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2006 :THE LONE STAR AFFAIRTargeting of Lone Star to Sell Interest in KEB (Feb-Mar 2006) Following the prosecutors' decision to indict Hermes Pensions has prompted speculations that Lone Star may speed up its process to sell a 51 percent stake in Korea Exchange Bank. Such stern stance of the Korean authority on foreign investors' alleged misconduct should prompt Lone Star to accelerate the sale process, analysts say. (NOTE: Behind the scenes, the nation's top lenders were seeking to expand through mergers and acquisitions. Kookmin and Hana Bank were vying to acquire Korea Exchange Bank, the nation's fifth largest lender, although progress has been slow because of a costly price tag and unfavorable circumstances surrounding the bank's owner, Lone Star. The U.S. investment fund, acquired a controlling 51-percent stake in KEB in October 2003. Lone Star was moving to sell the stake after a two-year lockup period ended last year. However, 2005 was good year for the banking industry and foreign investors will receive healthy returns on their investments, so Lone Star may not be in a major rush to sell.)Lone Star is under prosecution investigation for alleged tax evasion dealing with the sale of its Seoul building. If the prosecution indicts the U.S. private equity fund, as it did against Hermes, and the court rules against the foreign investor, it loses, under the relevant Korean law, the status of the largest shareholder of KEB. (NOTE: The KEB was under audit by the NTS in Feb 2006, but because of the political issues of the ROK "persecution" of foreign ownership, the investigation was supposed to be limited to the years PRIOR to Lone Star gaining control of the company. However, if there is a penalty, the Lone Star fund would still be "punished" as a majority shareholder through loss of earnings so the action is still viewed as political.) Under such circumstances, "Lone Star may want to end the sale process before the court makes any decision on its tax evasion case," said a bank official. Yet the sale process may take a longer time than Lone Star expects. For one thing, KEB stock price has recently surged to a level that is prohibitingly high to some potential bidders. If the stock price remains high, it would not be easy to find bidders, analysts say. A Lone Star official declined to comment when asked whether the Hermes case would affect the process to sell its stake in KEB, the nation's fifth-largest lender. Park Han-cheol, deputy prosecutor at Seoul District Prosecutors' Office, said during a press briefing yesterday that the probe into Lone Star, which started last October at the request of the National Tax Office, is still in its initial stage. Park, however, declined to provide an exact time frame for future investigation and did not elaborate on how the court would decide on the case. Prosecutors admitted that they have made little progress in the investigation so far as the whereabouts of key figures are unknown and prosecutors are required to look into tax regulations both at home as well as overseas. Lone Star sent confidential agreements to major financial institutions and also sent information memorandum to potential bidders. The quarterly earnings' report of Korea Exchange Bank that came almost a week earlier than scheduled prompted speculation that Lone Star was accelerating the sale process. The lender's eight consecutive quarterly profits since Lone Star took control in October 2003, more than tripled the value of the fund's 51 percent stake. (Source: Korea Herald.) (NOTE: The rosy picture for the KEB earnings was reflected throughout the industry. With a solid earnings outlook, local lenders were expected to pay hefty dividends to shareholders including foreign investors who hold a combined 60 percent stake in local lenders. Major commercial lenders will hold a shareholders meeting in March. The FSS estimate the total dividend payout will reach as much as 2 trillion won on the basis of an average dividend payout ratio of 20.2 percent in 2004. Kookmin Bank and most other commercial lenders are expected to announce their 2005 earnings reports beginning next week. The majority reported a sharp rise in their net profit on the back of a decline in bad debt costs up until the third quarter. However, the shock came to KEB shareholders after Lone Star agreed on the sale of KEB to the Kookmin bank. Though other banks were offering dividends, the KEB stated it would NOT pay dividends. The reason is that Lone Star, the majority shareholder, opted to take its profits directly from the sale instead of dividends.) On 5 Feb the Jongang Ilbo reported that National Assembly's Finance and Economy Committee believed that the capital adequacy ratio of the Korea Exchange Bank was manipulated and set at an unrealistically low figure in 2003 to allow a quick sale to the U.S.-based Lone Star Funds. After the sale, Lee Kang-won, the president of Korea Exchange Bank, resigned but received "abnormally high" pay as an advisor to the bank, the lawmakers said, suggesting that he had been rewarded for arranging the attractive price. The committee said that after Mr. Lee resigned as president of Korea Exchange Bank, he was paid 2.5 million won per month as advisor to the bank on a three-year contract. He resigned six months later, but the bank paid him the full contract amount. He was also given a 720 million-won bonus by the bank for arranging the sale to Lone Star. Mr. Lee is now the president of the state-run Korea Investment Corp. The committee had been looking at the sale of the bank since Oct 2005. The lawmakers were considering asking Korea's prosecutors to investigate the bank and its management. The opposition parties on 17 Feb 2006 urged Lone Star not to sell its majority stake in KEB until an inquiry into the U.S.-based equity fund is over. Korea Exchange Bank said in a report to the Financial Supervisory Commission in July 2003 that its capital adequacy ratio, calculated by the standards of the Bank for International Settlements, would fall to 6.16 percent by the end of the year because of its load of bad debt. The committee said that was based on the bank's assumption that bad debts would exceed 1.7 trillion won ($1.7 billion) at the end of 2003. At a meeting of the bank's board about the same time, the lawmakers said, the bank forecast a bad debt burden of 1.4 trillion won. "It is likely that the swollen estimate of Korea Exchange Bank's bad debts was made by Samjong KPMG, an accounting firm under contract with Lone Star at that time," said Representative Choi Kyung-hwan of the Grand National Party. "It is absurd that a bank was sold at the value calculated by an accounting firm related to the bidder." (Source: Jongang Ilbo.) At the end of Feb views remained mixed with lawmakers demanding a halt on the sale, while those in the industry have raised concerns about the repercussions such a move could have. Finance Minister Han Duck soo recently dismissed demands for government support to defend homegrown companies from foreign investors. Meanwhile, bidding for Lone Star's controlling stake was expected to start from the end of March when prospective suitors complete their respective audits. Lone Star appeared to be aiming for a June sale of its 51 percent stake. The fund acquired its shares in October 2003 for 1.38 trillion won ($1.43 billion). It is expected to reap close to $3 billion in profit on a selling price of some $7.3. To accelerate the process and gain negotiating leverage, the U.S. fund was expected to hold separate talks with each bidder prior to picking a preferred offer. "Clarifying the mutual interests with each bidder will obviously help speed up the process," said Ku Yong uk, a researcher at Daewoo Securities. However, Lone Star denied that it was preparing to start the bidding in March. Analysts support the June deadline but say significant variables exist. "We have to consider the possibility of the government selling off its stake, meaning that added with Commerzbank's stake, over 80 percent of KEB could be sold," said Ku of Daewoo who has set a neutral grade on the bank. The state run Export and Import Bank of Korea and the Bank of Korea holds a near 20 percent in the local lender, while Germany's Commerzbank holds 14.61 percent. Among the prospective domestic bidders are Kookmin Bank and Hana Financial Group Inc. From overseas, the Development Bank of Singapore has been conducting a due diligence, while reports are divided over the participation of Deutsche Bank and HSBC. (Source: Korea Herald.) Then on 7 Mar, another allegation against Lone Star over the KEB buyout surfaced. Prosecutors started investigating whether the U.S. fund Lone Star bought Korea Exchange Bank at an unreasonably low price. This was a result of the National Assembly's Finance and Economy Committee request of a criminal probe in the matter. The committee said there was grounds for suspicion that Lone Star's controlling 51-percent in KEB was too cheap at W1.38 trillion (US$1.38 billion) in September 2003. It also questioned why Lone Star was allowed to buy the bank when the nation's banking law does not permit private offshore funds to take over a financial institution. It also pointed to a discrepancy between a capital adequacy ratio outlook of 9.14 