Regulators probe into Hyosung’s bond warrants

The Financial Supervisory Service, Korea’s financial regulatory agency, is currently probing into the financial records of derivatives issued by Hyosung Group in the late 1990s following calls for an investigation by a lawmaker during a National Assembly audit last year.

“We are looking into the matter on Hyosung’s warrant-linked bonds, including past records of its public disclosures, which reported that it was going to cancel the derivatives,” said an FSS official.

The probe came after Chung Woo-taek of the ruling Saenuri Party questioned last year the legitimacy of the bond warrants worth $60 million issued overseas in 1999 and 2000, and whether the regulators had properly checked to see that Hyosung had canceled the derivatives as promised.

Three sons of Hyosung Group chairman Cho Seok-rae, including Hyosung president Cho Hyun-joon, had acquired 60 percent of the warrants. They were found to have received about $33 million through the ownership in the bonds, and made extra profit by holding onto the derivatives and selling underlying new shares of Hyosung via overseas shell companies when the KOSPI-listed Hyosung share price rose.

When these irregularities were uncovered by the National Tax Service, Hyosung made a public disclosure saying it was going to cancel all of its bond derivatives and new shares. Korean conglomerates, including Samsung, had been found to use bonds for transfer of wealth and ownership from founders to their children.

Hyosung said that it had canceled the warrants held by the Cho family, and the Seoul Central District Court ruled in favor of the family in this case, but was slapped with a tax penalty early this year.

However, the whereabouts of the remaining warrants worth $20 million held by other investors remain unknown.

“This matter was tried in a court that ruled they had canceled all of the warrants. The involved parties of the Cho family paid capital gains and gift taxes (on shares sold by the paper companies) as ordered by the court,” said a Hyosung spokeswoman.

“As to what happened to the remaining warrants issued to other investors, the company does not know.”

FSS governor Zhin Woong-seob said during the government audit last year that it would look into Hyosung’s warrants. But he expressed difficulties in conducting a probe without sources, as much time has passed, adding that its investigative jurisdiction was not on a par with that of the NTS.

By Park Hyong-ki (hkp@heraldcorp.com)