Regulator says Texas buyout fund was eligible to own KEB until June 2006


The Supreme Court ordered the Financial Services Commission to make public Lone Star Funds’ eligibility as the biggest shareholder of Korea Exchange Bank on Thursday.

The FSC, which lost the original trial in 2007 and the second trial in 2009 in a lawsuit filed by Solidarity for Economic Reform, appealed to the highest court two years ago. The regulator has now lost its final case.

The FSC and the Financial Supervisory Service are poised to clarify their stance on Lone Star by saying that the biggest shareholder was eligible to own KEB, at least between 2003 and June 2006.

“We will follow the court’s ruling. Our interpretation at that time was that Lone Star could not be regarded as a non-financial investor, and was eligible to own a Korean bank at least between 2003 (when the fund acquired KEB) and June 2006,” FSC spokesman Lee Byung-rhae told The Korea Herald.

He also said that “not a non-financial” investor is the same as a “financial investor.”

“If the FSC had internally ruled that Lone Star was a non-financial one at that time, the regulator would have taken punitive measures,” he said.

Concerning the speculation that Lone Star has owned 130 golf courses worth about 3.7 trillion won ($3.2 billion) in Japan since at least 2005, hinting at it being a non-financial investor, the spokesman said the issue will not be addressed in the coming announcement following the court’s verdict.

He added that the speculation may be resolved later when the FSS, an executive arm of the FSC, completes its probe.

The nation’s banking laws ban an investor with non-financial assets exceeding 2 trillion won from controlling a Korean bank.

Further, speculation recently arose that the U.S. fund is moving to sell the golf courses following criticism from ruling and opposition lawmakers as well as the KEB union in Korea.

Civic groups continued to say that, depending on the verdict, Lone Star’s acquisition of KEB in 2003 could be regarded as invalid and the fund’s preliminary deal with Hana Financial Group to trade KEB shares could also be nullified.

But as the FSC is set to claim that the fund was a financial investor until June 2006, it is expected that arguments and protests will continue.

On Wednesday, a group of small shareholders of KEB filed an injunction with the Constitutional Court to suspend the FSC’s Nov. 18 action on the fund.

The FSC only considered an earlier verdict that the fund manipulated stocks of KEB’s credit affiliate and ordered it to sell most of its KEB shares to any investor.

Lawmaker and civic groups demanded the regulator reveal the shareholder eligibility before taking action on the U.S. fund.

Meanwhile, the FSS launched an investigation into KEB as the bank rejected the regulators’ instruction to dismiss three board members engaged in stock manipulation.

By Kim Yon-se and Cynthia J. Kim 
(kys@heraldcorp.com) (cynthiak@heraldcorp.com)