The Wall Street Journal-20080204-Lone Star Verdict Complicates Sale of Korean Bank to HSBC

Return to: The_Wall_Street_Journal-20080204

Lone Star Verdict Complicates Sale of Korean Bank to HSBC

Full Text (488  words)

A Korean court's guilty verdict against Lone Star Funds and its top executive in South Korea, for manipulating the stock price of Korea Exchange Bank's credit-card unit, complicates a plan by the private- equity firm to sell KEB to HSBC Holdings PLC.

The Seoul Central District Court Friday sentenced Paul Yoo to five years in jail and fined Lone Star and KEB each 25 billion won ($26.5 million). Prosecutors had sought a 10-year sentence for Mr. Yoo.

Lone Star's chairman, John Grayken, appeared voluntarily last month to testify at Mr. Yoo's trial and was temporarily detained by Korean prosecutors for questions on other matters. Mr. Grayken has since left Korea.

Dallas-based Lone Star acquired 51% of KEB for $1.2 billion in 2003. Last September, the firm agreed to sell an enlarged stake to HSBC for $6.3 billion, pending regulatory approval. Friday's verdict will delay that sale because regulators have said they won't approve any deals until all trials related to the case are concluded.

Lone Star and KEB said they will appeal the court's ruling. Lawyers for Mr. Yoo couldn't be reached. HSBC declined to comment.

The case involves KEB's credit-card unit, weighed down by bad debt when Lone Star bought KEB. Regulators say Mr. Yoo, with Lone Star and KEB officials, drove down the stock price of KEB Credit Services by informing the market that a capital reduction at the unit was imminent. Later, the unit merged with the bank.

Lone Star said Friday that it "emphatically maintains that Mr. Yoo and the other members of the board of directors of KEB, which included several non-Lone Star members, acted properly and never intended to, or attempted to, manipulate the share price of KEB Credit Services."

As part of an investigation into Lone Star in Korea, regulators are pursuing government and KEB officials who assisted in its purchase of the bank. Authorities contend that officials conspired to make KEB's financial distress appear worse than it was, paving the way for Lone Star's acquisition.

After the 1997-98 Asian financial crisis, Lone Star became one of Korea's biggest foreign investors. It bought assets cheaply and sold some of them profitably as the country's economy recovered. Gains by Lone Star and others have stoked local resentment, fueling a re- examination of the KEB deal and of policies under which foreign investors could avoid Korean taxes.

Lone Star's situation worsened when regulators discovered that its country head during the KEB purchase, Steven Lee, embezzled millions of dollars from his firm, causing Lone Star to file inaccurate tax returns. The firm has said it resolved tax discrepancies associated with Mr. Lee's actions. It also denies any wrongdoing in the KEB transaction.

At the time of the KEB purchase, Mr. Yoo was responsible for scouting Korea acquisitions and reported to Mr. Lee.

Kookmin Bank, Korea's largest bank by assets, last year abandoned a deal to buy KEB.

---

Jeongjin Lim contributed to this article.