Seoul court says KEB sale to Lone Star was 'unavoidable,' clears charges

By Kim Hyun

SEOUL, Nov. 24 (Yonhap) -- A district court ruled Monday the 2003 sale of Korea Exchange Bank to U.S. equity firm Lone Star Funds was an "unavoidable" decision amid the country's slumping economy, clearing involved officials of breach of trust charges.

"The Korea Exchange Bank needed a large capital injection at the time," said
Judge Lee Kyoo-jin of the Seoul Central District Court. "And there were no new
major investors stepping out at that time except for Lone Star... Pursuing the
management-rights transfer was unavoidable."
Lone Star paid US$1.5 billion to take over a 51 percent stake in KEB. Korea's
fifth-largest lender was then plagued by ill finances in the aftermath of the
1997-98 Asian financial crisis.
Prosecutors said the price was up to 825.2 billion won (US$550 million) lower
than its market value and accused a finance ministry director at that time, Byeon
Yang-ho, of conspiring with then the bank's chief, Lee Kang-won, to artificially
understate the lender's value.
The court dismissed the breach of trust charges against Byeon and Lee, saying
there was simply no other choice than to resuscitate the bank.
"The bank was weaker than other banks in terms of operation size," the judge
said, "Capital increase through a third party was the only choice for KEB."
The verdict belatedly cleared the long-delayed case that has held the KEB deal in
limbo.
Amid the legal dispute, Lone Star scrapped a deal with Korea's top retail lender
Kookmin Bank to sell its KEB stake in 2006.
The U.S. fund reached a new deal with London-based HSBC Holdings Plc in 2007, but
HSBC terminated the US$6.3 billion deal in September this year, citing falling
asset values and global financial turmoil.
KEB recently set up a task force to help find a new investor. Kookmin Bank has
expressed interest in buying KEB in a second attempt.
Prosecutors presented no opinion for sentencing. Protesting the court's decision
to rule as scheduled with no additional hearings, prosecutors had abruptly left
the courtroom in the final hearing on Nov. 10 and did not appear for Monday's
verdict.
As evidence of manipulation, prosecutors had cited KEB's capital adequacy ratio,
which was 9.55 percent at the time of its sale, higher than the 8 percent ratio
required under the Bank for International Settlement guidelines to survive on its
own.
The court found no intentional downgrading, citing Korea's global ratings' fall,
the North Korean nuclear stalemate, the Iraq war and other dismal signs at that
time. The court only convicted the former bank chief, Lee, of taking bribes and
handed out a year-and-a-half jail term.
"In the process of the KEB sale, it is undeniable that there was inappropriate
activity with the defendants, but considering the whole picture, it is difficult
to see that the defendants had engaged in or intended an activity amounting to
breach of trust," the judge noted.
Byeon pleaded not guilty. The former ministry director is already in jail,
sentenced to five years for taking bribes from Hyundai Motor.
On June, an appeals court also cleared stock manipulation charges for Lone Star
over its KEB purchase, overturning the lower court's guilty verdict. Yoo Hoe-won,
head of Lone Star's Korean unit who was jailed for five years, was set free.
In a separate case, prosecutors are seeking a three-year jail term for a lobbyst,
Ha Jong-sun, on charges of bribing Byeon to engineer the KEB deal.