S Korea Court Rules 2003 Sale of KEB to Lone Star Was Legal

SEOUL (Reuters) – A South Korean court on Monday rejected claims that the 2003 sale of Korea Exchange Bank (KEB) to U.S. investment firm Lone Star was illegal, a verdict that may clear a key hurdle to putting control of the bank back up for sale.

The ruling, which prosecutors will appeal, may end a long-running debate on whether KEB was sold at far below-market prices, which had been delaying Lone Star’s planned sale of KEB and led HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) to drop a $6.3 billion offer to buy 51 percent of the lender in September.

It also comes when South Korea is striving to woo foreign investors into the fourth-largest economy in Asia as major global economies are in recession and the country is bracing for the second consecutive annual trade deficit for 2009.

“We cannot judge that the capital ratio estimate for KEB had been manipulated to lower the acquisition price or make Lone Star eligible to buy the bank,” Yonhap news agency quoted a judge at the trial as saying.

A judge representing the Seoul Central District Court’s criminal trial division confirmed the ruling, but declined to be identified because he did not hand down the verdict.

The Seoul Central District Court cleared a former government official and former top executives of the bank of charges that offIcials involved in the $1.2 billion sale of KEB (004940.KS: Quote, Profile, Research, Stock Buzz) to Lone Star [LS.UL] had understated the bank’s value so that it was sold for about a third less than it was worth.

The legal battle is separate from a previous case settled in June that cleared Dallas-based Lone Star and the head of its South Korean operations of charges of manipulating the stock price of a former credit card unit of KEB to buy it cheaply.

Yonhap said prosecutors would appeal to the lower court ruling. The Supreme Prosecutors’ Office could not be immediately reached for comment.

Shares of KEB initially responded positively to the news, rising as high as 7.6 percent at one point before closing 0.5 percent lower in a weaker broader market .KS11.

The stock price is now less than one-third of the price HSBC had offered last year, hit by the prolonged legal wrangling and global financial market turmoil.


The prosecutors’ probe, prompted by politicians in early 2006, irked foreign investors who feared they could be the target of a growing backlash against heavy profits that foreign investment funds have reaped by buying distressed Korean assets.

Chang Hea-kyu, an analyst of Fitch Ratings, said the court ruling was positive news, but would not signal a quick sale of KEB to a new bidder.

South Korean regulators have withheld approval of Lone Star’s previous two attempts to sell control of the domestic lender to Kookmin Bank and HSBC (0005.HK: Quote, Profile, Research, Stock Buzz), citing legal uncertainties.

“The incumbent government has a stance of opening up further to foreign investors,” Chang said.

“But from a buyer’s point of view, they are worried about South Korean asset quality. There would be few M&A deals in South Korea in the next one to two years.”

Byeon Yang-ho, a former finance ministry official, was cleared of charges of colluding with Ha Jong-sun, a lawyer hired by Lone Star, and KEB’s then-CEO to inflate the bank’s losses.

By Kim Yeon-hee

Prosecutors had indicted Byeon, Ha and two former KEB top executives on bribery charges linked to the 2003 KEB sale, saying Ha took more than $1 million from Lone Star to lobby Byeon, who received 41.7 million won worth of bribes from Ha.

“It is impossible to deny that the accused behaved in an inappropriate manner during the sale process of Korea Exchange Bank, but in the wider framework of the sale it is difficult to say that the accused intended or carried out embezzlement,” Yonhap cited the court as saying.

The court also cleared Lee Kang-won, a former CEO of KEB, of his role in the sale of the bank, but handed him an 18 month jail sentence for taking bribes, the judge representing the court said.

(Additional reporting by Park Ju-min; Editing by Marie-France Han and Kim Coghill)