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| Lotte Insurance headquarters in Seoul / Yonhap |
By Lee Min-hyung
Lotte Insurance and Meritz Securities are locked in a heated tug-of-war over the brokerage's sale of $160 million (210 billion won) in risky fund products which incurred huge losses. The controversial fund was established in December 2018. The Lotte affiliate invested $50 million in the fund about two months later.
But with Blackstone ― the world's leading alternative asset manager which has a close link to the fund ― declaring default on the product in 2020, Lotte Insurance ended up reporting losses in all of the invested capital in only about two and a half years.
The non-life insurer argued that Meritz did not fully explain the inherent risk of the fund product. But the securities firm countered, saying that officials from Lotte and Mertiz conducted due diligence of a thermoelectric power plant in Texas for the investment which was used to operate the facility.
Earlier this week, Lotte Insurance brought its complaints to the Financial Supervisory Service (FSS) and asked the authority to review possible illegalities in the sales of the fund in which a group of other Korean institutional investors, such as the KDB Life Insurance, Korea Exchange and Korean Teachers' Credit Union, also invested.
Lotte insisted Mertiz did not clearly notify investors of the plant's serious cash-flow problem and the fund's vulnerable collateral structure.
"A document ― provided by Meritz before we made the investment decision ― did not contain any notification on the possibility of the default stemming from the cash flow sensitivity," a spokesman at Lotte Insurance said.
The reaction came in response to Meritz's argument that Lotte's claim does not make any sense in that the insurer was engaged in the due diligence with the brokerage. Meritz also refuted Lotte's argument, saying that it is not logical for the insurer to say that it was "ill-informed" about the fund product, as it had already invested in other overseas thermoelectric power plants multiple times.
It remains to be seen whether Lotte will file a lawsuit against Meritz.
Following the complaints from Lotte, the FSS launched an inspection into the case. But there is a strong chance of the insurer taking the case to court as Meritz claims no responsibility for the fund loss.
The watchdog is expected to look deeper into whether Meritz gave detailed notification of the riskiness of the fund product to investors ahead of time.
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