percent KEB submitted to its board of directors and one of 6.16 percent it reported to the Financial Supervisory Service. It also questioned the retirement package paid to former KEB president Lee Kang-won and other executives -- and the fact that one Lone Star lawyer also served as advisory lawyer for a KEB branch in the U.S. The latest move brings the number of criminal complaints against the offshore fund's ill-starred stint with KEB to four. Last September, Spec Watch Korea reported 20 concerned parties including former finance minister Kim Jin-pyo and ex-CEO Lee on suspicions that Lone Star bought the bank too cheaply. In October, the National Tax Service reported the fund and several executives of the subsidiary that nominally handled the transaction for tax evasion, and in February the FSS did the same on charges of violating foreign currency laws. The prosecution is considering combining the cases into one, to be handled by a special team. If Lone Star is found guilty, it could lose its rights as a majority shareholder in KEB and may have to sell any stake exceeding 10 percent within six months. (Source: Chosun Ilbo.) Lone Star Subsidiaries Fined (Feb 2006) Two subsidiaries of Lone Star Funds, controlling shareholder of Korea Exchange Bank, were disciplined for illegally transferring over $8 million overseas, the nation's top financial regulator said on 25 Feb. To pay commission for consulting they never received, Lone Star Korea and Hudson Advisors Korea sent some $8.6 million to overseas companies run by Texas based Lone Star executives. Citing the charges, the Financial Supervisory Commission ordered Hudson Advisors to establish internal control systems for better business operations. Simultaneously, the regulator banned both affiliates from paying any kind of commission fees to overseas residents for one year. Lone Star Korea supervises the fund's local investment ventures, which total to around 16. Hudson Advisors manages the investment fund's assets, such as those in the special purpose companies it abused to wire the illegal funds. The financial watchdog said it would seek prosecutors' help to investigate further on the counts. Hours after the FSC announcement, Lone Star pledged to ensure a more "thorough and complete" internal management system. "We will fully live up to the orders regarding operation improvement. We have already conducted an internal inspection of the individual involved and are planning to take necessary legal actions accordingly," it said in a statement. (Source: Korea Herald.) Lone Star Pressured to Sell KEB over "Possible" Tax Haven Change -- But Later Belgium declared as NOT a Tax Haven (Feb-Mar 2006) As of Feb 2006 the negotiations to sell off KEB were at a stalemate. New tax laws passed in 2005 means foreign companies domiciled in tax havens as identified by the Finance Ministry will from July 1 have to pay withholding tax here and can then get a refund later if they are deemed to come under a dual taxation agreement. So far firms from countries with which Korea has double taxation agreements have simply been exempt. Officially, the largest shareholder in KEB is LSF-KEF Holdings, the Lone Starr subsidiary headquartered in Brussels, with a 50.53 percent stake. Under the double taxation agreement of 1979, the fund is thus not subject to tax. But if the ministry designates Belgium a tax haven under the new rules and KEB is sold after July 1, Lone Star will have to pay withholding tax. The fund would then have to persuade the National Tax Service that the double taxation agreement applies before it gets its refund. (SITE NOTE: During the same time period the press was full of articles of ROK financial institutions attempting to form agreements to purchase the KEB -- at what they hoped were bargain rates with the NTS pressure on Lone Star.) KEB's market capitalization stands at W9.318 trillion, according to share closing prices on Monday. If Lone Star, which became the bank's largest shareholder in October 2003 by investing W1.38 trillion, sells its KEB shares at that price, it will make a profit of W3.77 trillion from the transaction. It will then have to pay 10 percent of the selling price or 25 percent of the capital gain, whichever is the smaller. Capital gains tax would come to W943.2 billion, so it would have to pay W515.3 billion on the selling price and hope for the best. It was unclear if Belgium would be included, a ministry official said. Belgium is not on the list of international tax havens, and if Korea designates the country a tax haven, it could cause friction in the bilateral relationship. But if the ministry does not include Belgium, it will find itself in trouble because an enraged public would say the government favors the fund, an NTS official points out. It therefore remains to be seen if Lone Star would ever see its refund. The NTS says it will have to take a closer look at a dual taxation agreement. (Source: Chosun Ilbo.) On 15 Mar 2006, the Ministry of Finance and Economy decided that Belgium, the nominal home of the Lone Star subsidiary was NOT a tax haven. This would remove one key obstacle to the offshore fund reaping huge profits from its controversial foray into Korea's financial market. It meant that Lone Star would have to pay no so-called withholding tax on profits from the KEB sale, which are forecast to be astronomical, regardless of the outcome of a battery of other investigations hanging over the fund. However, the National Tax Service is unhappy and has written to the ministry to review its decision. The ministry, however, had decided to designate Malaysia's Labuan, where Newbridge Capital was based for the purpose of selling Korea First Bank last year, and the Cayman Islands will be designated tax havens. That suggests Belgium, with which Korea has a double taxation agreement, will not. The financial industry had expected a different decision. Pundits had speculated that Lone Star was hurrying the sale of KEB since new tax laws coming into force in July 2006 would make tax haven-based funds liable to withholding tax. Given the many investigations Lone Star faces, that would be a drawn-out process. (Source: Chosun Ilbo.) Kookmin Bank to Buy KEB (Mar 2006) The nation's largest lender Kookmin Bank on 23 Mar got the official nod from offshore fund Lone Star as the preferred bidder for Korea Exchange Bank, beating out Hana Financial Group and late entrant Development Bank of Singapore. Once the sale is complete, Kookmin will become a "superbank," one of the world's 50 largest with assets of over W270 trillion (US$270 billion) and a customer base of some 30 million. The announcement raised eyebrows when it emerged that the selling price was over W7 trillion ($7 billion) -- W1 trillion ($1 billion) more than expected. At this news, the Korean media started out the xenophobic war drums again of how foreign companies are "cheating" Koreans. Kookmin Bank was to buy Lone Star's stake for W7.388 trillion at W15,400 a share. This was above the W14,000, previously expected and gave rise to criticism that an excessive amount of the national wealth was going into the pockets of the offshore fund. Lone Star, which took over KEB for W1.3 trillion in July 2003, was to make W4.2 trillion ($4.2 billion) in capital gains after only 32 months. (NOTE: The sales figures and dates in the newspapers varied. Yonhap News stated, " Lone Star bought a controlling 50.5 percent stake in KEB for 1.4 trillion won in 2003, and signed a preliminary deal with top lender Kookmin Bank to resell it for 6.4 trillion won." Others stated, "The fund acquired its shares in October 2003 for 1.38 trillion won ($1.43 billion). It is expected to reap close to $3 billion in profit on a selling price of some $7.3.") However, a series of NTS, FTC and Prosecutor's investigations hanging over the fund's head may continue to plague the fund. The most contentious issue is tax. Lone Star could reap three times its original investment of W1.38 trillion from the sale tax-free because the subsidiary that owns KEB, LSF-KEB Holdings, is nominally based in Belgium, with which Korea has a dual taxation agreement, and has no place of business in Korea. But the NTS is looking for ways of taxing the fund by proving that Lone Star does have a de-facto subsidiary here. If it can prove that, the fund is subject to 25 percent corporate tax like any Korean firm and will have to pay W1.635 trillion. A new tax law before the National Assembly that would come into force on July 1 plus a possible decision by the government to designate Belgium a tax haven could mean that Lone Star has to pay withholding tax, subject to a later refund should authorities decide everything was above board. Thus in case that the fund cannot complete the sale before July 1 and subject to these eventualities, it might have to pay W641.7 billion or 10 percent of the selling price. It would then have to try and wrest the refund from the NTS. That is why Lone Star is in a hurry to sell KEB. But a criminal investigation related to Lone Star's original purchase of KEB could delay the deal. An additional hurdle for the fund could arise when the FTC investigates whether Kookmin Bank's takeover of KEB would lead to a monopoly. (Source: Chosun Ilbo.) To complicate matters, on 23 Mar the NTS discussed seizing the KEB shares of Lone Star as a way to secure a $140 billion won tax judgment on the sale of its Seoul properties in a separate case. But to do so, the NTS must prove that the fund manager for the Seoul building transaction and the fund manager for the KEB bank buyout are legally identical -- which is probably not the case. Lone Star is reportedly preparing for an appeal to the National Tax Tribunal (NTT), claiming that the 140 billion won taxes imposed by the NTS is an unfair amount. (Source: Donga Ilbo.) The NTS feeling frustrated on 25 Mar took the attitude that it would do whatever it took, within the boundaries of law, to levy taxes on profits taken by Lone Star in order to increase pressure on U.S.