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SEOUL, Dec 7 (Reuters) - U.S. buyout fund Lone Star's 2003 acquisition of Korea Exchange Bank (KEB) 004940.KS was illegal, according to South Korean prosecutors, putting the high-profile deal at risk and rattling foreign investors.
According to prosecutors, an ex-finance ministry official colluded with a lawyer hired by Lone Star [LS.UL] and KEB’s CEO to inflate the bank’s losses, allowing Lone Star to buy it for around $900 million less than it was worth.
Prosecutors, who have spent nine months probing the $1.2 billion acquisition, said they would press on with their search for more evidence of wrongdoing around the sale.
Local courts or financial regulators could potentially declare the deal void or force Dallas-based Lone Star to dispose of shares that exceed a 10 percent stake in KEB. Either move would need a Supreme Court ruling and one analyst gave it low odds.
“I don’t think there’s anything so far that supports financial authorities nullifying the 2003 deal,” said Daewoo Securities analyst Ku Yong-uk. “Based on what’s announced, Lone Star itself could be considered a victim of the authorisation given for the deal.”
The prosecutors' findings are likely to hit efforts by Lone Star, the most active private equity fund in Asia's third-largest economy, to sell its 64.62 percent stake in KEB. Late last month, it called off the $7.3 billion sale of the bank to Kookmin Bank 060000.KS due to the ongoing legal battle.
“Through this investigation, we confirmed that the sale of Korea Exchange Bank was conducted abnormally without following regulations and due procedure, and the sale price did not reach the adequate level,” the Supreme Prosecutors’ Office said in a statement.
In a statement, Lone Star Chairman John Grayken said there was “nothing new” in the prosecutors’ interim report.
“It is the same old broad conspiracy theory that never made any sense and still is not supported by any hard evidence,” he said, adding that claims that parties colluded to manipulate KEB’s financial position so it could be bought on the cheap were “absurd”.
Shares in KEB ended off 1.1 percent at 13,350 won, while the wider market .KS11 was off 0.2 percent. Kookmin closed down 0.6 percent at 71,100 won.
The probe, prompted by politicians in February, irked foreign investors, who fear they could be the target of a growing backlash against heavy profits foreign investment funds have reaped by buying distressed Korean assets.
“The decision will not have a positive effect on foreign investors’ sentiment but it will make major deals more transparent and clear,” said Chang Lee, a banking analyst at Daiwa Securities in Seoul.
Anti-foreign sentiment has been rising in South Korea after concerns such as Newbridge Capital [NB.UL] and Carlyle Group [CYL.UL] made big gains from snapping up local banks at fire-sale prices following the 1997-98 Asian financial crisis.
“The result that S.Korea prosecutors found illegal aspects in Lone Star’s purchase of KEB will badly impact on foreign investors in the country,” said Ryu Jae-cheol, an analyst at Tongyang Investment Bank.
Prosecutors said former finance ministry official Byeon Yang-ho had agreed with the lawyer -- Ha Jong-sun, who is now CEO of Hyundai Marine and Fire Insurance 001450.KS -- to sell KEB at 4,000 won per new share and more than 5,000 won per existing share, to help Lone Star buy a majority stake in the lender.
Byeon, reached by telephone, denied all the allegations.
Under local laws, funds and non-banking institutions can only own more than 10 percent of a local bank if it is in financial difficulty.
Prosecutors indicted Byeon, Ha and two former KEB top executives on bribery charges linked to the KEB sale, claiming Ha received more than $1 million from Lone Star to lobby Byeon, who received 41.7 million won worth of bribes from Ha.
“(Then-KEB CEO) Lee Kang-won took 1.58 billion won in return for cooperating with Lone Star to buy KEB between November 2003 and January 2005,” the prosecutors’ statement said.
KEB declined comment.
Chae Dong-wook, a prosecutor in charge of the probe, said it was not up to his office to nix the 2003 acquisition.
“That is a matter for the Financial Supervisory Commission or other authorities, depending on the outcome of our probes,” he said.
A senior FSC official said the regulator planned no immediate action following the prosecutors’ announcement.
Prosecutors have put off plans to question two key Lone Star officials until they can be extradited from the United States. (Additional reporting by Marie-France Han, Rhee So-eui and Kim Soyoung)
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