South Korea Says Lone Star-KEB Deal is Illegal

South Korean prosecutors said on Thursday the 2003 sale of Korea Exchange Bank (KEB) to U.S. buyout fund Lone Star broke the law, which could unravel the high-profile deal and further rattle foreign investors.

According to prosecutors, ex-finance ministry official Byeon Yang Ho, induced by a lawyer hired by Lone Star, agreed with then CEO of KEB, Lee Kang Won, to inflate KEB's losses and understate its value to allow Lone Star to buy the bank at below its proper value.

The findings are likely to hit efforts by Lone Star, the most active private equity fund in Asia's third-largest economy, to sell its 64.62% stake in KEB. Late last month, it called off the $7.3 billion sale of the bank to Kookmin Bank due to the nine-month legal battle.

Prosecutors had been looking into allegations that data on KEB's financial health was understated to help Lone Star buy it at a bargain price of $1.2 billion in 2003.

"Through this investigation, we confirmed that the sale of Korea Exchange Bank was conducted abnormally without following regulations and due procedure, and the sale price did not reach the adequate level," the Supreme Prosecutors' Office said in a statement.

Prosecutors indicted two former KEB top executives, a former director general of the finance ministry and the CEO of Hyundai Marine and Fire Insurance Co. on bribery charges linked to the 2003 sale of KEB.

Under local laws, funds and non-banking institutions are barred from owning more than 10% in a local bank unless it is in financial difficulty.

The statement said lawyer Ha Jong Sun, who is now CEO of Hyundai Marine and Fire Insurance, received more than $1 million from Lone Star to lobby Byeon, who himself received 41.7 million won worth of bribes from Ha.

"Lee Kang Won took 1.58 billion won in return for cooperating with Lone Star to buy KEB between November 2003 and January 2005," the prosecutors' statement said. Officials at Lone Star and KEB declined comment.

A senior Financial Supervisory Commission official said the regulator planned no immediate action following the prosecutors' announcement.


If Lone Star is found guilty of the alleged improprieties, its acquisition of KEB could be ruled void by the courts. The Supreme Court could also force Lone Star to dispose of shares that
exceed a 10% stake in KEB.

"I don't think there is anything so far that supports financial authorities nullifying the 2003 deal," said Ku Yong Uk, analyst at Daewoo Securities. "Based on what's announced, Lone Star itself could be considered a victim of the authorisation given for the deal."

The investigations, initiated at the request of politicians in February, have triggered an outcry among foreign investors, who fear they could become the target of a growing backlash against heavy profits foreign investment funds have reaped by buying distressed Korean assets.

Anti-foreign sentiment has been rising in South Korea after foreign concerns such as Newbridge Capital and Carlyle Group made hefty gains from snapping up local banks at fire-sale prices following the 1997-98 Asian financial crisis. Newbridge Capital more than doubled its $500 million investment in Korea First Bank after selling it to Standard Chartered in 2005.

"The decision will not have a positive effect on foreign investors' sentiment -- but it will make major deals more transparent and clear," said Chang H Lee, a banking analyst at Daiwa Securities.