By Kim Rahn, Park Hyong-ki
Staff Reporters
A Seoul court ruled that Lone Star Funds was guilty of rigging stock prices in the process of merging the credit card unit of the Korea Exchange Bank (KEB) with the bank in 2003, complicating Lone Star's planned sale of KEB to HSBC.
The Seoul Central District Court handed down guilty verdicts on Lone Star, KEB and Paul Yoo, head of the U.S. investment fund's Seoul office, on almost all the charges laid down by the prosecution, including stock manipulation.
The court sentenced Yoo to a five-year prison term.
The ruling is expected to complicate the planned sale of the bank by the U.S. fund to HSBC. The lawsuit was part of a broader investigation into Lone Star, centering on allegations that the U.S. firm lobbied Korean government officials to exaggerate the bank's financial problems so that it could buy the bank at a price cheaper than market value.
Following the court decision, the Financial Supervisory Commission (FSC) reiterated that it will not endorse the KEB sale to HSBC until the court also delivers a ruling on whether the Korean bank was deliberately sold for a less than fair price.
``Our position remains the same, despite the ruling, as the issue is still unresolved,'' FSC spokesman Hong Young-man said.
Yoo had been indicted without physical detention on charges of intentionally driving down the stock price of KEB's credit card unit in collusion with Lone Star executives to take it over at a lower-than-market price. Yoo and Lone Star allegedly spread false rumors that a capital reduction of the unit was imminent.
He was also indicted for breach of trust, tax evasion, and refusal to testify at the National Assembly.
The court ordered the KEB and LSF-KEB, a Belgium-based unit which holds Lone Star's controlling stake in KEB, to pay 25 billion won each in fines. The court said they reaped 10 billion won and 12.3 billion won in benefits, respectively, through the stock rigging.
``At that time in 2003, KEB Credit Card had impaired capital and Lone Star likely wanted a capital reduction. However, the fund was aware that the reduction was unavailable at that time. But it spread the rumor in order to make improper gains by dropping the stock price, and that is a fraudulent act,'' the court said in the ruling.
Lone Star said it will appeal. John Grayken, chairman of Lone Star Funds who took the stand here as a witness for Yoo last month, said in a statement that Lone Star is disappointed at the ruling and is confident that the verdict will be reversed. He said that Lone Star executives neither tried to nor actually did manipulate the stock.
Grayken testified last month that he had received a report in advance about the credit card unit takeover plan which included the capital reduction, according to prosecutors.
If the ruling is upheld in higher courts, Lone Star will lose its status as the largest shareholder of KEB. The fund is holding a 51.02-percent stake in the bank, and in September signed a $6.3 billion contract with HSBC Holdings to sell it. The deal is valid until April.