Korea finds Lone Star guilty of stock price manipulation

The firm’s country head, Paul Yoo, has been sentenced to five years in prison, while Lone Star has been fined $26 million by a Korean court.

The South Korean Central District Court has found US firm Lone Star Funds guilty of manipulating the stock price of the credit card division of the Korea Exchange Bank, in order to acquire the division on the cheap shortly after paying $1.2 billion for a 51 percent stake in the bank in 2003.

John Grayken

Lone Star and the Korean Exchange Bank were fined W25 billion ($26 million; €18 million) each. Lone Star’s South Korea country head, Paul Yoo, was sentenced to five years in prison.

Lone Star said in a statement that there is “no credible evidence to support the court’s findings”, and that it intends to appeal the decision.

“Lone Star emphatically maintains that 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 KEBCS,” the firm said.

“Rather, the board's actions and words fairly and accurately represented the state of mind and intentions of the Board at each step of a crisis-management situation during the rescue of KEBCS as it was on the verge of bankruptcy in 2003.”

Lone Star was poised to make an enormous profit on its investment in the bank at the end of 2006, when it agreed to sell its stake to Kookmin Bank for $7.3 billion. But by then the deal had attracted government scrutiny of the conditions surrounding the 2003 buyout forced Lone Star to cancel that agreement. Last August Lone Star looked set to sell its stake to HSBC for $6.3 billion, but today’s verdict throws the deal into doubt.

In a separate case, Lone Star faces charges that it colluded with members of the South Korean government and the Korea Exchange to exaggerate the bank’s financial troubles in 2003 in order to buy the bank at a lower price.

In August, Korean tax officials raided Lone Star’s offices in the country and confiscated documents related to the deal. Earlier this month, Lone Star chairman John Grayken was detained for 10 days by prosecutors after he arrived in the country to testify on the matter.

Lone Star’s troubles in Korea had already been complicated by the case of former Lone Star employee Steven Lee, who fled the country in 2006 and later admitted to embezzling around $12 million from the firm. Lone Star apologised to the South Korean government after the incident and offered to donate W100 billion as a “gesture of good will”.

The verdict comes just two weeks after South Korea’s president-elect, Lee Myung Bak, said at a news conference that he would “significantly improve Korea’s investment climate for foreign firms”.

Yoo is not the first financier to face prison time in South Korea. A year ago the head of Warburg Pincus’ South Korea office was sentenced to four years in prison on charges of insider trading.

Industry figures have accused South Korea of economic xenophobia, saying its actions against represent a backlash against foreign funds for earning large profits from investments made in struggling local companies after the1997-1998 Asian financial crisis.

But the government has gone after locals as well as foreigners in its corruption investigations. The former director-general of the finance ministry’s financial policy bureau, Byeon Yang-Ho, is being investigated for accepting a W40 billion investment in a private equity fund he runs, Vogo Investment, from the Korean Exchange Bank in exchange for his collaboration in the Lone Star acquisition. Numerous other Korean officials have been indicted for taking bribes from Lone Star in relation to the deal as well.