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Korea's most wanted

January brought a new twist in South Korea's KEB saga: authorities detained Lone Star's chairman John Grayken as part of their ongoing investigation into the transaction.

South Korean officials detained the chairman of Lone Star Funds, John Grayken, on Friday 11 January, as part of their investigation into an alleged stock price manipulation surrounding the firm's purchase of Korea Exchange Bank (KEB) in 2003. Local prosecutors issued a 10-day travel ban on Grayken, and questioned him after he testified in a trial pertaining to Lone Star's bid for KEB.

The chairman was not formally charged with any wrongdoing, and Grayken promised full cooperation. However, during his testimony he asserted that Lone Star has “never been accused of a crime anywhere” and that he felt the charges against his firm were “completely untrue”. He appeared as a defense witness at the Seoul Central District Court on behalf of Paul Woo, chief of Lone Star's Korea office. Authorities indicted Yoo in 2006, accusing him of spreading false rumours of a capital reduction in KEB to depress the stock price.

On the day of Grayken's testimony, prosecutors presented email evidence to support their allegations that Lone Star had spread the rumours to lower the price of KEB. Grayken dismissed the emails on the grounds that they were authored by a junior staffer at Citigroup, the fund's financial adviser at the time, and therefore did not represent any actual policy of the firm.

Grayken had not been in Korea since April 2007, and flew to the country the week of 7 January specifically to testify. During his time on the stand, Grayken stressed the risks the fund had taken in purchasing the 65 percent stake in the bank for $1.2 billion. “Had [KEB Card, the credit card arm of the bank] failed, all shareholders would have been wiped out: the easy thing would have been to let it fail and buy it later,” he said.

Prosecutors assured the media there was no political motivation for their action, but not everyone seems convinced. Mark Mobius, a prominent fund manager who heads Franklin Templeton Investments' emerging market portfolio, was quoted in the Wall Street Journal as saying: “We are very concerned about foreign investment in Korea. People should start to speak out, because we are all at risk.”

Lone Star's plans to sell a 51 percent stake in KEB to HSBC remain in flux as the regulators have refused to approve any sale until all legal issues surrounding the initial purchase of the bank are resolved. The agreement with HSBC is set to expire in April, and if the firm chooses to appeal any court decision due to arrive this February, any further resolution may not arrive from the courts until 2009.