New battle with Lone Star begins

Federation of Korean Trade Unions members protest at the National Assembly in Seoul, accusing the government of approving Lone Star Funds’ sale of Korea Exchange Bank to Hana Financial Group, in this Jan. 30, 2012 file photo. / Korea Times

By Kim Jae-won

A legal dispute between the government and Texan private equity firm Lone Star Funds kicked off last week in Washington, extending their decade-long battle to one more round.

The International Center for Settlement of Investment Disputes (ICSID) said Monday that it hosted its first hearing Friday in the case which Lone Star filed with the agency two-and-half years ago. The first round of the hearings will continue until May 24.

The U.S. buyout fund wants the Korean government to pay it $4.7 billion (5.1 trillion won) in compensation for delaying approval of its sale of the Korea Exchange Bank (KEB) to HSBC in 2007, and imposing of 850 billion won in taxes on the sale of the lender to Hana Financial Group in 2012.

Legal representatives of Lone Star argued that the fund suffered from losses worth 2 trillion won because the Financial Services Commission (FSC) delayed approval of the deal for Lone Star to sell its 51 percent stake in KEB to HSBC for 6 trillion won.

The U.S. fund also said that it was inappropriate that the government imposed 850 billion won in income tax on the sale of KEB to Hana because that violated a bilateral agreement between Korea and Belgium to exempt taxation on investments. LSF-KEB, a subsidiary of Lone Star, was based in Belgium.

However, the government countered, saying Lone Star was not eligible to file the suit because the Korea-Belgium treaty does not protect paper companies based in their countries.

Government officials argued that the Lone Star affiliate cannot benefit from the bilateral treaty because it was a shell company designed to exploit tax exemption rules.

Former high-ranking government officials involved in the case are preparing to testify in court on behalf of the government. They are former Finance Minister Han Duck-soo and former FSC chiefs Kim Seok-dong and Jun Kwang-woo.

On the side of Lone Star, Chairman John Grayken is expected to come to speak on behalf of his firm. He is the founder of the company and was involved in the sale of KEB directly.

Civic groups urged the government to make the process known to the public, considering more than 5 trillion won in taxpayer money is at stake.

“The government should announce information on the case because a huge amount of taxpayers’ money has been used for the legal dispute with Lone Star,” said the Lawyers for a Democratic Society, an organization of progressive attorneys, in a statement.

However, the government has declined to do so, referring to the court’s confidentiality order. It said that the ICSID ordered both the government and Lone Star to keep progress of the case secret.

But, some observers suspect that the government wants to keep a low-key stance because it played a role in approving Lone Star’s purchase of KEB in 2003, though the fund was not qualified to do so. By Korean law, non-financial firms are prohibited from owning more than a 4 percent stake in a bank.