And how the South Korean government investigated it for tax evasion and embezzlement after the Dallas company bought a controlling stake in a Korean bank? A corporation-heading FBvian hypothesized at the time that the investigation was nothing more than Korean xenophobia: the Americans must be doing something illegal to make all that money off our companies, right?
Well, maybe. Shady dealings are definitely going down. As a result, Lone Star is donating about $104 million to the South Korean government. But maybe, just maybe, the corporation-heading FBvian was on to something with the xenophobia charge. The story after the jump comes from yesterday’s Wall Street Journal.
Moving to quell public outrage over its pending $4.5 billion windfall on the sale of a bank in South Korea, private-equity firm Lone Star Funds offered to donate about $104 million to the government there, as prosecutors stepped up their probe of the partnership.
The offer came amid an intensifying backlash against foreign private-equity firms in South Korea, with the announcement yesterday of insider-trading charges against the head of Warburg Pincus LLC’s South Korean office, Sung-Jin Hwang, and two Warburg-affiliated holding companies.
The Lone Star investigation is focused on whether the Dallas-based firm bought Korea Exchange Bank for less than its true value in 2003. Prosecutors say they are looking into whether South Korean bank officials or government bureaucrats were bribed to make the bank appear more financially distressed than it was in advance of the sale to Lone Star.
Authorities also are investigating whether the firm underpaid its taxes on past profits. The authorities have said little publicly about evidence gathered to date. People familiar with the matter say Lone Star’s former top official in the country has told the firm that he misappropriated millions of dollars. That theft caused the firm to underpay its taxes, which is one of several tax matters under scrutiny.
The firm has said it is cooperating with investigators and has set aside $763 million in its South Korea bank account until the tax disputes are settled.
Lone Star’s troubles were sparked by the agreement it struck to sell a controlling stake in KEB to Korea’s Kookmin Bank for $6.7 billion, a deal the investigation could jeopardize. News of Lone Star’s expected profit on the transaction fueled simmering resentment in South Korea over big profits reaped by foreign investors who swooped into the country looking for deals in the aftermath of the 1997-98 Asian financial crisis.
The Warburg case involves its sale of stock in LG Card Co., South Korea’s largest credit-card issuer. Warburg led a consortium that acquired a major stake in LG Card in 2000, when it was a private company. In 2003, the year after LG Card started selling shares to the public, it faced a raft of bad debts.
Before that news became widely known and caused the stock to plunge, Warburg and other big shareholders began selling shares. Mr. Hwang, the Warburg executive, sat on LG Card’s board at the time. The indictment against Mr. Hwang includes charges against other big local shareholders, as well as two holding companies the Warburg-led consortium used to buy the LG Card stake.
Warburg didn’t make money on the sales, but prosecutors are expected to argue that its losses would have been far greater had it sold later. LG Card has since recovered, thanks to a bailout by creditors.
Mr. Hwang couldn’t be reached for comment. A Warburg spokeswoman declined to address the charges.
Lone Star’s donation offer came from its vice chairman, Ellis Short, in a letter faxed Friday to finance minister Han Duck Soo, a ministry spokesman said. Lone Star is engaged in a tax dispute with South Korea authorities, who contend that the firm owes $147 million in taxes on profits for a previous deal, involving the Star Tower office complex in Seoul. Lone Star maintains that it owes nothing on that deal, and is expected to argue that it shouldn’t have to pay taxes on the KEB gain under tax treaties.
Other foreign investors have made similar payments to mollify authorities. After the National Tax Service launched audits of several U.S. private-equity funds last year, five of them paid a total of $207 million to settle the matter. Two of the firms, Carlyle Group and Newbridge Capital Ltd., had made big profits by selling stakes in Korean banks.
Complicating Lone Star’s case is the alleged theft of millions of dollars by Steven Lee, its former head of operations in Korea. Mr. Lee left Lone Star’s Korean operations last summer, saying that he was relocating to the U.S. to fulfill a promise to his family, with whom he now lives in Short Hills, N.J.
People familiar with the investigation say South Korean tax regulators contacted Lone Star executives in the U.S. last summer about unusual invoices submitted by Mr. Lee to justify tax deductions. Lone Star executives summoned Mr. Lee to London to ask him about the invoices, these people say. At the meeting, Mr. Lee said he had billed a fictional consulting firm for services and had the money deposited into bank accounts he controlled, these people say.
Mr. Lee apologized without explaining his actions, and later paid Lone Star more than $10 million, which was more than the amount he misappropriated, these people say.
“He has repaid all the funds that were misappropriated and paid all taxes due and owing,” said Lawrence Lustberg, Mr. Lee’s attorney. He declined to confirm the amount. Mr. Lee couldn’t be reached for comment.
Mr. Lee is in his late 30s, the eldest child of Korean immigrants who settled in California. He attended Harvard Business School. He transferred to Lone Star’s office in Seoul in 1998, while still a junior executive. After the crisis, the fund’s investments in Korea performed well, and his stature rose.
Lone Star has filed a civil suit against Mr. Lee in the Supreme Court of Bermuda, where several of its funds are based. The suit seeks to nullify his financial stake in Lone Star, which would prevent him from sharing in the profits from the KEB sale. Private-equity firms generally keep 20% of investment profits for themselves, with clients getting the balance. As a former senior partner responsible for that deal, Mr. Lee’s cut could total tens of millions of dollars, partners at other private-equity firms say.
Mr. Lustberg said that he and his client haven’t been summoned to appear in court in Bermuda and “will vigorously contest” any attempt to void Mr. Lee’s share of the KEB profits.