-based fund Lone Star to pay taxes on profits that it gained from selling an office building and the KEB. (SITE NOTE: The amount of the tax levied varied in the newspapers. Yonhap News stated, "The U.S. company is currently under separate fire for allegedly evading taxes worth 14.7 billion won and illegally transferring $8.6 million overseas after the fund profited from the 2003 buyout.") Immediately thereafter, the Dallas-based fund lodged a complaint against the 140 billion won (US$143 million) in penalty taxes imposed last September by South Korean tax authorities, a dramatic shift from a low-key stance it has shown in the past. The fund had previously promised to pay the penalty tax and cooperate with the National Tax Service's inquiry. (SITE NOTE: The oft heard statement from Lone Star was that Lone Star would "live up to its responsibilities under the law" which was not quite a promise, but a challenge that the NTS ruling must meet the test of law.) However, Lone Star failed to pay the tax by the end-of-February deadline set by the tax authorities. Lone Star filed the complaint with the National Tax Tribunal in early March around the time when Ellis Short, the fund's vice chairman, visited Seoul. The reason was that South Korea's tax authorities have shown strong willingness to impose taxes on the fund's profit from its sale of the stake in KEB. According to current domestic tax laws, Lone Star won't have to pay taxes on the transaction in South Korea because the U.S. private equity fund purchased the KEB stake through its unit based in Belgium -- that the Ministry of Finance has declared is NOT a tax haven. Lone Star argues LSF-KEB Holdings, the fund's holding company for KEB, is based in Belgium with which South Korea has a tax treaty designed to prevent double taxation for people who would otherwise pay tax on the same income in two countries. (Source: Yonhap News.) BAI Auditors First Claim FSS "Confessed" to Manipulating KEB Sale Data -- Then Recants (Apr 2006) In April 2006, the calls for the nullification of U.S. investment fund Lone Star's takeover of Korea Exchange Bank (KEB) were likely to gain momentum as South Korean state auditors indicated that the bank downplayed its financial situation to facilitate a quick sale. If prosecutors prove that KEB was not an ailing bank when Lone Star signed the deal and had actively participated in the deception, the 2003 deal could be declared null and void, local court judges said. The Seoul government, which arranged the 2003 deal, will likely be criticized for selling a financially stable lender to the private U.S. fund at a fire-sale price. State auditors said on 11 Apr 2006 that its provisional estimation showed KEB's Bank for International Settlements (BIS) capital adequacy ratio was at least 8 percent as of the end of 2003, far higher than the 6.16 percent estimated by KEB at the time. BIS capital adequacy ratio is a critical measurement in determining the financial position of banks. Banks are regarded as healthy when the ratio is above 8 percent. Whether the capital adequacy ratio was understated or not is likely to be a key point in the speculation looming over the KEB sale. The BAI was scheduled to announce the final estimation on 15 Apr. Prosecutors and state auditors suspect that former executives of KEB and government regulators were highly likely behind the manipulation. Auditors said on 11 Apr that a Financial Supervisory Service (FSS) official had admitted to reporting the manipulated KEB financial data to the Financial Supervisory Commission at the behest of his boss in July 2003, a month before the bank's sale. The official said he knew the rate should have been 9.14 percent at the time. The FSS report led the commission to okay Lone Star's bid to purchase the bank, inspectors claimed. However, the official reversed his statement on 12 Apr, denying that he had been told to lower the capital adequacy figure by his boss. The FSS also denied the BAI's allegations that its officials were involved in the alleged fraud. It claimed that although its earlier estimate had been 9.14 percent, it was to eventually report an updated figure at the time that took into account the repercussions of a multi-billion-dollar accounting scandal involving SK Group's trading arm SK Global, now SK Networks Co., as well as other financial crisis that occurred between March and June of 2003. Angered by the official's retraction, state auditors threatened to expand its investigation into the issue and question a number of financial regulators involved in the sale. The debate between state auditors and financial regulators over whether the ratio was intentionally and fraudulently lowered is likely to continue as more details emerge from the investigation. Some analysts said it was unclear whether financial officials or Lone Star would easily accept a possible domestic court decision on nullifying the KEB takeover. The U.S. fund could file a complaint against the investigation and make the issue an international dispute, they said. (Source: Yonhap News.) Lone Star Offer to Deposit $725M in bank pending Tax Outcome and Donate $100M to Government (Apr 2006) On 20 April 2006, Lone Star chairman and founder John Grayken said that the fund was willing to donate 100 billion won ($100 million) and deposit 725 billion won ($725 million) at a local bank until South Korea completes its investigation into the equity fund. Analysts viewed the offer as a gesture to ease growing public anger on Lone Star and beg leniency from the authorities regarding the ongoing probes. (SITE NOTE: Other pundits viewed it as Lone Star's method of saying "we will pay the tax if we have to but you must prove it first. In the meantime, we are moving on." It also states the Lone Star views Korea as on a witch hunt and it wants out of Korea -- taking its profits and moving on. The message it is sending to prospective investors in Korea was obvious -- beware of investments in Korea during this xenophobic frenzy. In Apr 2006, public prosecutors officially sought Lone Star's cooperation in pressuring Steven Lee, a former head of the U.S. investment fund's South Korean office, to return to face charges of embezzlement and tax evasion. The action came after visiting Lone Star Chairman John Grayken said Lee had confessed in an internal audit last year that Lee embezzled millions of dollars from the company. (Source: Yonhap News.) There was not much chance that this would happen.)) The Board of Audit and Inspection (BAI) chairman Jeon Yun-churl didn't rule out the possibility that the KEB's capital adequacy ratio, or the Bank for International Settlements ratio, was cooked up to help Lone Star took over the bank in late 2003. ``There are still many things to be cleared about the assessment of KEB's capital adequacy ratio. We will keep looking into this,'' Jeon said. The state auditor said that KEB met minimum requirements for financial health in late 2003, so it could have been illegal to sell the bank to Lone Star. The equity fund is registered as a non-finance company in South Korea, so it isn't qualified to buy a bank. It can purchase a bank only when it is financially unhealthy. Until early 2003, the KEB's capital adequacy met minimum requirements for financial health, but was lowered to make it a financially unhealthy bank, just before being sold to Lone Star. Prosecutors are now intensifying their search for evidence proving Lone Star's involvement in the alleged manipulation. Grayken denied speculations that the fund played a role in the assessment of KEB's capital adequacy ratio in 2003. ``We have no involvement in the calculation of the BIS ratio,'' Grayken said during a media conference in Seoul. ``The BIS ratio was calculated and assessed by a number of people, including the bank's management, auditors and regulators, but there were some problems in assessment.'' (Source: Korea Times.) On 21 Apr 2006, officials in the ruling Uri Party and Cheong Wa Dae are reportedly contemplating voiding Korea Exchange Bank's sale to the offshore investment firm Lone Star in 2003. Board of Audit and Inspection Chairman Jeon Yun-churl became the first time high-ranking government official in a parliamentary judiciary committee meeting on Thursday to make an official comment about the possibility that Lone Star's original takeover of KEB could be annulled. The KEB trade union and civic organizations also say the original sale of KEB to Lone Star should be voided, but experts say this will be legally difficult if the BAI cannot provide conclusive proof of Lone Star wrongdoing. This latest move has added more ammunition