Lone Star Funds was found guilty of stock-price manipulation and the former head of its South Korean unit was jailed after a five-year legal dispute that stalled the U.S. buyout fund’s efforts to sell Korea Exchange Bank. (004940)
Paul Yoo was sentenced to three years in prison by Judge Cho Kyung Ran today. Korea Exchange Bank was found not guilty, Cho said after presiding over a retrial ordered by the Supreme Court this year following their acquittal in June 2008.
The verdict may remove the final barrier to Lone Star’s sale of Korea Exchange to Hana Financial Group Inc. (086790), after the litigation delayed its plan to offload the 51 percent stake and derailed two earlier attempts. A public backlash over Lone Star’s legal woes and profit on its eight-year investment may deter foreign takeovers, impeding the government’s plans to sell state assets such as Woori Finance Holdings Co.
“It has taken too long for the resolution of the KEB-Lone Star case,” Hank Morris, North Asia adviser at Triple A Partners Ltd., said by e-mail before the verdict. The delay “will have had a negative effect upon the plans of global investors in regard to direct investment into Korea.”
Fined $21 Million
Lone Star was fined 25 billion won ($21 million) by the court. South Korea’s financial regulator may order Lone Star to sell most of its stake in Korea Exchange Bank if the fund fails to prove it is a legitimate shareholder, the Financial Services Commission said in an e-mailed statement today.
“It doesn’t matter whether Lone Star voluntarily sells the stake or is forced to do so,” Kim Sung Yong, a law professor at Sungkyungkwan University in Seoul, said before the judgment. “The result is the same: exit from its investment as it has wished.”
The Seoul High Court began the retrial on June 16 after the Supreme Court asked it to reconsider whether Yoo, Korea Exchange Bank and Lone Star’s local unit broke stock trading rules. Prosecutors said Yoo spread false rumors of a possible capital reduction at Korea Exchange Bank’s credit card unit in 2003, driving down the company’s value before the lender merged it.
“Now it’s all up to the regulator and we’ll follow the their decision,” Hana Financial President Kim Jong Yeol said by phone today. “We will do our utmost to complete the Korea Exchange Bank takeover to best serve our shareholders.”
Respects Decision
Korea Exchange Bank spokesman Lee Sun Hwan said the company respects the court’s decision to clear it of the manipulation charge. He declined to comment on the FSC’s remark that it may order Lone Star to sell its stake.
Jed Repko, a spokesman for Lone Star in New York, didn’t immediately respond to phone calls or reply to an e-mail sent after regular office hours.
Korea Exchange shares rose 2.8 percent to 7,280 won today before the verdict, which was delivered after the 3 p.m. close of trading. Hana Financial gained 6 percent to 35,500 won. The benchmark Kospi index advanced 2.6 percent.
Hana has lost 20 percent since May 12, when the Financial Services Commission said it wouldn’t approve its proposed acquisition of Korea Exchange until Lone Star’s legal dispute is resolved. The FSC has left the deal in limbo for almost a year because of the litigation, prompting Hana and Lone Star to extend a deadline for the transaction to Nov. 30 from May and trim the purchase price to 4.4 trillion won.
Failed Attempts
Lone Star, which bought Korea Exchange Bank in 2003, first tried to sell the lender to Kookmin Bank in 2006, and the deal was thwarted amid the same legal dispute. Then in 2008, HSBC Holdings Plc (HSBA) walked away from a $6 billion deal to buy Korea Exchange as regulators delayed approval, citing the case.
While the court proceedings have postponed Lone Star’s exit, it has profited from the investment. The U.S. fund has recovered 2.5 trillion won after tax through block share sales and dividends out of a 2.15 trillion won investment in Korea Exchange, according to the bank’s data.
South Korean civic groups such as Seoul-based SpecWatch Korea have criticized foreign investors including Lone Star for pursuing an “eat-and-flee” strategy of buying companies and selling them quickly, pocketing big profits. Public discord and the U.S. buyout firm’s legal woes have dissuaded foreign investors from acquiring Korean companies, said Henry Seggerman, president of New York-based International Investment Advisers.
Negative for Investors
“The case is extremely negative for any prospective strategic investors,” Seggerman, whose firm manages Korea International Investment Fund, said by e-mail before today’s decision. “Public sentiment is hostile towards profitable overseas investment, not supportive overseas investment.”
Overseas takeovers of Korean companies fell to $3.6 billion last year from a record $8.1 billion in 2005, according to data compiled by Bloomberg. The biggest foreign investments in Korea over the past decade were Standard Chartered Plc’s $3.4 billion purchase of a local bank in 2005, and Citigroup Inc.’s $3.1 billion takeover of a lender in 2004, the data show.
South Korean President Lee Myung Bak’s latest effort to sell Woori Finance, the nation’s biggest financial firm by assets, collapsed in August after the taxpayer-rescued company failed to attract any bids from abroad.
Lone Star was one of the first overseas firms to invest in South Korea following the 1997-98 Asian financial crisis that led the country to accept a $57 billion bailout from the International Monetary Fund.
To contact the reporter on this story: Seonjin Cha in Seoul at scha2@bloomberg.net
To contact the editor responsible for this story: Brett Miller at bmiller30@bloomberg.net
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