The verdict is in for Warburg Pincus on allegations of insider trading of LG Card shares in South Korea: guilty (see also feature on p. 24). The ruling, a fine of KRW53billion ($57 million) and a four-year jail term for the firm's Korean head, is the first against foreign investment firms on such charges.
Hwang Sung-jin, managing director of Warburg Pincus Korea and a former director of LG Card, was sentenced to four years in jail for helping the firm avoid KRW26.2 billion in potential losses from the sale of LG Card shares.
Warburg Pincus had been under investigation since 2004 on allegations of improperly disposing its almost 20 percent stake in LG Card prior to a crash in the company's share price. The share sale, in 2003, occurred just before the Korean credit card industry bubble burst. Lending practices were unsustainable due to issuers' practice of ‘re-aging’ credit card loans.
The court also sentenced Lee Dong-reoul, managing director of LG Chemical, to three years in jail and fined Choi Byung-min, a member of LG Group's controlling family, KRW22.5 billion on similar charges.
“The punishments were necessary, given the need of economic justice and the fact that such activities of creating profit through illegal means should be stopped,” the court said.
Warburg Pincus has not commented on the ruling. At press time, it was not clear whether there would be an appeal.
Warburg Pincus invested $370 million in LG Card in November 2000 via investment arms in Labuan, a Malaysian offshore tax haven. The South Korean government has been trying to shut down these tax ‘loopholes’ which were also used by Newbridge Capital, which made a $1.2 billion profit from the sale of Korea First Bank to Standard Chartered Bank.
The ruling for Warburg Pincus, which had previously denied wrongdoing, comes five months after courts cleared UK firm Hermes Investment Management of making “unfair” profit by manipulating the share price of Samsung Corp.
Overseas investors have come under increased public scrutiny in South Korea following the revelation that some groups did not pay taxes on huge profits made from selling Korean banks bought cheaply after the 1997 Asian financial crisis. In the highest profile case, Lone Star is still being investigated for the sale of Korea Exchange Bank to Kookmin Bank.