that the xenophobic business environment exists in Korea. (Source: Chosun Ilbo.) On 25 Apr, the Kookmin Bank received approval from Lone Star that it could withdraw from the sale of the KEB without penalty if the NTS found Lone Star guilty of any wrongdoing. The details of the negotiations were not released. Kookmin also asked for a three-week extension in the inspection of documentation to settle on the value of the KEB that would then be sent to their board of directors for approval of the KEB sale. The process was to have been completed in mid-April, but the complications of the NTS investigations -- along with raids on the Lone Star offices -- has added to the delays. Lone Star Fed up and Does U-turn (May 2006) Lone Star has made a sudden U-turn over investigations by Korean prosecutors and auditors into a range of allegations against the offshore investment firm. Lone Star Funds chairman John Grayken on on 23 May told a press conference in the world's financial hub New York that the Korean government's plan to tax the hedge fund on its profits from selling Korea Exchange bank was inconsistent with international regulations. He also called for the ongoing probe into a plethora of irregularities including doubts over the original sale of KEB to Lone Star to be conducted "fairly." Grayken defended his firm's purchase of Korea Exchange Bank in 2003, dismissing recent criticism of the transaction as driven by an "anti-foreign political climate," in Korea. He also insisted that the U.S. private equity firm, which is now set to sell Korea's fifth-largest bank to another Korean lender, did not evade any Korean taxes, but availed itself of "protections" under Korea's bilateral tax treaty with Belgium. Grayken complained that a series of investigations, including raids by prosecutors in which he said more than 1,000 boxes of documents and records were seized, had been influenced by a "hostile anti-foreign investment attitude" here. He said Lone Star, if it stayed here, would have to work hard "so we can rebuild out business in Korea." Perhaps the straw that broke the camel's back was the fact that Lone Star was hit with a new tax bill from the city of Seoul, which said, with support from the Home Ministry, that it owed 25.2 billion won ($26.5 million) on its purchase of an office building in the city in 2001. The Ministry of Home Affairs said on 24 May that Lone Star had violated Korea's "principles of tax collection" and "abused the system for tax evasion." It was replying to a request from the Seoul city government about whether the fund owed transfer taxes on its purchase of the Star Tower building in 2001. The ministry said that Lone Star had purchased a failing domestic corporation shortly before buying the office tower and routed the transaction through that company. That allowed Lone Star to avoid taxes of double the normal amount on real estate purchases, which are levied on companies that have been in business for less than five years. The ministry said because no employees had been kept on after the purchase of C&J Trading and no business lines were continued by the company after its sale, the refurbished company should have been considered a new entity subject to the double tax levy. The city government, after receiving the ministry's interpretation, asked the Gangnam District Office to collect an additional 25.2 billion won in taxes. The deadline for payment, the city said, was the end of June. (Source: Joongang Ilbo.) At a press conference in Seoul in Apr 2006, Grayken promised the fund would deposit W725 billion (US $725 million) in escrow in anticipation of due taxes, indicating he would cooperate with the investigation. But in the 23 May press conference, Grayken's speech was peppered with complaints about the "anti-foreign political climate" in Korea and "absurd arguments" by ROK officials. Pundits speculate Lone Star intends to pressure the Korean government by seeking maximum exposure in the international press, thus diluting the force of the investigation and cutting the amount of tax the government feels it can charge. "Lone Star thinks its plan to sell KEB is actually complete by concluding the share purchase agreement with Kookmin Bank and is trying to stir up U.S. public opinion to hinder investigations," says the KEB trade union. (Source: Chosun Ilbo.) (SITE NOTE: In essence, Lone Star agreed with our statements that Korea has been fostering a xenophobic business environment that is persecuting any foreign business that turns a profit in Korea. Korean officials denied any xenophobic motives for their investigations of Lone Star, but warned that Lone Star's future in Korea was "difficult to determine" with all 50 of its transactions in Korea since 1998 were being investigated. With this attitude on the part of the ROK government, there still hangs the possibility that Lone Star could file a complaint against the investigation and make the issue an international dispute.) Lone Star Acquires 6.25 Percent Stake in KEB (Jun 2006) On 1 Jun 2006 U.S. equity fund Lone Star said it has acquired a 6.25-percent stake in Korea Exchange Bank from the state-run Export-Import Bank of Korea. The fund exercised a call option on the 90.9 million shares on May 12 and completed payment on 1 Jun, the fund reported in a regulatory filing. The share sale reduces the stake held by Export-Import Bank of Korea in KEB to 6.25 percent. In addition, the fund exercised a call option on a 6.48-percent stake held by Frankfurt-based Commerzbank. The stake purchase comes as the fund is pushing to sell a combined 64.62-percent stake in Korea Exchange Bank to the nation's top lender, Kookmin Bank, for 6.3 trillion won ($6.6 billion). Lone Star appeals its 25 billion won tax bill from Seoul (Jun 2006) In May 06 Seoul City slapped additional taxes on thirteen foreign firms of W36.3 billion (US$33 million) for evading tax or using tax loopholes to reduce their taxes when purchasing large buildings worth trillions of won. The city has asked the Government of Singapore Investment Corporation (GIC) to pay W16.7 billion in additional tax for its purchase of Star Tower from the offshore investment firm Lone Star. (SITE NOTE: We at first thought this was not aimed at Lone Star but rather another example of the xenophobic business environment growing in Korea. We now see that it is a continuation of the old cases against Lone Star.) In June 2006, the Seoul's government stated it would accept an appeal made by Lone Star Funds, a Dallas-based buyout firm, against the city's decision to charge it 25.4 billion won ($26.7 million) in taxes and penalties. The Seoul Metropolitan Government on June 5 issued an invoice to Lone Star that the fund should pay 25.2 billion won of property registration taxes and 194 million won of equity-related taxes for a 2001 purchase of the 45-story Star Tower office building. "A corporate taxpayer can appeal our imposition of taxes to upper government bodies or a court within 90 days," Mr. Shin Si-sup, head of the government's Tax Collection Division, said. "We hold a committee for mediation upon an appeal." Lone Star said the acquisition complied with local tax laws and it paid all necessary taxes related to the purchase. Seoul City officials audited the transaction in 2003 and decided additional taxes weren't due, Lone Star said in a statement. The Seoul government can ask for additional taxes on the registration of a building within five years once the purchase is made if it finds irregularities in the purchase, Mr. Shin said. (Source: Joongang Ilbo.) On 19 Jun 2006, the Board of Audit and Inspection said that the management of Korea Exchange Bank had exaggerated its financial woes in 2003 before it was sold to Lone Star Funds. The BAI said that Lone Star was an unqualified buyer. But the bottom line is that the BAI could find no evidence that the Lone Star Fund was involved in any of the "shady" dealings -- thus they had no basis to void the sale. The BAI said it has found a large number of former and incumbent government officials and finance industry figures deliberately manipulated KEB’s financial records to facilitate its sale to the Texas-based fund. The deal was said to be "shady" as they complained that the bank had no need to sell a majority of its ownership, transferring the management, and should have consulted with its major shareholders, including the Export-Import Bank of Korea and the Bank of Korea, the latter Korea's central bank. The audit board's report also charged that the Ministry of Finance and Economy allowed a small number of executives of Korea Exchange Bank to conduct the negotiations to sell the bank in secrecy. The audit board said Lee Kang-won, the bank's president, and other executives played up the bank's bad debts even though they were acting for the seller in an effort to strike a deal with Lone Star. The report also charged that the bank asked its accountants to paint the bank's finances in the worst possible light and also gave the accountants misleading information about the shakiness of some of the bank's assets. Finally, the report named some civil servants, including Byeon Yang-ho, already in custody for other alleged crimes, as having colluded in manipulating the sale. They said some incumbent government officials could face charges of dereliction