South Korean Court Again Rejects Bid to Arrest Executives of US Fund

Posted 08 November 2006 @ 09:48 am EET     Print     Reprint     E-Mail     Comments

SEOUL (AP) - A South Korean court has again rejected an attempt by prosecutors to arrest three executives of US private investment fund Lone Star on charges of manipulating share prices.

Dallas-based Lone Star, whose legal problems began after it took over an ailing Korean bank in 2003, said it hoped the ruling would end "strong-arm tactics" by the prosecutors.

The American Chamber of Commerce in Korea (Amcham) said the foreign business community is closely watching the case.

Prosecutors, whose initial bid for arrest warrants was rejected last Friday, said they would now make a third application, possibly by next week, backed with more evidence.

They accused the Americans of showing disrespect for the legal system.

Prosecutors want to arrest Lone Star vice chairman Ellis Short, general counsel Michael Thompson and Yoo Hoe-Won, the head of Lone Star Advisors Korea.

They believe Lone Star, after buying the Korea Exchange Bank (KEB) in 2003, acquired its separate credit card unit cheaply by spreading false rumours of a capital write-down which depressed share prices.

They claim smaller shareholders of the card unit suffered losses totalling 22.6 billion won (now 24 million dollars).

Judge Lee Sang-Ju said the explanation of the need to arrest Short and Thompson was still "not persuasive."

They are in the United States, while Yoo is in South Korea. The judge said Yoo is already banned from leaving the country.

Senior prosecutor Chae Dong-Wook said he "cannot understand why the court turned down the application for arresting the prime suspects of the case as they showed no respect for South Korea's legal authorities."

Chae, quoted by Yonhap news agency, said Short and Thompson had informed prosecutors they were unwilling to respond to the summons.

They had "mocked the South Korean prosecution by asking such questions as what questions will be asked and when they could return home (if they came to Seoul) and if the prosecutors can come to the US for the questioning," he said.

Lone Star and others are also beeing probed over the sale of KEB itself. Lee Kang-Won, a former KEB president, was arrested early Tuesday.

He is suspected of helping the bank understate its financial value before the sale and taking 1.98 billion won in bribes from contractors, but denies any wrongdoing.

The US fund bought a 51 percent stake in KEB for 1.38 trillion won (1.45 billion dollars) in 2003 and recently signed an agreement with South Korea's top lender Kookmin Bank to resell its current 64.62 percent stake.

The deal is expected to yield a profit of more than four trillion won, Yonhap said. It has been delayed by allegations of wrongdoing.

Lone Star chairman John Grayken said in a statement his fund had done nothing illegal in its investment in KEB or subsequent rescue of KEB Card.

"We hope that this latest decision will put an end to the prosecutors' strong-arm tactics and finally lead to the conclusion of these seemingly unending investigations."

Amcham's president and CEO Tami Overby said the court's decisions were reassuring to foreign investors.

Lone Star, she said, was trying to sell a company it had turned around.

"This in many ways is a landmark case for Korea. The economy was not built with a lot of foreign money until after 1997-98 (the East Asian financial crisis). This is the first big cashout where a foreign company would make an enormous amount of money."

She said many Koreans were unhappy when Lone Star, rather than a strategic investor, took over KEB. "But the reality was the finances of the bank at that time were so dire, no strategic investor would be able to get that deal through its board."

The Lone Star case, Overby said, was "a perfect example of high risk, high return." Korean taxpayers had also benefited since they had been saved the cost of a bailout and since the government has shares in KEB.