Lone Star chairman denies Seoul conspiracy

Lone Star Funds chairman John Grayken leaves the Seoul District Court Office in Seoul, South Korea, yesterday. Grayken said yesterday that South Korean prosecutors have banned him from leaving the country. PHOTO: AP

The chairman of Lone Star yesterday rejected allegations that colleagues of the US equity fund had conspired to manipulate a share price to acquire a South Korean credit card company on the cheap.

John Grayken took the witness stand to testify for Paul Yoo, head of Lone Star's Seoul subsidiary, who was indicted a year ago.

"I think it's completely untrue," Grayken told the court.

Yoo charges of spreading false rumors in 2003 about a possible capital writedown of the credit card firm so that Korea Exchange Bank (KEB), controlled by Lone Star, could absorb the unit at a low price.

Lone Star bought 50.5 percent of KEB for about US$1.5 billion in October 2003, becoming major stake holder in its credit card unit.

In November of that year, Lone Star senior officials decided at a conference call to merge the card unit instead of liquidating it, Grayken told the court.

The card company was then merged with KEB in February 2004, resulting in 22.6 billion won (US$24 million) in losses for small shareholders.

Grayken that KEB had no time to implement any capital reduction, which was also facing strong resistance from labor unions, and that the unit was facing financial collapse, which the authorities wanted to avoid.

KEB under "strong pressure" from the financial watchdog, the Financial Supervisory Service (FSS), to buy it out quickly at the market price to avoid the card company's otherwise imminent collapse, he said.

"It was totally impossible for my senior officials to plot to commit a crime," Grayken said, adding such a plot would have jeopardized the fund's acquisition of KEB and its global US$60 billion investment portfolio.

But he added that Steven Lee, then head of Lone Star's Korean subsidiary, had been rebuked for a "serous failure in his judgement" because the fund had failed to expect "this type of pressure from the FSS to rescue" the unit.

Lone Star wants to sell its current 51.02 percent KEB holding to global banking giant HSBC, but the FSS says it won't approve the US$6.3 billion deal until legal cases over its previous sale are settled.

Prosecutors also accused Lee, Ellis Short, the company's vice chairman, Michael Thomson, its general counsel, of collaborating with Yoo. They have sought the extradition of Short, Thomson and Lee from the US.

Grayken he had "voluntarily" made the trip to South Korea at the request of Yoo's lawyers to testify on his behalf.

But prosecutors said Grayken would also face separate questioning over allegations the fund conspired with government and KEB officials to acquire a controlling stake in KEB at below market prices.

Grayken, speaking to reporters after testifying yesterday, said that prosecutors have banned him from leaving the country.

``I intend to comply fully with the investigation,'' Grayken said.

South Korean media say the ban is for 10 days, though prosecutors have not confirmed it.

Grayken has not been charged.