Lone Star Ruling Corners Regulator
By Na Jeong-ju
Staff Reporter
The court's ruling on Friday that U.S. investment firm Lone Star Funds was guilty in a stock price rigging case in November 2003 is expected to put pressure on financial regulators to change their lukewarm attitude toward the buyout fund.
The Seoul Central District Court sentenced Paul Yoo, head of Lone Star's Seoul office, to a five-year prison term, saying the fund rigged the stock price of the credit card unit of the Korea Exchange Bank (KEB), which it acquired in Aug. 2003, to save costs needed for its merger into the bank.
Civic groups welcomed the ruling and called for immediate action by regulators to protect the national interest from Lone Star, while some foreign media raised concerns that the ruling will dampen foreign investments here.
Some analysts say the Lone Star case provides a crucial opportunity for the country to draw a line between ``good'' foreign investors and ``bad'' ones that tend to seek short-term and speculative transactions and ``don't follow South Korean rules.''
In line with the ruling, the Financial Supervisory Commission (FSC) now can deprive Lone Star of its status as the largest stakeholder of KEB and order the fund to sell shares exceeding 10 percent in the bank within six months. Lone Star holds a 51.02 percent stake in KEB and signed a contract with HSBC Holdings last year to sell its entire stake.
After the ruling, the regulator reiterated its earlier stance, saying it won't make any regulatory decision on Lone Star until the court delivers a final ruling. In addition to the stock rigging case, Lone Star faces another court case regarding its acquisition of KEB in 2003.
Analysts say it will take more than two years for the court to reach a final verdict in both cases.
``Our position remains the same, despite the ruling, as the issue is still unresolved,'' FSC spokesman Hong Young-man said, Friday.
Critics, however, argue the regulator's hands-off policy fails to reflect growing anti-Lone Star sentiment here and is not helpful in protecting the national interest, either. They called for a quick action to seize Lone Star's assets in Seoul to block it from selling them before final verdicts are reached.
``Lone Star has claimed it stuck to Korean law in doing business here, but the court ruling shows it lied about it,'' said Chang Hwa-shik, an official of Spec Watch Korea, a private organization dedicated to monitoring investments by foreign funds here. ``Stock rigging is a serious crime. It is time for regulators to take action to punish it. If they don't, Lone Star will move to retrieve its investments here through dividend payouts, asset disposals and other methods.''
Chang said if Lone Star was a Korean firm, its Chairman John Grayken would have been put behind bars. However, law enforcement authorities are showing leniency just because it is a foreign firm.
KEB said Friday it has decided to pay 700 won per share in dividends to its shareholders, totaling 451.4 billion won, or 47 percent of its 2007 earnings. As the largest shareholder, Lone Star will receive about 230 billion won in dividends, retrieving 10.7 percent of its 2.15 trillion won investment in the bank.
Together with last year's dividend income and sale of KEB shares, the fund has recovered over 85 percent of its initial investment in KEB.
Lone Star said it would appeal the court's ruling.
``We are very disappointed in the court's ruling in the stock price manipulation case,'' Lone Star said in a statement. ``Lone Star emphatically maintains that Mr. Yoo and the other members of the Board of Directors of KEB, which included several non-Lone Star members, acted properly and never intended to, or attempted to, manipulate the share price of KEB Credit Service.''
``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,'' it said.