S. Korean prosecutors discover illegal acts in sale of KEB to Lone Star

South Korea's prosecutors concluded Thursday that U.S. equity fund Lone Star's 2003 takeover of Korea Exchange Bank (KEB) was the result of illegal acts.

Prosecutors said there were illegalities in the South Korean government's approval of the U.S. company's qualifications to buy the bank at a below-market price.

Investigators at the Supreme Prosecutors' Office (SPO) announced the results after nearly wrapping up their nine-month investigation into possible illegal activities in the KEB deal.

The conclusion may lead South Korea's financial regulators to nullify the deal depending on future court decisions. However, the prosecutors failed to prove allegations that Lone Star systematically bribed then South Korea's lead financial officials and regulators to acquire the bank. Steven Lee, the former head of Lone Star's Seoul office who prosecutors believe is the key to solving the case, fled to the United States in September last year.

"We will organize a separate investigation team to keep looking into Lone Star's illegal lobbying suspicions and alleged stock manipulation," said Park Young-soo, the chief investigator in the Lone Star cases.

Prosecutors said the financial health of KEB was deliberately understated to help the initially unqualified non-banking company buy a majority stake in South Korea's fifth largest lender at a price at least 344.3 billion won (US$374.6 million) lower than the market price. In South Korea, a non-banking company is banned from buying a bank unless that bank is in serious financial trouble.

The U.S. company bought a 50.5 percent stake in KEB for 1.4

trillion won in 2003, and signed an agreement in May this year to sell its increased 64.62 percent stake to Kookmin Bank, South Korea's top lender. Lone Star last month scrapped the deal, which was expected to give it a profit of more than 4 trillion won, citing the Seoul prosecution's investigation.

Byeon Yang-ho, a former head of the Finance-Economy Ministry's financial policy bureau, is accused of masterminding the discount sale for private gains in concert with the bank president at the time, Lee Kang-won, prosecutors said.

Byeon is accused of luring a 40 billion won investment from KEB to Vogo Investment, which he now heads, in return for his alleged collusion. He also allegedly took bribe money from Lone Star lobbyist Ha Jong-sun in return for pledging government favors in the bank acquisition, prosecutors said.

Lee received 1.5 billion won from KEB's board of directors in exchange for his cooperation in the sale, they said.

Ha, president of Hyundai Marine and Fire Insurance, was arrested last month on charges of accepting $1.05 million from Lone Star in 2003, when he was working as a legal advisor for the company in return for his lobbying activities.

On Thursday, the prosecution indicted six people, including the three mentioned, on breach of trust and bribery-related charges.

In a separate case, the Dallas, Texas-based company is suspected of manipulating the stock price of KEB's credit card arm after taking over the bank in order to cut the cost of the lender's merger with the card company. Prosecutors said they found Lone Star took 40.3 billion won in illegal profits by releasing a false report on a capital write-down plan by the card company to news media. The stock price of the card company nose-dived in a short period of time after the announcement, they said.

Prosecutors said they will indict Yoo Hoe-won, head of Lone Star's Seoul office, on stock manipulation charges as soon as the Supreme Court makes a decision on the issuance of an arrest warrant for him.

Prosecutors filed an appeal last month after a lower court repeatedly rejected their request to issue the arrest warrant, saying the Seoul resident was unlikely to run away or destroy evidence.

The prosecution is seeking the extradition of two American executives of Lone Star's head office, Vice Chairman Ellis Short and General Counsel Michael Thomson and Steven Lee, under an extradition treaty with the United States.

Prosecutors additionally discovered that Lone Star evaded paying 11.4 billion won in taxes after it profited from the 2003 bank acquisition.

"Despite many difficulties facing us, we have strictly and thoroughly investigated the case without any prejudice and according to global standards," Park said.

Lone Star Funds, which has consistently denied any financial wrongdoing, refuted the investigation results.

"After nine months of intensive investigation, there is nothing new in the SPO's latest public announcement. It is the same old broad conspiracy theory that never made any sense and still is not supported by any hard evidence," Lone Star Chairman John Grayken said in an e-mail statement distributed to reporters. "It is time for this investigation to be concluded."

He said the bank was not sold at a "bargain price" as claimed by prosecutors, but at "a significant premium to the publicly traded share price at the time."

Byeon's lawyer also refuted the prosecution's determination that the bank's financial value was deliberately understated.

"KEB was sold to Lone Star at a 14 percent premium on the market share price in 2003, which was never a bargain sale," the lawyer said in a written opinion released to reporters. Byeon has also denied the bribery charges.

Seoul, Dec. 7 (Yonhap News)