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

(ATTN: UPDATES with prosecutor quote in paras 3, 9-10, minor changes)
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 bank's financial ill-health, 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. "For KEB, the bank sale
that naturally accompanies the management-rights transfer was unavoidable."
The ruling upheld Lone Star's ownership of the bank as legitimate. Prosecutors
said they will appeal.
Lone Star paid US$1.2 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 the bank's then chief, Lee Kang-won, to artificially
understate the lender's value.
The bank's capital adequacy ratio, prosecutors cited, 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, however, found no evidence of intentional downgrading. Citing Korea's
global ratings' fall, the North Korean nuclear stalemate, the Iraq war and other
dismal signs between 2002 and 2003, the court said the sale was "the only choice"
to save KEB and dismissed the breach of trust charges against Byeon and Lee.
"In the process in which Lone Star taking over KEB, it is difficult to see the
defendants committed or intended an act against their duties," the judge said.
Choi Jai-kyeong, spokesman for the Supreme Prosecutors' Office, said he "can't
understand" and will immediately appeal to the high court.
In protest, prosecutors did not appear for the sentencing after the court
rejected their request to hold additional hearings and ruled as scheduled. They
did not recommended a sentence.
The court cleared the way for Lone Star to sell KEB, but a deal was not likely
anytime soon.
Lone Star scrapped a deal with Korea's top retail lender Kookmin Bank to sell its
KEB stake in 2006 amid the legal dispute.
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.
Government officials backed the KEB deal. Testifying in court in September,
Byeon's former boss, Rep. Kim Jin-pyo of the major opposition Democratic Party
who was finance minister in 2003, said, "We thought there was no alternative, and
I would reach the same conclusion at this moment."
Byeon stood the trial in a jail suit, serving a five-year term for taking bribes
from Hyundai Motor.
In 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.
Prosecutors appealed to the Supreme Court.
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.
hkim@yna.co.kr
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