Lone Star's KEB Deal Said Illegal

By Na Jeong-ju
Staff Reporter Korea Times

State auditors said Monday Lone Star Funds, a U.S. private equity fund, was not eligible to acquire Korea Exchange Bank (KEB) in 2003, but financial regulators approved the deal in violation of the law.

Following its audit of Lone Star’s qualification to become the majority shareholder of KEB, the Board of Audit and Inspection (BAI) concluded it was illegal for the Financial Supervisory Commission (FSC) to approve the sale of KEB’s controlling stake to the company.

BAI officials said the auditor has requested the FSC to review its 2003 decision to endorse the sale.

In line with the request, FSC may embark on the procedure of deciding on whether to withdraw its ruling for Lone Star, but doing so is not compulsory.

“We can’t do anything about it until a final court ruling comes out,’’ an FSC official said.

The auditor also requested the FSC to file a damages suit against then-KEB President Lee Kang-won and take disciplinary action against Morgan Stanley, which managed the KEB sale to Lone Star.

The BAI decisions are expected to rekindle a controversy about whether Lone Star was qualified to own KEB. The decision may affect the court reviewing the case, and deal a blow to Lone Star’s move to sell its entire stake in KEB.

Civic groups may raise their voices again against Lone Star and South Korean regulators who gave the go-head for the fund’s 2003 acquisition of KEB.

Back in 2003, the Dallas-based equity fund was not eligible to buy a bank in South Korea as financial laws banned equity funds from acquiring financial institutions under normal conditions. Equity funds were able to buy an institution only when the target firm didn’t meet requirements for financial soundness, and its capital adequacy ratio, or the Bank for International Settlements ratio, was used as a measurement.

Lone Star has been accused of having been involved in the “manipulation’’ of KEB’s BIS ratio to take over the bank, but has denied the allegations. Lone Star chairman John Grayken earlier said the fund has abided by South Korean laws and paid all existing taxes.

So far, the FSC has said it can’t make a decision on whether to nullify its 2003 approval for Lone Star without a ruling from the Supreme Court of Korea.

jj@koreatimes.co.kr

03-12-2007 17:50

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SeanHayes@ipglegal.com