of duty. BAI investigations have thrown up circumstantial evidence implicating former KEB president Lee Kang-won, now president of Korea Investment Corporation, Bogo Fund CEO and former director-general of the Finance Ministry’s Financial Policy Bureau Byeon Yang-ho, and Deputy Finance Minister Kim Seok-dong. They and other former and current officials in the Finance Ministry will be questioned about the allegations that KEB's BIS capital adequacy ratio was manipulated to justify the sale and other charges. That could also include former deputy prime minister Lee Hun-jai, who is under a travel ban over alleged dubious earnings, with a prosecutor saying Lee was “not a person unrelated to the Lone Star scandal.” Auditors Raid KEB (July 2006) Despite the fact that the BAI findings that cleared Lone Star of any wrong-doing in manipulating the data for the sale of KEB, the BAI found "circumstantial evidence" that key officials manipulated the data that allowed the sale of KEB to Lone Star. Prosecutors, national auditors and tax authorities, in part reacting to popular outrage at the image of "Korea on sale," have all been investigating allegations that Korea Exchange Bank's financial position was misrepresented to facilitate the 2003 sale; civic groups and legislators have called for the sale to be nullified if Lone Star acted illegally as part of that transaction. Prosecutors, reacting to that pressure, have raided Lone Star's local offices and those of the bank. Though the BAI denies it, it is obvious that they pursued the matter to attempt to find out if the KEB officials were somehow bribed by Lone Star. At the end of June, the BAI raided the offices of KEB -- and searched the offices of those individuals suspected of manipulating the data and confiscated records. However, there is a warning from foreign hedge fund managers that Korea's financial markets could be set back 15 years or more if the sale of Korea Exchange Bank to Lone Star Funds in 2003 is nullified. Foreign investors are nervous about Korea. Investors felt that Seoul was spending far too much energy on digging into the past instead of encouraging foreign funds to invest. There was increasing criticism that Korea's financial regulators had made the nation's financial companies uncompetitive internationally. Lone Star Complains of 'Unfair' Taxation (July 2006) US. private equity fund Lone Star has, since January, submitted 20 complaints to the National Tax Tribunal in relation to its row with the National Tax Service (NTS). The prosecution is now investigating 12 of the 20 cases in relations to fraud allegations sources at the tribunal said, adding that the it may issue rulings later this year after the investigation is concluded. Lone Star faces claims for tens of billions of won in taxes, but has refused to pay, claiming its South Korean investments were made by its units in Belgium, with which the country has signed a treaty to avoid double taxation. Lone Star has set up several investment units in South Korea since it entered the market in late 1990s. Authorities allege it used the units to divert capital gains. In January, the fund filed petitions with the tribunal over 12 cases and filed three more in March, including one against Seoul City’s decision to impose 100 billion won in capital gains tax over its sale of the Star Tower office building in Seoul. Lone Star is also fighting some 140 billion won in taxes claimed by the NTS. According to the tax tribunal, it usually takes 90 days until it makes a ruling over a case, however, it needs a longer period in this case due to the prosecution’s investigation, it said. If Lone Star doesn’t accept the tax tribunal’s ruling, it can file a court appeal. Lone Star’s investment in South Korea began in 1999 when it purchased non-performing loans worth 540 billion won from the Korea Asset Management Corp., which was set up by the government following the Asian financial crisis to deal with bad loans. Since then, it has bought Korea Exchange Bank (KEB), Kukdong Engineering and Construction and the Star Tower office building in southern Seoul. The prosecution earlier said the funds investment in South Korea totaled 11 trillion won. (Source: Korea Times.) Lone Star to Renew Contract with Kookmin Before Sept (Aug 2006) Lone Star Fund will likely have to renew its contract to sell a stake in Korea Exchange Bank to Kookmin Bank, as an investigation by public prosecutors drags on. The sales contract, which is waiting for central government approval, will expire Sept. 16. Lone Star will either have to renew the contract with Kookmin Bank or seek other bidders. Lone Star had earlier this year agreed to hand over its 64.62 percent stake in KEB to Kookmin Bank for 6.95 trillion won ($7.3 billion). The sale process stalled after the Board of Audit and Inspection claimed that the 2003 sale of KEB to Lone Star Fund had been manipulated, and the financial state of the bank at the time of the sale deliberately undervalued. By early September, Lone Star has to decide whether it will stick with Kookmin Bank or look for other buyers. Market consensus is that Lone Star, a U.S. private equity fund, will likely stay with Kookmin Bank. Observers believe that the Texas-based fund is looking to cash out on the deal as fast as it can, and that Kookmin Bank is the only player in the local financial industry that can deliver the capital and make a matching offer. In addition, the investigations by the Financial Supervisory Committee and the Fair Trade Commission are said to be almost over, so Lone Star only needs to wait for a final green light from prosecutors. If it selects another buyer, the entire approval process with the FSC, FTC, and prosecutors will have to be undertaken again. Kookmin Bank is expected to promptly hand over the cash after the final approval, so Lone Star has little reason to do anything other than renewing the contract with Kookmin, industry insiders said. Separately, the ongoing investigation by prosecutors is expected to continue indefinitely, though industry insiders say it should be done by late September before Chuseok, the local Thanksgiving period. In the worst case, the investigation could go on until year end. So far, the public prosecutors have failed to bring in critical witnesses to the case, namely Steven Lee, a former executive of the fund, Yoo Hoi-won, the president of the fund's Seoul office, and Chung Hun-joo, a representative of Hudson Advisor Korea. The FSC and FTC may slow their approval procedures in line with the prosecutors' ongoing investigation, insiders said. (Source: Korea Herald.) Lone Star Gives Ultimatum (Aug 2006) Lone Star chairman John Grayken's threatened to walk away from the sale negotiations unless the NTS investigation is wrapped up on Sept. 16, when the contract expires. Grayken told Bloomberg in New York on 30 Aug that his company could delay the sale, change the terms or cancel in altogether unless Korean prosecutors are done. However, prosecutors said they cannot complete it by 16 Sep. They will continue investigating the U.S. fund Lone Star regardless of the fund’s ongoing negotiations with Kookmin Bank to sell Korea Exchange Bank. In response, the Minister of Finance stated that the investigation will not affect the sale process sending out conflicting signals. Lone Star-KEB negotiations Continue (Sep 2006) Getting the go-ahead from Korea's antitrust watchdog for Kookmin's merger with the nation's fifth-largest lender is regarded as another stumbling block to the deal. Whether they will revise the terms of the original contract is as yet unknown, Kookmin officials said on 15 Sep. Kookmin's CEO Kang Chung-won said that he was hoping to extend the deal by the end of this week without changing the purchase price and other terms. Lone Star is demanding that Kookmin make up for a loss stemming from the delay in the acquisition process, industry insiders say. It may take longer for both sides to reach a compromise on the issue. Kang did not rule out the possibility that the deal could collapse if Lone Star makes "unacceptable" demands. Last month, Lone Star chairman John Grayken reportedly also said that the contract could be scrapped if prosecutors did not conclude the investigation before the deadline on 16 Sep. Even if the deadline passes, the contract is still valid unless either Kookmin or Lone Star void it. Lone Star Challenges Probe (Oct 2006) The prosecution on 31 Oct requested arrest warrants for key Lone Star Funds officials for alleged stock price rigging here in 2003, but the U.S. buyout fund challenged the prosecutors’ move, The Supreme Prosecutors’ Office sought to detain Lone Star’s Vice Chairman Ellis Short and two outside directors for their involvement in the alleged stock price manipulation. It also requested a court warrant to detain the fund’s Korean operation chief, Yoo Hoe-won. One of lawyers for Lone Star said that all charges against the fund are ``a willful distortion of facts.’’ The lawyer, who declined to be named, said that all Lone Star officials will be cleared of all charges at court. ``So far, Lone Star has refrained from challenging the Korean government, but Lone Star is running out of patience,’’ he said. Short and Yoo served as outside directors for the Korea Exchange Bank (KEB) when the bank merged its credit card unit, KEB Credit Services, in November 2003, two months after the bank was acquired by Lone Star. Prosecutors believe Lone Star bigwigs played crucial roles in rigging the stock price of the card unit to acquire it at a price far below market value. The Dallas-based fund has denied the manipulation claims. ``We requested that these people turn in for questioning last week, but they ignored our calls. So we decided to take them into custody,’’ prosecutor Chae Dong-wook told reporters. ``Short is believed to have conspired with Yoo to mastermind the rigging or to have been deeply involved in this case.’’ Chae said the prosecution is considering a request to the Justice Ministry for the extradition of Short and two other directors, who are now staying in the United States. Yoo, head of Lone Star Advisors Korea, is working in Seoul. It is the first time the South Korean prosecution has sought the arrest for those working in the U.S. headquarters of the equity fund, which is under investigation on suspicions of stock price rigging, tax evasion and illegal business dealings. In May, prosecutors requested an arrest warrant for Yoo, but the court rejected it, citing little possibility of Yoo destroying evidence or running away. After conducting an investigation, the Financial Supervisory Commission (FSC) raised the possibility in September that Lone Star exercised influence to fix the stock price in 2003 and reduce costs for the merger with KEB Credit Services. According to prosecutors, Short and Yoo attended a KEB board meeting on Nov. 20, 2003, when management reached a temporary agreement on the reduction of capital at KEB Credit Services, sending the card unit’s stock price plummeting. However, one week later, it decided to merge the unit into KEB without capital reduction, drawing criticism that it leaked false information to the market to buy its shares at cheaper prices. During the week, the card firm’s share price fell about 250 percent. (Source: Korea Times.) Prosecution Goes After Lone Star and KEB Execs (Nov 2006) On 2 Nov Yonhap News reported that a South Korean court rejected on Friday a prosecution request to issue warrants to detain two executives of U.S. private equity fund Lone Star Funds, which is being investigated on stock price manipulation charges. The Seoul Central District Court refused to allow prosecutors to detain the two executives, Vice Chairman Ellis Short and General Counsel Michael Thompson, saying an additional investigation is needed. However, the court issued an arrest warrant for Steven Lee, former head of Lone Star's Korean unit. Prosecutors were miffed when the court turned down the applications for four Lone Star executives over share price manipulation in the sale and promptly refiled the petitions for arrest warrants. On 6 Nov the Seoul Central District Court granted an arrest warrant for former Korea Exchange Bank president Lee Kang-won over irregularities in the sale of Korea Exchange bank to the offshore investment firm Lone Star in 2003. Lee is accused of losing the bank hundreds of billions of won by exaggerating KEB’s financial problems in the course of the sale. Lee is also suspected of taking a total of W1.98 billion in bribes from suppliers and subcontractors in the bank’s renovation. His is the first arrest in the investigation of Lone Star’s takeover of KEB at a bargain basement price since the probe started in March. Judge Lee Sang-ju said he granted the arrest warrant since there was sufficient evidence supporting the charges and a danger that the ex-KEB chairman could destroy evidence. Lee on arrest denied the charges. “Selling the bank to Lone Star was the best decision at the time. I didn’t get a penny for myself,” he said. Lee’s arrest is tipped to pave the way for prosecutors to expand their investigation into government agencies involved in the sale, including the Finance Ministry, the Financial Supervisory Service and the Financial Supervisory Commission. They say they will seek the arrest of three or four former financial officials and KEB staffers. Senior Prosecutor Chae Dong-wook last week hinted the targets were KEB staffers and officials of the three government financial bodies who supervised and approved the sale of the bank. Asked whether government officials were involved in finagling the sale, Chae said there could be “accomplices who were not bankers” while financial supervisory agencies were also involved. On 8 Nov Judge Lee Sang-ju rejected arrest warrants for Mr. Short and Mr. Thomson, and said the suspects were U.S. citizens and lived in the United States, and that the prosecution failed to convince him that warrants were needed to actually arrest them. Mr. Lee also denied a warrant request to detain Mr. Yoo, saying there was no risk of flight or evidence destruction. The Supreme Prosecutors' Office said it would file a third request for the warrants with more evidence related to irregularities surrounding the Texas-based private equity fund's purchase of the Korea Exchange Bank (KEB) in 2003 Prosecution Summons of Lone Star Execs Degenerates in Comedy (Nov 2006) The Prosecutors give ultimatum to Lone Star executives degenerated into a burlesque comedy. South Korea's state prosecutors delivered an "ultimatum" to two executives of U.S. equity fund Lone Star "urging" them to come to Seoul to face an investigation into their alleged stock price manipulation. The summons were sent to Lone Star Vice Chairman Ellis Short and General Counsel Michael Thompson, both in the United States, "asking them" to attend the South Korean prosecution by 10 a.m. 13 Nov. The two executives of the Lone Star headquarters are suspected of manipulating the stock prices of Korea Exchange Bank (KEB)'s credit card unit in November 2003 after Lone Star's takeover of the bank. Prosecutors have delivered summonses to the suspects more than five times since Oct. 24, but the Americans refused to travel to South Korea to face criminal investigation. The Lone Star executives agreed to cooperate IF the prosecution would guarantee they could leave the country after being questioned. They also demanded to have in writing the questions that would be asked. The prosecution refused these terms. The Lone Star executives then offered to have deputations taken in the US if the questions were forwarded. The prosecution again refused. The crux of the matter is that the prosecution wanted a license for a fishing trip. In the end, the Lone Star executives stated that the prosecution can do what it wants. The prosecution filed for their arrest. A local court rejected the prosecutors' second application for arrest warrants for the Lone Star officials saying it was unclear whether they directly profited from the alleged manipulation. Prosecutors had publically expressed their disappointment when the court rejected the arrest warrant for Lone Star executives. The court had refuted the claim, stressing that prosecutors had to prove why the U.S. executives needed to be arrested. The prosecution moved to file a third request. On 16 Nov the Seoul Central District Court granted arrest warrants for Lone Star vice chairman Ellis Short and Lone Star's legal advisor Michael Thompson after twice rejecting prosecutors’ warrant requests. An arrest warrant request against another suspect, Lone Star Advisors Korea head Yoo Hoe-won was rejected. Prosecutors are appealing against the court’s decision against the arrest of Yoo, following its refusal to issue a warrant for former director-general of the Finance Ministry’s Financial Policy Bureau Byeon Yang-ho. The prosecution plan to take steps to extradite the suspects from the U.S. as soon as the court allows the arrest. Seoul and Washington have a criminal extradition treaty that allows for the transfer of criminals and those suspected of having committed a crime. (SITE NOTE: It is very doubtful that the US would EVER agree to an extradition under such circumstances.) Prosecutors claim Lone Star spread false rumors of a capital write-down by the Korean lender's credit card unit in order to cut the fund company's purchase price for the card unit. It was merged into KEB, whose largest shareholder was Lone Star, the following year. The card company's stock price nose-dived from 6,700 won to 2,550 won a share in a week after the rumors began to spread. Prosecutors say, citing financial officials here, that Lone Star is estimated to have made 22.6 billion won (US$17.6 million) in unfair profits from the purchase of shares dumped by small shareholders of the card company. ,br> In South Korea, stock manipulators can face up to 10 years in jail even if they didn't directly gain from the manipulation. Lone Star has consistently denied any wrongdoing, calling the investigation "politically motivated" and "driven by anti-foreign investor sentiment." "We don't discriminate against Lone Star just because it is a foreign equity fund," Chae said. "We are conducting the investigation according to global standards and principles to find the truth." (NOTE: Any reasonable person watching the scenario develop would disagree.) (Source: Yonhap News.) "Honorable" Gadget Recorded 2003 Meeting (Nov 2006) Immediately after the prosecution said it would find more evidence to support its third request for arrest warrants for Mr. Short and Mr. Thompson, suddenly the