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Financial Services Commission Vice Chairman Kim Yong-beom announces that Samsung BioLogics committed accounting fraud involving over 4.5 trillion won (US$4 billion) on Dec. 14. (Shin So-young, staff reporter)
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Decision raises suspicions that system is once again going easy on chaebols
A South Korean court has temporarily suspended sanctions that the Securities and Futures Commission (SFC) imposed on Samsung BioLogics because of accounting fraud, increasing concerns that the courts are once again going easy on the country’s chaebols. The court’s ruling, released on Tuesday, fully incorporated the arguments advanced by Samsung BioLogics about the “damage to its corporate image” and the “stigma of accounting fraud.” “If the SFC’s decision is wrong, Samsung BioLogics could suffer damage that would be difficult to reverse even if it is eventually exonerated in the lawsuit,” said Hon. Park Seong-gyu, the judge in charge of the third administrative district at the Seoul Administrative Court, on Jan. 22. In his ruling, Park accepted the company’s request to suspend sanctions ordered by the SFC, which reports to the Financial Services Commission (FSC). As a consequence, the SFC’s directives to the company – which include firing its CEO, paying a fine of 8 billion won (US$7.1 million) and making public revised versions of its account books and financial statements – will be put on hold until the district court makes its ruling in the administrative lawsuit. Although the court explained that the reason for its judgment is that there are still matters to address in the main trial, some believe that the court has been persuaded by Samsung’s arguments and that this injunction foreshadows the eventual outcome of the trial. Accounting experts criticized the court for overemphasizing “irreversible damage” to Samsung without reviewing the internal documents at Samsung BioLogics that are the “smoking gun” that could prove deliberate accounting fraud. But legal experts don’t seem to place too much importance on this decision, since it is routine for the courts to issue such injunctions when there is any doubt about the outcome of the trial. Court rejected five rulings of accounting fraud by expert organizations One of the most notable aspects of the court’s decision was its conclusion that “it cannot be assumed that Samsung BioLogics broke the law in its accounting between 2012 and 2014.” Earlier, the SFC had concluded that Samsung BioLogics had deliberately violated accounting standards during this period and that this had made it possible to inflate the company’s value by 4.5 trillion won (US$4 billion) in 2015. That was the year that the merger between Samsung C&T and Cheil Industries occurred, which provided Samsung Electronics Vice Chairman Lee Jae-yong with the key leverage for inheriting control of the Samsung Group. Samsung BioLogics was a subsidiary of Cheil Industries. The evidence cited by the court included the fact that “even the Financial Supervisory Service initially responded that Samsung BioLogics’ accounting had been lawful before later declaring that it had broken the law and that a large number of accounting experts, including professors at the Center for Accounting Research at Seoul National University (SNU) and at the business department at Korea University, submitted a brief arguing that Samsung BioLogics’ accounting had accorded with international standards.” These were points that Samsung BioLogics had strongly argued during the Financial Supervisory Service’s (FSS) second audit and during the SFC’s review. “The fact that the court cited briefs by professors and other experts as evidence shows that the court isn’t an expert on this case. It has effectively made the safest and most convenient ruling without making its own decision,” said Noh Jong-hwa, an attorney and accountant. “Fraud has been found in this case by professional bodies on five occasions altogether: two times by the FSS, two times by the SFC and one time by the audit committee. The court overturned this not because of its own independent judgment but because of the opinion of some outside professors,” said Kim Gyeong-yul, an accountant. Kim reserved his strongest criticism for the court adducing Samsung’s argument that the FSS had reversed its decision. Samsung’s claim that even the FSS initially concluded there was no accounting fraud was a reference to the FSS’ perfunctory response to a brief inquiry sent by the People’s Solidarity for Participatory Democracy before the relevant documents had turned up. Samsung’s argument was basically echoed in the court’s decision. It turns out that the briefs written by the SNU Center for Accounting Research and other groups and cited in the court’s decision to put the sanctions on hold were submitted to the FSS at the request of the Kim & Chang law firm, which had commissioned the professors to argue that Samsung BioLogics’ accounting had not broken the law. The court didn’t take a position about that. Court only weighed potential costs of “non-fraudulent” ruling In its ruling, the court noted, “If the SFC’s sanctions were announced to the outside, it could result in serious damage to the company’s image, credit, and reputation due to the stigma of being branded a ‘corrupt company engaging in accounting fraud involving over 4 trillion won [US$3.55 billion].’” “Revision of the financial statements would expose it to incalculably large financial losses as the shareholders, creditors, and customers who trusted in them with their investments demand damages or withdraw their investments,” it added. On the basis, the court concluded, “In certain respects, it would accord with the public interest to suspend the validity of the SFC’s decision.” In its argument, it raised the need to prevent the potential damages that would result if the financial statements were corrected too quickly, only for the trial on the merits to conclude that the company’s actions did not constitute accounting fraud. But observers who have claimed deliberate accounting fraud by Samsung BioLogics argued that the court overlooked the public interest of avoiding a belated correction that would lead to damages for new and existing investors. “The court determined that announcing a revision to the financial statements would cause major damages, but investors also stand to suffer considerable damages from trusting in the unrevised financial statements,” said accountant Hong Soon-tak. “It looks like the court took too light a view of the resulting mistaken investment decisions,” Hong said, suggesting the court considered only the “public interest” of the scenario where the company was not guilty of accounting fraud. The court also noted that the possible revision of the financial statements has already been reported in the press, adding the decision’s suspension was only provision until the trial on the merits and raising concerns that existing and future investors might suffer damage if the court suspended the decision. But observers said this position conflicted with the key reasoning for acknowledging the injunction – namely the losses to Samsung BioLogics and its 80,000 or so minority shareholders. In an official statement the same day, Samsung BioLogics pledged to “work to see that the appropriateness of our accounting is recognized in the lawsuit on the merits.” The SFC announced plans to “examine the content of the court’s decision before reviewing a response plan, including whether to appeal immediately.” “We will be focusing our full energies on preparing for the lawsuit on the merits,” the SFC said. By Kim Nam-il, Ko Han-sol, Choi Woo-ri, Choi Hyun-june and Park Su-ji, staff reporters Please direct comments or questions to [english@hani.co.kr]
