Korea-Lone Star duel to start in Washington

The legal battle over a multibillion-dollar investment compensation case between U.S. private equity firm Lone Star and the Korean government will start with its first hearing in Washington D.C. on Friday.

This will be the first investor-state dispute case hearing faced by the Korean government, as well as the biggest of the years-long legal conflicts regarding Lone Star’s takeover and sell-off of Korea Exchange Bank.

The International Center for Settlement of Investment Disputes, an international arbitral organization affiliated with the World Bank, will hear the case.

The second hearing will be held for another 10 days from June 29.

The U.S. fund demands $4.68 billion in compensation from the Korean government, claiming that it was forced to sell its stake in KEB at a lower-than-expected price because of Seoul’s delay in approving a more beneficial offer earlier on.

In 2007, Lone Star had agreed to sell its 51 percent stake in KEB to global banking group HSBC for 5.94 trillion won ($5.4 billion), but the latter withdrew the deal a year later amid the global financial crisis.

The company sold the stake to Hana Financial Group in 2012 for 3.9 trillion won. The original purchasing price in 2003 was 1.4 trillion won.

Seoul argued that it could not rush the HSBC deal as there were allegations at the time that Lone Star had tampered with the stock price of KEB’s credit card affiliate to lower its acquisition price.

The U.S. buyout firm also demanded a refund on the taxes it paid on the asset sell-off, claiming that its Europe-based subsidiaries that actually carried out the transactions should be exempt from Korean taxation, according to an international treaty.

But the subsidiaries are paper companies, and thus not subject to investment treaties, Seoul officials said.

Over past years, Lone Star’s involvement with the Korean financial industry has raised criticism that it made excessive profits by taking advantage of the aftermath of the Asian financial crisis in the late 1990s.

By Bae Hyun-jung (tellme@heraldcorp.com)