**Shinyoung Securities to Compensate 59% of Damages**
The Financial Supervisory Service’s Financial Dispute Mediation Committee (FDMC) has decided, through a second dispute resolution, that damages of up to 80% should be compensated for issues related to the Discovery Fund, which caused a halt in redemptions amounting to several trillion won. For Shinyoung Securities, a distributor of the Discovery Fund, it was decided that they should compensate 59% of the damages.
On the 22nd, the FDMC made this decision regarding the incomplete sales damage compensation case of Industrial Bank of Korea (IBK), the largest distributor of the Discovery Fund, and announced it on the 23rd.
Back in May 2021, the responsibility for damage compensation was already acknowledged in the Discovery Fund case, and a second dispute resolution was conducted in 2023 after additional illegal activities were discovered during further inspection of Discovery Asset Management. New findings, such as additional deficiencies in the fund’s underlying assets, which were not considered in the first settlement in 2021, led to the adjustment of the common risk-weighted ratio for IBK from the initial 20% to the maximum 30%.
For Shinyoung Securities, taking into account the relatively smaller scale of damage, the common risk-weighted ratio was set at 25%, leading to the decision to compensate 59% of the damages.
The Discovery Fund, managed by the brother of former Blue House policy chief Jang Ha-sung, Jang Ha-won, was sold through three banks and nine securities firms, including IBK and Hana Bank, from 2017. Investors were misled into believing it was a stable, high-return investment, but it invested in the distressed U.S. peer-to-peer (P2P) loan receivables and led to a redemption halt involving 250 billion won in 2019.
In the first settling, the FSC acknowledged responsibility for damage compensation due to breach of suitability and explanation duties and inadequate internal controls, setting the representative compensation ratio at 64%.
However, with the FSS’s announcement in 2023 that new illegal activities were uncovered in re-examinations of Lime, Optimus, and Discovery funds, the settlement faced a new phase. The FSS considered imposing greater liability on the sellers if deficiencies in the Discovery Fund’s underlying assets were confirmed through cooperation with the U.S. Securities and Exchange Commission (SEC) and U.S. fund administrators.
Notably, in this process, the FSC contemplated not just incomplete sales compensation but also applying “contract cancellation,” which allows for returning the entire investment principal if critical contract information was not disclosed, potentially reversing the agreements. This has previously been applied to only three funds: Lime Trade Finance (sold after November 2018), Optimus, and Heritage funds.
However, as the SEC and others replied that they could not provide information due to lack of records and security concerns, and Discovery Asset Management’s former CEO, Jang Ha-won, was acquitted by the Supreme Court in January regarding fraud charges, it seems the conclusion was drawn towards damage compensation.
The FSC stated, “Based on the settlement discussion, due to a lack of objective evidence to ascertain asset impairment at the time of sale, contract cancellation was not recognized.”
The FSS anticipates that this FDMC decision will help conclude the compensation process for affected investors with 209 accounts of IBK and 35 accounts of Shinyoung Securities, whose fund redemptions were delayed.