Lone Star convicted of stock fraud in South Korea
By Choe Sang-Hun
Published: Friday, February 1, 2008
SEOUL — A court here on Friday found Lone Star, the U.S. private equity fund, and one of its executives guilty of manipulating stock prices, dealing a blow to Lone Star in its intensely monitored legal battle with South Korean prosecutors.
Paul Yoo, head of Lone Star's South Korean operations, was sentenced to five years and taken directly to prison from the courtroom.
Foreign investors have closely followed the Yoo case for its possible impact on Lone Star's plan to sell its majority stake in Korea Exchange Bank, one of the country's largest lenders, to HSBC Holdings, which has agreed to pay $6.3 billion.
The Friday verdict, if upheld in higher courts, will undermine Lone Star's repeated claims that it was victimized by politically motivated prosecutors who it said was capitalizing on widespread public sentiment against foreign investors. As the tug-of-war persisted, some foreign investors have come to Lone Star's defense, depicting the battle as a test of South Korea's willingness to embrace them.
"Their activity constituted a grave fraud activity and severely damaged the interest of minority shareholders," Lee Kyung Choon, a judge at the Seoul Central District Court, said in his ruling.
Lee also ordered Korea Exchange Bank and LSF-KEB Holdings, a Belgium-based unit that holds Lone Star's stake in the Korean bank, each to pay fines of 25 billion won, or $26.5 million.
Lone Star, which is based in Texas, bought Korea Exchange Bank for a fire-sale price of $1.2 billion in 2003, as the country was trying to rescue its distressed banks in the aftermath of the Asian financial crisis of 1997 and 1998. Soon afterward, the bank absorbed KEB Credit Service, the bank's credit card unit.
Prosecutors, who denied that they were politically motivated, sought a 10-year prison sentence for Yoo on charges of driving down the share price of the card unit by spreading a rumor that a capital reduction of the card company was imminent, and allowing the bank to absorb it at below-market prices.
"Lone Star is very disappointed in the court's ruling," Lone Star's chairman, John Grayken, said in a statement. "Lone Star maintains that there is simply no credible evidence to support the court's findings. Lone Star will appeal this decision and is confident that it will be reversed."
The verdict was the first in a long-running legal battle. In a separate lawsuit, Lone Star is fighting allegations that it conspired with the South Korean government and Korea Exchange officials to understate the financial health of the bank so that it could buy it cheaply. Lone Star denies it.
Lone Star's legal battles, as well as tax disputes with the local authorities, have fueled public doubts about the role of foreign investors.
They also prevented it from selling Korea Exchange and making an exit from South Korea with a staggering profit.
In 2006, Grayken acknowledged that Steven Lee, the buyout firm's former South Korea country manager, had embezzled "millions of dollars," causing the firm to breach tax rules in South Korea. He apologized and offered to donate 100 billion won "as a gesture of good will" to South Koreans.
Officials at Spec Watch Korea, a civic group that has led a campaign against Lone Star, said Friday that the American buyout fund might have hoped for a guilty verdict. Such a verdict can allow South Korea's financial regulators to strip Lone Star of its right to hold a majority stake in a local bank and order it to unload the share within six months - a move that they said could expedite Lone Star's exit plan.
On Friday, Hong Young Man, spokesman for the government's regulatory Financial Supervisory Commission, said his agency would not approve Lone Star's plan to sell Korea Exchange until all legal battles over the fund are resolved. The comment means that Lone Star's plan to sell the bank will be on hold for months.
Lone Star or HSBC can terminate their agreement if the deal is not completed by April 30. Gareth Hewett, a Hong Kong-based spokesman for HSBC, said the bank had no comment.
The verdict came three weeks before Lee Myung Bak, South Korea's president-elect, is sworn in on Feb. 25. Lee has vowed to attract foreign direct investment to help bolster South Korea's economy.
Pledged foreign direct investment in South Korea fell 6.5 percent in 2007 to $10.51 billion, the third consecutive annual decline.
But Tami Overby, president of the American Chamber of Commerce in Korea, said last month that the Lone Star issue "is having a significant negative impact on" foreign direct investment."
Last month, David Eldon, the chairman of the Dubai International Financial Center Authority, who works as an adviser for Lee, warned against what foreign investors have called a tendency among South Koreans to vilify foreign investors who try to leave the country with huge profits.
Eldon is a former chairman of Hongkong & Shanghai Banking Corp., the Asian arm of HSBC.
In a news conference with the foreign news media two weeks ago, Lee said he would "significantly improve Korea's investment climate for foreign firms." But in a comment that he said was not targeted directly at Lone Star, however, he also said that foreign investors operating in South Korea must honor local regulations.
After refusing to be interrogated by prosecutors, Grayken arrived here last month and said he underwent 10 days of questioning.