prosecution provided new evidence. In an apparent attempt to pressure the court, prosecutors have made public some of the evidence they gathered from their investigation, including a tape recording of a meeting between Lone Stars officials and KEB executives dated Nov. 19, 2003, a day before the bank's board meeting. The recorded conversations back the suspicions that the Lone Star executives manipulated the stock prices of KEB's credit card unit by releasing false information that the board reached a temporary agreement for a capital reduction, prosecutors said. However, Hwang said the content of the tape recording is nothing new and was first presented by prosecutors five months ago during the early part of the investigation. Hwang Ju-myung, co-founder of the Seoul-based law firm Hwang Mok Park, which represents Lone Star, criticized the prosecution's decision to send a written summary of the tape recordings to more than 7,000 people, including lawyers, judges and prosecutors, calling it a violation of Korean law. On 8 Nov, the Chosun Ilbo reported that a James Bond-style gadget played a key role in cueing investigators into irregularities in the stock price manipulation of Korea Exchange Bank Credit Card Services. Prosecutors say a Nov. 20, 2003 meeting of the KEB board got underway at the Lotte Hotel in Sogongdong, Seoul to discuss incorporation plans for the card services division. It was attended by KEB outside directors from the offshore investment firm Lone Star that had recently taken over the bank -- its vice chairman Ellis Short, head of Lone Star Korea Steven Lee, Yoo Hoe-won, the head of Lone Star Advisors Korea, and legal advisor Michael Thompson. The meeting was conducted in English, and recording was banned to ensure nothing that was discussed left the room. But a KEB staffer tasked with keeping the minutes placed a voice-recorder pen behind a flowerpot and recorded the entire meeting unbeknownst to the Lone Star execs because he did not trust his linguistic skill. “As the meeting was being carried out in English, there was really no other option but to record it so that I could accurately document what happened.” After seizing the voice pen, prosecutors were able to listen to the whole meeting. With this evidence, prosecutors say it is clear Lone Star executives attempted to finagle the stock price with false rumors of a capital reduction. Thanks to the discovery, prosecutors sought arrest warrants on charges of stock price manipulation for the executives three years after the incident took place. SITE NOTE: What seems irregular is that such a device is recordable. Why would the person who recorded the meeting secretly retain the recording for a period of THREE YEARS -- as transcription of the meeting was to be made immediately? Why would such a recording be retained if there were such incriminating evidence on it -- especially after the prosecution started raiding offices. All kinds of nefarious reasons come to mind -- OR the recording is a fake on the part of the prosecution -- OR the person had retained the recording in order to blackmail others, but was caught during a raid. Who knows? The prosecution refers to the snitch as an "honorable" person -- but he is anything but that. He is a man who betrayed his employers who had given him a special trust. He is one that can't be trusted.“In a case of stock price manipulation such as this where a major shareholder is involved, it is nearly impossible to prove the charges, but an ‘honorable person (‘guiin’ in Korean)’ made it possible,” a prosecutor quipped. “The honorable person we mentioned in briefings was in fact the voice-recorder pen.” Prosecutors deny the tape constitutes illegal wiretapping because a person involved in the meeting taped it. (Source: Chosun Ilbo.) Prosecution Claim Lone Star Committed Illegal Acts (Nov 2006) The prosecution has uncovered evidence that Lone Star, the U.S.-based private equity firm, engaged in illegal acts when it acquired Korea Exchange Bank (KEB) at a low price. The prosecution is now expanding its investigations into the Lone Star headquarters. If it is confirmed that Lone Star is guilty, the deal itself will be invalidated. The Supreme Prosecutors’ Office’s Central Investigation Bureau (Chief Park Young-soo) stated on November 7 that the 1.5 billion won former KEB president Lee Gang-won received as an advisory fee is actually compensation for aiding Lone Star in acquiring KEB at a knockdown price. They will further investigate to see if Lone Star was involved in the transaction. The prosecution also confirmed that former president Lee made contact with Steven Lee, the former head of Lone Star Advisor Korea and a key figure in this issue, on about a dozen occasions unofficially and received a guarantee that he would be able to continue as president of KEB. However, Lee was notified by Steven Lee three days before the payment (Oct 31) that a new bank president would be appointed. On November 3, when the management rights were passed on to Lone Star, Lee entered into a contract as a business advisory with KEB and received 1.5 billion won in 2004. The prosecution believes the money was "compensation based" and Lee was abetting Lone Star in acquiring KEB. The prosecution also plans to request arrest warrants for two or three persons including Byeon Yang-ho, former director-general of the Finance Ministry’s Financial Policy Bureau, and officials from the financial authorities on November 8 at the earliest for their malfeasance in the KEB sale. On the afternoon of November 7, a warrant inspection was held again for Yu Hoe-won, current head of the company`s local unit, Lone Star Advisor Korea, after the initial request for a warrant was refused by judge Lee Sang-ju, who tries warrant requests at the Seoul Central District Court. Yu Hoe-won is accused of being involved in the stock price manipulation of KEB Card, the credit card arm of KEB. Lone Star puts on hold talks with Kookmin on KEB sale (Nov 2006) On 17 Nov Yonhap News reported that Lone Star had put on hold its talks with Kookmin Bank on the sale of Korea Exchange Bank (KEB) due to a prosecution investigation into its takeover of KEB in 2003. "Lone Star's talks with South Korea's top lender Kookmin Bank to sell Korea Exchange Bank are on hold and the U.S. fund will not invest any money in the country until the probe is over," Reuters quoted John Grayken, the fund's chairman, as saying. (SITE NOTE: The key statement was that Lone Star would NOT invest in KOREA --and the implication is that it was a warning to other equity funds to follow Lone Star's example as well.) Lone Star Scraps KEB sale to Kookmin Bank (Nov 2006) Lone Star Funds said on 22 Nov 2006 that it had canceled its agreement with Kookmin Bank to sell its controlling stake in Korea Exchange Bank for $7.3 billion. "We have concluded that we cannot move forward with the sale of KEB to Kookmin Bank due to the continuing investigations surrounding Lone Star's investment in KEB and KEB's subsequent rescue of its credit card subsidiary, which have been extended several times and now have no firm completion date," John Grayken, chairman of the fund, said in a statement. On 23 Nov, the Financial Times quoted Mr. Grayken as saying such a plan was being considered. Last week, Mr. Grayken said Lone Star would make no further investments in Korea until the investigations were concluded. Prosecutors are trying to extradite Lone Star's vice chairman Ellis Short and its general counsel for Asia, Michael Thomson, from the United States. The two are suspected of manipulating the stock price of Korea Exchange Bank's credit card unit in 2003. Until the investigations are over, Mr. Grayken said, "We will continue to vigorously defend our company and our officers against the prosecutors' groundless accusations." Chae Dong-wook, the lead prosecutor, said his investigation would be concluded by mid-December. Kookmin Bank's president, Kang Chung-won, told reporters that the bank had prepared "alternative growth engines," and that in the longer term the cancellation of the deal would have no significant impact on Kookmin. Mr. Kang also said a new set of negotiations with Lone Star remained a possibility, but added, "It's up to Lone Star whether the talks will resume after the conclusion of the investigations." A spokeswoman for Korea Exchange Bank said the bank would not comment on the decision of its largest shareholder. The bank's union welcomed the decision. Financial regulators said they were still reviewing the impact of the cancellation on the Korean financial market, but one official at the Financial Supervisory Service said the flow of foreign direct investment into Korea might be reduced after 22 Nov events. (Source: Joongang Ilbo.) Industry watchers said now that the deal is officially over, Lone Star may attempt to draw a hefty dividend out of KEB soon in order to recoup part of its investment money. The dividends may amount to 1.3 trillion won, they said. In 2003, Lone Star paid 1.38 trillion won to purchase a 51-percent stake in the bank. Analysts predicted that the U.S. buyout fund would keep trying to sell its KEB shares, although the price may be lower after dividend payouts Choi Jung-wook, a banking analyst at Korea Investment Co., pointed out that because the worst-case scenario of