors. Optimus suspended withdrawals from its funds in June 2020, after it failed to pay out about 500 billion wons (417 million USD) in deposits.

The fraud was that the fund publicly announced that it would invest its funds in government bonds, or “safe” accounts receivable, which would be paid out by its clients associated with the government or civil associations, and that they would generate an annual return of about 3%, which is high indicator in this era of ultra-low interest rates. The funds were sold through major brokerage houses and banks for three years starting in June 2017.

However, from the very beginning, the funds were invested in speculative bonds issued by unregistered companies, or in third-tier lenders or junk bond companies. Some of the funds were even invested in non-bank financial institutions that do not accept deposits, but extend loans to clients for personal use. At the same time, the fund forged documents to disguise non-performing assets as accounts receivable owed by civic associations.

As a result, half of the fund’s 500 billion wons in assets ended up missing from the books, so even if marketing representatives or financial institutions compensate for some of the losses, most investors may not get their money back.

At the same time, back in October 2018, one state-owned Korean communications agency that had invested 106 billion won in Optimus petitioned the prosecutor’s office to investigate the company’s activities involving fraud, embezzlement, and other charges. But after a seven-month investigation, all charges against Optimus were dropped.

Even then, conservative deputy Cho Hae-jin found out that Optimus founder Lee Hyuk-jin was still implicated in five criminal cases, including embezzlement, physical abuse, sexual assault, and tax evasion. But in March 2018 he managed to flee the country. Why? He was simply not barred from leaving the country, which is extremely unusual for a suspect involved in tax evasion and embezzlement, and the fact of the matter is that at the time the Financial Control Service reported to the Supreme Prosecutor’s Office that Lee had embezzled 7 billion wons in corporate funds. Moreover, judging by his photos posted on social media networks, Lee traveled to Vietnam and the UAE at the same time that President Moon Jae-in’s made visits to those locations.

There is speculation that Lee Hyuk-jin was a classmate of Im Jong-seok, the then-Chief of Staff under the presidential administration, and had previously run as the Democratic candidate in the 2012 general elections. He did not become a legislative deputy, but was hired as a special adviser to the then-presidential candidate Moon Jae-in. Since that time, there have been many photos of Lee with Moon, or with former Minister of Justice Cho Kuk.

This is why Lee’s company is suspected to have received preferential treatment, or outright protection, from the presidential administration.

Then, as it turns out, the wife of the director of Optimus Asset Management had been working in the office of the president’s senior secretary for civil affairs since last October, and only resigned after the fraudulent activity came to light.

And even when it became impossible not to launch an investigation into the Optimus case, Lee Sung-yong, the head of the Seoul Central Prosecutor’s Office, referred it to the bureau of investigations that deals chiefly with civil cases, rather than to the department for particularly serious or corruption-related crimes.

In total, Lime and Optimus inflicted a total of more than $1.75 billion in losses to approximately 5,000 investors.  As the financial authorities’ audits and prosecutorial investigations into the cases stalled, suspicions arose that key officials in the Moon administration, and the ruling Democratic Party of Korea, were lobbied by hedge funds experiencing problems.

Why is this scandal so significant? First, this scale of financial crimes would be unthinkable if a certain number of officials and security service employees had not been given bribes. And at the very least, in the case of Optimus the fund’s management was quite energetic about using its connections in the circles of power.

Second, the suspicion exists that the money that was spent inappropriately went into things like confidential funds, which are very commonplace in South Korea. Since there is always not enough official funding for political parties to function, if only because from the point of view held by the political culture, the leader must keep those close to him well-fed, and additional sources of funding are required, even though a struggle has been going on against them since back in the early 1990s. Since then, few episodes of political strife have gone by without people accusing their opponents that certain financial distribution stems from a confidential fund, whose money has gone to satisfy the corrupt inclinations of politicians. In particular, these were the kinds of suspicions harbored about funds that started the fall from grace of Park Geun-hye and Choi Soon-sil.

Moon Jae-in’s government does not seem to have escaped the appeal of this enticement: the pressure exerted on the largest chaebols, primarily Samsung, fluctuates depending on how much they voluntarily donate to projects that involve Moon Jae-in, and in this case it was from conservative circles that the idea arose that it was not just a financial pyramid scheme, but a pyramid scheme that propped up definite people in power – and that is why the official government, headed by the Minister of Justice, effectively declared war on the Supreme Prosecutor’s Office by starting to intervene in the process of the investigation, and one in which there were no conservatives, in such an overt manner.

Konstantin Asmolov, PhD in History, a leading research fellow at the Center for Korean Studies of the Institute of the Far East at the Russian Academy of Sciences, exclusively for the online magazine “New Eastern Outlook”.


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