Shinsegae case shows chaebol wealth transfer scam

Hyundai Motor, Samsung also involved

By Kim Tae-gyu

Staff reporter

Midway through June, the Seoul Central District Court exonerated Shinsegae Group Vice Chairman Chung Yong-jin and four current or former group executives on charges of illegalities related to a capital increase at the Gwangju Shinsegae Department Store.

Although the verdicts hardly got any media attention, some observers pointed out that the case was important because it shed light on the intricacies of wealth transfer at chaebol.

Chung’s case is typical and it has yet to see its end, pending an appeal by minority shareholders of Shinsegae, being helped by civic activists at the Solidarity for Economic Reform (SER) associated with the People’s Solidarity for Participatory Democracy.

Shinsegae Group, the country’s foremost brand in department stores and discount chains, has several department stores but only one ― Gwangju Shinsegae ― was built as a separate legal entity.

Established in 1995, Gwangju Shinsegae struggled to stay afloat in the midst of the Asian financial crisis, which hit many Asian countries including Korea back in 1997 and 1998.

To grapple with the jitters, the store decided to increase its capital by 2.5 billion won ($2.1 million) in 1998 but its 100 percent shareholder ― Shinsegae ― opted not to participate in the capital increase for some reason.

Instead, Chung snapped up all the shares newly issued at 2.5 billion won so that the sole son of Shinsegae Chairwoman Lee Myung-hee could jack up his shares by 83.3 percent.

When Gwangju Shinsegae, located in the southwestern part of the Korean Peninsula, was listed four years later, Chung earned around 20 billion won, or eight times more than his original investment.

The value of the 41-year-old’s shares is now said to be in the vicinity of 125 billion won. The 50 times return on investment in slightly longer than a decade would practically be a windfall.

Some minority shareholders and SER activists took the case to court in 2008, claiming that Shinsegae caused damages to its shareholders by giving up its rights in the capital increase of Gwangju Shinsegae.

The plaintiffs also argued that the store issued its stocks at 5,000 won a share although its value was estimated at up to 20,000 won.

After two years of legal conflict, however, the Seoul court ruled last month in favor of Chung on the grounds that Gwangju Shinsegae was a separate legal entity from Shinsegae.

Furthermore, the court came up with a ruling that there was no clear-cut evidence showing it had substantially underpriced the new shares.

Understandably, plaintiffs and defendants were split into two opposing camps with regard to the judgment.

The official response from Shinsegae was that it respected the verdict while refusing to elaborate on the case involving the group’s present chief executive officer. By contrast, SER issued press releases refuting the judgment.

``Back then, Gwangju Shinsegae was 100 percent owned by Shinsegae. Accordingly, the sales of its new stock is tantamount to selling Shinsegae’s own assets,’’ SER said.

``The court seemingly did not delve into why Shinsegae abandoned its rights all of a sudden even though it had sufficient financial leeway and why the stocks were given to Vice Chairman Chung.’’

It lodged an appeal against the ruling, Monday.

SER head Kim Sang-jo, also a professor at Hansung University in Seoul, insists that Shinsegae and Chung were not creative in devising the ways of power and wealth transfers at chaebol.

``Samsung Group has embraced similar methods based on initial public offerings (IPO) while trying to hand over the throne to a third-generation scion. Hyundai-Kia Automotive Group also devised a unique way to do so,’’ Kim said.

Samsung is the country’s largest chaebol, while Hyundai-Kia is the No. 2 player.

Hyundai-Kia Automotive Group, the country’s largest carmaker, came up with more unique model featuring Globis, the logistics company that covers a large chunk of the group’s logistics demand.

The Seoul-based outfit was founded in 2001 by Hyundai-Kia Chairman Chung Mong-koo and his son Eui-sun, now Vice Chairman at Hyundai Motor, with capital of 5 billion won.

Its sales stood at 374.2 billion won in 2002 but the figure snowballed to 1.9 trillion won in 2006 as it absorbed much of group’s logistics work. When it went public in late 2005, the firm’s largest shareholder Eui-sun raked in a massive amount of the proceeds.

In 2007, the country’s Fair Trade Commission ruled Globis garnered unfair support from group units while levying penalties of 63.1 billion won. Hyundai tried to overturn the decision in court but lost in the first trial, though it has appealed.

SER and minority shareholders of Hyundai Motor also filed a civil lawsuit against them, claiming the two Chung’s inflicted a large amount of damage on the company’s shareholders.

``The prosecution hardly indicts cases involving chaebol. If it does, the court typically acquits the plaintiffs or suspends prison terms so that they can remain free. Then, the president instantly gives them a pardon,’’ Kim said.

``This is not a society ruled by the law. I admit that chaebol deserve credit for the country’s fast economic development over the past decades. But for further growth, we need to overhaul the ownership structures as well as establishing the rule of law.’’