Evidence of Lone Star stock manipulation discovered: prosecutors

South Korea's prosecution said Sunday it has secured incriminating evidence that could link U.S. equity fund Lone Star to illegal stock manipulation for a more favorable takeover of a local credit card company.

State prosecutors alleged that Lone Star's representatives serving on the Korea Exchange Bank (KEB)'s board intentionally spread false rumors in late 2003. They said the action may have been aimed at preventing a surge in prices ahead of the merger between the KEB and its credit card unit.

Lone Star, the largest shareholder of the country's fifth-largest lender, is trying to sell the KEB to Kookmin Bank for a huge profit.

After the announcement, the stock prices of the credit card company plunged over 50 percent, which the prosecution estimates resulted in minority shareholder losses of 22.6 billion won (US$24.1 million). Lone Star signed a deal on the merger a week later.

The prosecution said Lone Star executives decided to spread rumors because concerns over a liquidity crisis would not cause stock prices to fall to desired levels. Investigators said they have secured related evidence, including a cassette tape of a board meeting, which they believe would prove the stock price was manipulated.

They also said Lone Star even sent e-mails to KEB employees that falsely predicted a reduction in capital to give the rumor more credibility.

Last Friday, a local court rejected a prosecution request to issue warrants to detain two Lone Star executives -- Vice Chairman Ellis Short and General Counsel Michael Thompson -- as part of the investigation.

The Texas-based fund bought a controlling 50.5 percent stake in KEB for 1.4 trillion won in late 2003, and recently signed an agreement with South Korea's top lender Kookmin Bank to resell the now 64.62 percent stake in KEB.

The deal, from which Lone Star is expected to receive profits of more than 4 trillion won, has been delayed as prosecutors examine allegations of wrongdoing by the U.S. fund.

Seoul, Nov. 5 (Yonhap News)