On Friday, 1 February, a South Korean court sentenced Paul Yoo, the local head of Dallas-TX-based Lone Star Funds, to five years in prison for stock manipulation related to the firm's acquisition of Korea Exchange Bank's credit card unit. In addition to Yoo's prison sentence, Lone Star and Korea Exchange Bank (KEB) were each fined 25 billion won ($26.5 million).
The private equity firm immediately pledged to appeal the verdict. The proposed sale of its remaining stake in KEB requires the resolution of all legal proceedings surrounding the initial acquisition.
Last August, HSBC agreed to acquire the firm's 51 percent stake in KEB for $6.3 billion pending regulatory approval, which has been withheld by the country's Financial Supervisory Committee (FSC). The regulator refuses to review the application for the HSBC sale until there is a final resolution to all charges surrounding the KEB transaction, though the 1 February verdict doesn't appear to be sufficiently final. In a press conference after the sentencing, Hong Young-man, an FSC representative said: “We will continue to defer any regulatory decision regarding Lone Star until ongoing legal issues surrounding KEB and Lone Star are fully resolved.”
The defence attorneys for Yoo admitted being shocked by the verdict as they felt that after Lone Star's chairman Jon Grayken testified on Yoo's behalf, the tide had turned in favour of the firm. The buyout firm maintains its innocence in the face of the conviction, saying there is “no credible evidence” to support the court's findings. It vowed to appeal the decision as soon as possible in a statement issued to the public. One local observer noted such an appeal could drag on for a year, though the agreement with HSBC expires in April. So far, officials from HSBC in Hong Kong and Korea have declined to comment on the matter.
Changing the legal outcome and closing the HSBC sale may not be the only challenges for Lone Star going forward. After the verdict, minority shareholders in KEB told local media they were planning to sue the firm for damages incurred from the alleged stock manipulation. KEB's performance of late can't help matters, as the bank recently reported its earnings for 2007 declined 5.9 percent from a year earlier, due mainly to higher provisions against risky loans.
In spite of these regulatory and legal hurdles, Lone Star has so far managed to recoup 85 percent of its investment in KEB. In the same month Yoo was sentenced, the firm received dividends totaling 230 billion won from the bank. Combined with the sale of shares and last year's dividend income, the firm has already recovered most of its initial investment in the bank.
HSBC's involvement with Lone Star doesn't seem to have tarnished its image with the FSC, as a subsidiary of HSBC Holdings recently won approval to purchase a large stake in the life insurance unit of Hana Financial, just two months after the deal was announced.