News & Analysis

Warburg Pincus under investigation in Korea

The New York-based global private equity firm has said in a statement that it expects to be cleared of any wrongdoing over the disposal of its stake in LG Card Co.

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Warburg Pincus is being investigated by the South Korean authorities over possible illegal trading during the disposal of its stake in LG Card Co.

The Financial Supervisory Service (FSS), the country's financial watchdog, said today that the investigation has been underway for a year, and is due to report before the end of next month.

Warburg Pincus led a group of investors that paid $380 million (€291 million) for a 19 percent stake in LG Card Co in 2000.

The company, which issues credit cards in Korea and went public in 2002, boomed on the back of government schemes intended to compensate for weakening exports by encouraging consumer credit spending.

However, the number of defaults soared, and the company is now 10.8 trillion won ($10.3 trillion) in debt. Its creditors and former parent, LG Group, agreed on a 3.78 trillion won infusion of capital in January 2004. This was followed last month by a $1 billion package intended to prevent the company's liquidation.

Warburg Pincus, which did not participate in the rescue packages, began selling its holdings in the company in late 2003. The FSS has been investigating whether it knew of the company's distress, and used non-public information during trading.

The firm has denied any wrongdoing, announcing in a statement that it 'has always conducted business in accordance with the relevant laws and the highest ethical standards'. It added that it expected that the investigators 'will conclude that Warburg Pincus has complied with all relevant Korean laws and regulations.'

Some commentators have perceived the investigation to be part of a backlash against foreign investors in South Korea.

The government imposed advantageous rules to attract foreign investment to the country following the 1997 currency crash.

However, major recent successes, such as the $1 billion profit Newbridge Capital made on its $3.3 billion sale of Korean First Bank to UK-based emerging markets bank Standard Chartered this month, have caused controversy.