South Korean prosecutors said yesterday they have reached an "early conclusion" that US private equity group Lone Star Funds colluded with government and bank officials to make it appear that Korea Exchange Bank (KEB) was insolvent so that it could be sold for less than its fair value.
Lone Star, which bought a controlling stake in KEB in 2003 for US$1.5 billion, stood to make a hefty profit when it signed an agreement in May to sell its entire 70.9 percent stake in the bank to the country's top lender, Kookmin Bank, for more than US$7 billion.
But a high profile probe by prosecutors into the deals prompted Dallas-based Lone Star last month to terminate the contract to sell KEB.
Prosecutor Park Young-soo said yesterday that former Finance Ministry official Byeon Yang-ho and Lee Kang-won, the former KEB chief executive, worked with Lone Star to intentionally understate assets of KEB and inflate insolvency, and thus sold the bank at a price that was up to 825.2 billion won (US$898 million) cheaper than it should have been valued.
"It was confirmed that they improperly lowered the capital adequacy ratio of the bank, leading the Financial Supervisory Commission to approve the sale," said Park Young-soo, the official in charge of the nine-month probe at the Supreme Prosecutors' Office.
Under South Korean regulations, an investment fund cannot take over a bank unless the bank is determined insolvent.
Park also said Lone Star made illegal profits of 40.3 billion won by manipulating the stock price of KEB's credit card unit in 2003 ahead of the bank's merger with it.
Prosecutors also said Lone Star Funds breached trust and evaded taxes worth 11.4 billion won in its non-performing loan transactions through its various special purpose companies.
National financial regulator the Financial Supervisory Commission has said that if the allegations of the Supreme Prosecutors' Office are proven in court, it will consider nullifying Lone Star's 2003 acquisition.
Lone Star has consistently denied any wrongdoing, denouncing the probe as "politically motivated."
"It is the same old broad conspiracy theory that never made any sense and still is not supported by any hard evidence," John Grayken, Chairman of Lone Star Funds said in a statement, calling for the end of investigation.
Grayken also dismissed pro-secutors' assertion as "absurd" and vowed to "continue to vigorously defend against these charges, and are confident that we will ultimately prevail."
Park also said prosecutors were proceeding to process a request to the US to extradite three Lone Star executives: vice chairman Ellis Short, general counsel Michael Thomson and Steven Lee, former head of the fund's Seoul office.
Prosecutors also said they will indict Lee Kang-won, Byeon and 13 other persons on breach of trust charges.
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