Friday's court ruling against the U.S. private equity fund Lone Star is likely to cast a dark cloud over its planned sale of the Korea Exchange Bank (KEB). The Seoul Central District Court found the fund and the bank guilty of manipulating the stock price of KEB's credit card unit in 2003. KEB and its main shareholder, Lone Star, were fined 25 billion won ($26.5 million) each. The court also sentenced Yoo Hoe-won, head of the fund's Korean unit, to five years in prison for collaborating in the manipulation.
Lone Star immediately said it would appeal the ruling, expressing its disappointment with the verdict. The fund's chairman John Grayken issued a statement saying, ``Lone Star maintains that there is simply no credible evidence to support the court findings.'' The Dallas-based investment fund was thrown into a legal battle in 2006 over stock price manipulation claims. In a separate case, local prosecutors have also brought charges against Lone Star, claiming the fund conspired with the Korean government and KEB officials to take over the bank at below market prices in 2003.
The high-profile litigation has touched off a dispute over the role of foreign capital, seen by some as a predator preying on local banks and companies. On the other hand, Lone Star has criticized Korea's strong sentiment against foreign capital. Many foreign investors have sympathized with the fund, demanding that South Korea should respect international standards to prevent discrimination against them.
With the guilty verdict, Lone Star should refrain from taking issue with anti-foreign capital sentiment, although a small number of anti-globalization and anti-free trade activists continue to invoke this. The court said that KEB reaped 10 billion won in illegal gains from the share price manipulation, while LSF-KEB, a Belgium-based unit which holds Lone Star's controlling stake in the bank, pocketed 12.3 billion won.
The accused were found to have driven down the share price of KEB Credit Service by spreading a false rumor that a capital reduction of the card firm was imminent before the bank's planned merger with it. The rumor helped the Lone Star-owned KEB acquire the unit cheaper. But it caused the card firm's small shareholders 22.6 billion won in losses.
The ruling is expected to have some impact on another legal battle against Lone Star which is accused of lobbying Korean government officials to exaggerate the financial woes of KEB so that the fund could buy the bank cheaper. The fund took over an initial 50.5-percent stake in the nation's sixth-largest lender in South Korea for $1.4 billion in August 2003. If the court rules against Lone Star, its acquisition of KEB might be nullified. Therefore, the litigation draws keen attention over Lone Star's plan to sell a 51-percent stake in KEB to the British bank HSBC for $6.3 billion.
Korea's Financial Supervisory Commission said that it will withhold approval for the KEB sale until a final verdict comes from the Supreme Court. Lone Star's September 2007 deal with HSBC expires in April. It will be inevitable for the fund to face a delay in its plan to cash out from South Korea due to the long legal battle. Besides, the litigation might have an adverse effect on President-elect Lee Myung-bak's efforts to attract more foreign investment.
What's important is that we have to learn a valuable lesson from the Lone Star case. If prudent regulations were in place in South Korea, the equity fund could not have acquired KEB at a fire-sale price and made illicit gains from the dubious deals. Lone Star has recouped about 85 percent of its investment in KEB by selling its additionally acquired stake and collecting dividends. The Korean authorities should never condone illegal profiteering by foreign predators, no matter how badly the country needs outside capital.