Investors who lost money on Joongang Group bonds have asked South Korea's Financial Supervisory Service to review audit reports issued by accounting firms, arguing the firms gave clean opinions without properly reflecting risks at affiliates that were already visible in last year's financial statements. They also filed for dispute mediation against Shinhan Securities and others to recover their losses.
The legal team representing the bond investors said on the 19th that it submitted a supplementary opinion seeking the review, along with a dispute mediation application, to the FSS on the 16th. The investors are represented by the law offices of Lee Bok-hyun and Lee Ju-hyun and the law firm Changcheon, among others.
In July, the legal team had asked the FSS to review the classification of JTBC's hybrid securities as capital and the omission of footnotes on credit support agreements among affiliates. The latest filing adds complaints that no loan loss allowances were set aside against financial claims on affiliates and that credit support obligations went unrecognized. It also asks the regulator to include Joongang Ilbo and Deloitte Anjin among the targets of the review.
The legal team said six companies — Joongang Holdings, Contentree Joongang (036420.KS), Joongang P&I, Dabo Joongang, JTBC and Joongang Ilbo — recognized more than 600 billion won ($420 million) in impairments and writedowns on equity investments in affiliates when closing last year's books, yet left 740.5 billion won in financial claims on those same affiliates effectively untouched by loan loss allowances or impairments. In other words, the companies reflected deterioration in their equity stakes in affiliates while setting aside no loss provisions against lending to the same affiliates.
Joongang Ilbo had lent 45 billion won to its parent, Joongang Holdings, as of the end of last year, but the total loan loss allowance it set aside against all related-party claims came to just 464 million won. In the first half of this year, however, it recognized 33.39 billion won in bad debt expenses on related-party claims all at once. The legal team said JTBC likewise set aside no loss provisions against roughly 77 billion won in loans and short-term financial instruments tied to affiliates whose finances had deteriorated as of the end of last year.
Arguing that the affiliates' finances had already worsened by the end of last year and that the related losses may not have been properly reflected, the legal team also asked the regulator to review audit reports by Deloitte Anjin, Samil PwC and Woori Accounting Corp. Joongang Ilbo and JTBC received clean opinions on their financial statements for last year from Deloitte Anjin and Samil PwC, respectively, but in the half-year reviews this year they received a disclaimer of opinion and a disclaimer of conclusion, respectively. The legal team said regulators should establish how the opinions reversed in the space of just six months.
The legal team also filed for dispute mediation with the FSS against Shinhan Securities and JNS Investment Advisory. It alleged that JNS Investment Advisory solicited ordinary individual investors beyond the scope of its registration and recommended the investments without adequately disclosing the issuers' financial risks. Of Shinhan Securities, the team said, "The lead underwriter is a gatekeeper that must verify the issuer's financial condition and disclose it accurately to investors," adding that "Shinhan Securities failed to fulfill that role and was also involved in passing the securities it underwrote on to individual investors."