Lone Star Cleared in Korea Stock Price Manipulation Case

A South Korean high court on Tuesday cleared U.S. private equity house Lone Star of manipulating the stock price of a former credit card unit of Korea Exchange Bank, rejecting an earlier ruling.

The verdict is widely expected to provide a catalyst to the stalled $6.3 billion sale of KEB by Lone Star to UK-based HSBC, a deal seen as a major test of South Korea's openness to foreign investors.

A lower court in February found both Lone Star and the head of Lone Star's South Korean operations, Paul Yoo, guilty of driving down the share price of KEB's former credit card unit by spreading rumours to allow the bank to buy the unit at below-market prices.

"There is no evidence to prove Lone Star guilty of stock manipulation," Koh Eui-young, judge of the Seoul High Court said in a court ruling.

Lone Star said in a statement it was "very gratified" by the ruling. Its chairman, John Grayken, said: "We maintained our innocence throughout this process, and are pleased today to have the court's confirmation. We hope that now we can all put this behind us and get back to business."

But it may be difficult for the Lone Star-HSBC deal to win regulatory approval by a July 31 deadline.

The country's financial regulator, the Financial Services Commission, said in a statement it was not appropriate to go ahead with the sale process for KEB while that legal proceedings were still ongoing.

Prosecutors will appeal the decision, a prosecutor said following the ruling.

The government has remained cautious about the sale given the legal troubles surrounding the investment firm, which include an allegation that Lone Star's 2003 purchase of KEB was illegal, and as it has been grappling with daily street protests against President Lee Myung-bak's policies for more than a month.

That may convince officials to hold off on approving the deal until a supreme court decision and lead HSBC to pull out to look for other opportunities. Hwang Jina, an HSBC spokeswoman, reiterated the bank's previous statement that it was committed to buying KEB and waiting for regulatory approval. KEB said the ruling was good news, but did not elaborate.

The High Court handed down a suspended two and a half-year jail term for Lone Star's Yoo on separate charges of negligence of duties in Lone Star's other investment deals in South Korea. Yoo was cleared of the stock price manipulation charge.

London-based HSBC early this month said that it might consider dropping out of the deal unless regulatory approval was given by the July 31 deadline, a move analysts said would turn up pressure on South Korean regulators.