Lone Star and Ex-KEB Chief: Accomplices?

The prosecution has uncovered evidence that Lone Star, the U.S.-based private equity firm, engaged in illegal acts when it acquired Korea Exchange Bank (KEB) at a low price. The prosecution is now expanding its investigations into the Lone Star headquarters. If it is confirmed that Lone Star is guilty, the deal itself will be invalidated.

The Supreme Prosecutors’ Office’s Central Investigation Bureau (Chief Park Young-soo) stated on November 7 that the 1.5 billion won former KEB president Lee Gang-won received as an advisory fee is actually compensation for aiding Lone Star in acquiring KEB at a knockdown price. They will further investigate to see if Lone Star was involved in the transaction.

The prosecution also confirmed that former president Lee made contact with Steven Lee, the former head of Lone Star Advisor Korea and a key figure in this issue, on about a dozen occasions unofficially and received a guarantee that he would be able to continue as president of KEB.

However, Lee was notified by Steven Lee three days before the payment (Oct 31) that a new bank president would be appointed. On November 3, when the management rights were passed on to Lone Star, Lee entered into a contract as a business advisory with KEB and received 1.5 billion won in 2004.

Senior prosecutor Chae Dong-wok, who is in charge of the investigation, stated during a briefing, “We believe that the 1.5 billion won former president Lee received was compensation based, with regard to Lone Star’s acquisition of KEB, and we have issued a warrant for Lee’s arrest.”

Another official of the Prosecutors’ Office said, “Though there were issues pertaining to Lone Star’s requirements in acquiring KEB, former president Lee supported Lone Star throughout, and we believe that he may have been abetting it.”

The prosecution also plans to request arrest warrants for two or three persons including Byeon Yang-ho, former director-general of the Finance Ministry’s Financial Policy Bureau, and officials from the financial authorities on November 8 at the earliest for their malfeasance in the KEB sale.

It was found that Byeon pressured the Korea Export Import Bank (Kexim), the largest shareholder in June 2003, to accept Lone Star’s call options (rights to buy stocks at a previously set price), despite Kexim’s opposition.

On the afternoon of November 7, a warrant inspection was held again for Yu Hoe-won, current head of the company`s local unit, Lone Star Advisor Korea, after the initial request for a warrant was refused by judge Lee Sang-ju, who tries warrant requests at the Seoul Central District Court. Yu Hoe-won is accused of being involved in the stock price manipulation of KEB Card, the credit card arm of KEB.

jefflee@donga.com needjung@donga.com