Tensions rise as Korea waits for verdict on Lone Star dispute

South Korea is watching closely a verdict set to be delivered by an international dispute settlement body for a decadelong dispute between the government and US private equity firm Lone Star next week.

The International Center for Settlement of Investment Disputes’ verdict on Aug. 31 will come almost 10 years after Lone Star filed a suit against the Korean government in November 2012, seeking $4.68 billion in compensation. Lone Star claimed that the financial authorities here botched its initial plans to sell a controlling 51 percent stake in the now-defunct Korea Exchange Bank – which it bought for 1.3 trillion won ($1 billion) in 2003 -- to HSBC in late 2007.

It took 8 months for the Financial Services Commission to assess and approve the request filed by Lone Star in November 2007 to sell off its stake in KEB to HSBC. But by then, HSBC had backed off due to risks stemming from the 2008 global financial crisis, and the stakes were sold to Korean financial giant Hana Bank for 3.9 trillion won in 2012. The US private equity firm believes that it could have gained more from the canceled deal with HSBC.

The Korean government is currently bracing for the US-based dispute settlement body’s verdict through a decade-old task force presided by the Ministry of Justice. If the ICSID rules in favor of Lone Star, the government is expected to compensate the firm with taxpayers’ money.

“We are working in tandem with the Ministry of Justice for the matter,” an FSC official told The Korea Herald on Thursday.

The Korean public has been in outrage over the matter for more than a decade, claiming that the case was an international “fraud” committed by an overseas private equity firm. Many experts say that the Korean public has gained a skeptical and somewhat hostile attitude towards foreign investors entering the market due to the case.

A comment written in Korean that got more than 3,000 likes under a YouTube video uploaded by local news media YTN reporting on the Lone Star case on Wednesday said: “How incompetent this country must be to pay compensations as a victim of fraud.”

Experts say that the verdict is difficult to predict at the moment, with some pointing out that the government’s decision to play in favor of Lone Star when it purchased KEB stakes in the early 2000s will now work against them.

“Lone Star’s investment in KEB breaches Korean laws in the first place, because in this country a private equity firm cannot legally purchase a stake in a bank,” said Jun Sung-in, an economics professor at Hongik University.

“It was a desperate move to save KEB at the time, which was likely to come back to bite them,” he added.

South Korea maintains that it treated Lone Star equally and fairly, as in the case of domestic entities, in accordance with international laws and regulations.

Four rounds of hearings on the case were held between 2015 and 2016, along with a question-and-answer session in October 2020.

(mkjung@heraldcorp.com)