Korea’s Board of Audit and Inspection has found Lone Star, a US private equity firm, to be an “unqualified” buyer of Korea Exchange Bank on grounds that the bank’s financial problems in 2003 were exaggerated.
The Board has found the bank’s capital adequacy ratio was manipulated to allow a sale to a non-bank buyer.
A spokesman for the audit board said: “We have documents with which we concluded that the sell-off of the bank stakes was improperly carried out. State prosecutors will continue to deal with this (with) further investigations.”
Local officials involved in the approval of the transaction will be summoned by the board for questioning, including Hun Jai Lee, former finance minister, and Kim Suk Dong, former director-general of first bureau of Supervisory Policy at Financial Supervisory Service.
The special investigation department of the Korean prosecution team working on the sale controversy also plans to summon former KEB president Lee Kang Won on and vice president Lee Dal Yong for questioning, the board’s spokesman said.
The board reported a pattern of misconduct by bank executives and government officials, but found no evidence that Lone Star had done anything illegal in the course of acquiring the bank, according to Korean newspaper JoongAng Daily.
However, the auditor said in The Korea Times the bank’s capital adequacy ratio was lowered to 6.13 percent to make it look like a more financially unstable bank than it was, before the sale to Lone Star.
The bank’s calculation in late 2003 showed the ratio to be below 8 percent, the threshold above which the bank may not be sold to a non-bank entity like private equity funds.
The spokesman from the Board of Audit and Inspection said: “Lone Star sale of KEB to Kookmin Bank will be affected by the prosecution’s investigation result.”
Lone Star is close to netting a $5 billion profit if it successfully executes the sale of its control stake in the bank to Kookmin Bank. According to a Korean industry source, unfavourable public sentiment toward funds such as Lone Star making unprecedented, tax-free gains from the sale of a national asset is driving the board’s investigation.
Korean prosecutors will also be questioning former director-general of the Ministry of Finance and Economy and current head of local private equity firm Vogo, Byeon Yang Ho for his role in the KEB sale. Byeon has been detained for allegedly accepting bribes from Hyundai Motors from 2001-2002.