Korean Prosecutors Reverse Lone Star Verdict
The Texas PE firm had its guilty verdict overturned, clearing charges that it had manipulated stock prices ahead of buying KEB.
June 25, 2008
After years of battling South Korean prosecutors, Lone Star Funds finally got some good news after an appeals court reversed a guilty verdict against the firm and Paul Yoo, who headed its operations in the region. Regulators had charged Lone Star with manipulating stock prices ahead of its majority-stake investment in Korea Exchange Bank (KEB).
“We maintained our innocence throughout this process, and are pleased to have the court’s confirmation,” Lone Star chairman John Grayken said in statement, adding that the hope now is that the firm can “get back to business.”
Texas-based Lone Star acquired a majority position in Korea Exchange Bank in 2003 through a momentous $1.5 billion deal. Lone Star had been an active buyer in Korea for years, primarily investing in nonperforming commercial loans, and previously tried to acquire banking properties, only to be passed over in favor of domestic buyers. The KEB deal was supposed to signal that South Korea's markets were opening up to outside investors.
However, shortly after the deal was struck, negative feedback emerged. In October 2004, local civic group Spec Watch Korea began protesting the sale and filed a lawsuit in an attempt to annul the transaction. By February 2006, federal prosecutors jumped on the bandwagon and launched a probe into the sale of the bank. Two years later, in February of this year, a Seoul court issued a guilty verdict against Lone Star.
While Lone Star is no doubt pleased by the decision, the imbroglio has repeatedly tripped up its efforts to exit the KEB investment. In early 2006, Lone Star inked a deal to sell the stake to Korean rival Kookmin Bank for $7.3 billion, but by November 2006, had to walk away because of the government inquiry. The firm left about $4.5 billion of profits on the table.
In September of 2007, Lone Star found another buyer in the form of HSBC, a deal that is still awaiting clearance. Regulators, according to press reports, said that the decision to overturn the guilty verdict would not impact their thinking as it relates to approving the KEB deal.
HSBC’s purchase agreement will expire at the close of July. Speculation abounds in the press that if HSBC walks away or the deal is blocked, Kookmin would likely make another push to buy Lone Star's stake, or other regional players such as Hana Bank could be interested.
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