Lone Star being stripped of its status as the majority shareholder of KEB is not ruled out, the fund may have difficulty finding an alternative buyer. Lone Star could be forced to dispose of shares exceeding 10 percent of KEB, if it receives fines or heavier punishments for breaching financial market-related regulations during its purchase of KEB. (Source: Korea Herald.) Findings in KEB Case Announced (Dec 2006) Prosecutors on 7 Dec announced the result of their contentious investigation into the sale of Korea Exchange Bank to the offshore fund Lone Star in 2003, at a price they say was between W344.3 billion and W825.2 billion (US $1=W914) below the true market price. Prosecutors said that there were illegalities in the South Korean government's approval of Lone Star's qualifications to buy the KEB at a blow-market price. Announcing the result of their 11-month probe into the Lone Star-KEB deal, the prosecution indicted six government officials and businessmen on charges of involvement in irregularities during Lone Star's acquisition of Korea's fifth largest commercial lender in 2003. Prosecutors argued that the U.S. fund acquired the bank at a price at least 344.3 billion won ($374.6 million) lower than the market price when it bought a 50.5 percent stake in KEB for 1.4 trillion won in 2003. They accused the former director general of the Finance Ministry's Financial Policy Bureau, Byeon Yang-ho, and former KEB president Lee Kang-won of conspiring with Lone Star to underrate the bank’s assets and exaggerate its bad loans in a bid to drive the price down. Prosecutors arrested Lee and indicted four others including Byeon without detention. They dropped charges against former finance ministers Kim Jin-pyo, Lee Hun-jai and Jin Nyum. Byeon’s lawyers deny the charge, saying KEB was sold at a 14 percent management premium, which shows it was not sold too cheap. Byeon denies receiving money either from Lone Star or from lawyer Ha Jong-sun, who was arrested on charges of lobbying for the deal. Lone Star Funds chairman John Grayken issued a press release condemning the findings. "There is nothing new in the Supreme Prosecutors Office's latest public announcement,” it said. “It is the same old broad conspiracy theory that never made any sense and still is not supported by any hard evidence.” Finance Minister Kwon O-kyu told reporters on the day the sale of KEB was “inevitable in some sense” but the decision-making process in government “partly lacked transparency.” Pundits say the greatest credit goes to prosecutors for making a case over alleged manipulation of KEB's BIS capital adequacy ratio. Prosecutors say Byeon and Lee distorted the ratio five or six times since 2003, when negotiations for the sale of KEB started. But they were unable to offer clear evidence that Lone Star illegally lobbied government officials and politicians, the crux of the case. It makes little sense that the manipulations should have been led by the director general of the Finance Ministry's Financial Policy Bureau, who is not considered influential enough to do that. Prosecutors were unable to investigate the Lone Star officials who are at the center of the lobbying scandal. Former head of Lone Star Korea Steven Lee fled overseas before the investigations began and prosecutors failed to arrest the head of Lone Star Advisors Korea Yoo Hoe-won. (NOTE: The prosecution has made a farce of the case by demanding EXTRADITION of the Lone Star executives for QUESTIONING. The officials refused to come to Korea for questioning unless they were guaranteed exit from Korea -- which was refused. In essense, the ROK showed they intended to arrest the executives once they arrived in Korea. Thus the Lone Star refusal to appear the ROK summons.) Prosecutors have come under attack for slapping a travel ban and tracking down bank accounts in the cases of Lee Hun-jai and Jin Nyum based on speculation without solid evidence. Lee was under an overseas travel ban for nine months after the investigation began. The bank accounts owned by his family members as well as his own were scrutinized thoroughly due to an allegation that he took out loans from KEB with excessively favorable conditions and was lobbied by Lone Star to facilitate the deal. The charges had to be dropped. (Source: Chosun Ilbo.) In response, John P. Grayken, chairman of Lone Star Funds, has said the prosecution lacks any hard evidence to back its assertion that the private equity fund bought KEB at a bargain price through collusion with policymakers and former KEB executives. He stressed that the prosecution assertion that it has factually determined that KEB's financial condition was knowingly manipulated through collusion between KEB's management and executives, and government policymakers and regulators, to allow Lone Star to control the bank at a bargain price, was absurd. Lone Star Battle May Backfire (Dec 2006) The South Korean prosecution's battle with Lone Star over the controversial takeover of the Korea Exchange Bank (KEB) may backfire, scaring away foreign investors, helping the Texas-based fund fatten its pockets and tarnishing the public confidence in the cowboy-style investigation. Many observers and analysts said potential investors might shift their investment to other Asian countries such as China and India out of concern over perceived negative public sentiment against foreign capital. (SITE NOTE: This has created a xenophobic business atmosphere -- but it started long ago with the Sovereign fiasco, followed by the KT&G management takeover bid, then Lone Star -- along with other funds that have been taxed for having the temerity to make a profit in Korea.) Michael Breen, head of a public relations agency, Insight Communications Consultants, told The Korea Times that the Lone Star case has already and will negatively affect foreign investor sentiment toward Asia's fourth largest economy. ``The probe's impact on foreign investors is quite serious. They are going to think twice before doing business in Korea because of regulatory risks involved here after witnessing the Lone Star case. Why risk a lot of money in this country if you are going to be treated like Lone Star,'' he said. Breen said prosecutors have come in an aggressive way, hunting for evidence even if there was nothing, adding that such behavior definitely weakens the country's endeavor to attract foreign investment. Tami Overby, president of the American Chamber of Commerce in Korea (AMCHAM), also said that most foreign investors see the Lone Star case as an example of the lack of predictability of the Korean market, which is having a negative impact at a time when Korea's economic competitiveness is already suffering. ``Foreign investors and the international media are watching the Lone Star case very closely so we hope the courts will resolve this case quickly in a manner consistent with international standards,'' Overby said. The country has seen its inbound foreign investment drop over the past year. Foreign direct investment (FDI) stood at $7.5 billion for the first nine months of the year, down 2.3 percent from the same period last year, according to the Ministry of Commerce, Industry and Energy. During the third quarter alone, it dropped 14.8 percent from a year earlier. The ministry expects the investment from overseas to come below its goal of $11 billion this year. Last year, the country attracted less than 1 percent of global FDI at $7.2 billion, lag behind its Asian rivals. China attracted 7.9 percent of global FDI last year and Singapore also attracted 2.2 percent, though its economy is only one seventh that of Korea. (SITE NOTE: Companies flat refuse to invest in Korea. The latest was a German-Korean joint venture. The Germans refused to build the factory in Korea and finally they settled on Singapore -- instead of Korea. The Roh administration has also done nothing about the infrastructure deficiencies that foreign businesses have criticized for years. In addition, the labor problems in Korea has driven the wages up while productivity has remained static in most major industries. Korea is not a good place to invest at the moment.) Many local analysts also said that the ongoing Lone Star investigation is having a negative impact on foreign investor sentiment to a certain degree. Citigroup economist Oh Suk-tae expects foreign investors to become more reluctant to make investments here after watching a stronger than expected anti-foreigner sentiment in Korea against funds which realized large capital gains from their investments. ``Regulatory risks associated with investing in Korea for foreign investors have certainly increased, as clearly shown by the prosecution's investigation into Lone Star. I think the country will have a harder time attracting fresh incoming investment,'' Oh said. ``To attract more foreign investment, the government should ease anti-foreign sentiment prevalent in the country and a range of regulations to create a more business-friendly environment for non-Korean investors and companies,'' he said. Oh also said the country needs international capital and expertise to strengthen the competitiveness of its service industry, adding that foreign businesses should be treated equal to domestic ones. (Source: Korea Times.)
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