FSS faces hurdles in Lone Star ruling

Some lawyers claim the U.S. fund should not have been allowed to buy KEB


Financial regulators face a bumpy road in their scheduled ruling on whether Lone Star Funds was eligible to acquire Korea Exchange Bank in 2003.

Over the past few weeks, the Financial Supervisory Service asked 10 major law firms to make legal reviews on the U.S. buyout fund’s eligibility as KEB’s biggest shareholder.

At least one the 10 law firms ― in their report to the FSS ― allegedly claimed that Lone Star is not a financial investor but a non-financial investor, sources said on Tuesday.

Non-financial investors, or industry-oriented capital, are barred from controlling the majority stake in a Korean financial company under local laws.

The following issue is the coming ruling of the Financial Services Commission, the decision-making body of the FSS, while Hana Financial Group applied for a regulatory endorsement on its plan to take over KEB from Lone Star.

An FSC official in charge of probing shareholders’ eligibility decline to comment on the several lawyers’ opinion, saying, “We’re not officially informed of the result from the FSS.”

An FSS official said the point is how the FSC panel ― composed of its chairman Kim Seok-dong and several key officials ― takes the law firms’ opinion into consideration.

While chief regulator Kim has already pledged to finalize the issue by the end of this month, the FSC’s regular panel meeting is scheduled to be held on April 6 and then again on April 20.

Considering the conflicting opinions among the law firms, the possibility that the officials will conclude the issue on April 6 is low.

Apart from the law firms’ documents, several other factors are pressuring regulators to probe the U.S. fund’s eligibility more sincerely and frankly.

On Monday, Rep. Im Young-ho of the opposition Liberty Forward Party said that he uncovered that Lone Star was a non-financial investor in 2003.

“We’ve analyzed the documents submitted by Lone Star to the FSC on Sep. 2, 2003,” Im said. “The ratio of non-financial capital accounts for 25.17 percent of its total equity capital at that time.”

While the law stipulates that a company whose non-financial capital ratio exceeds the 25 percent mark is a non-financial investor, Lone Star had argued that its ratio stayed at 21.26 percent.

Korean law bans industrial capital from taking more than 9 percent of a bank. A firm is categorized as industrial capital when its non-financial assets exceed 2 trillion won ($1.75 billion) or its holdings of non-financial concerns account for at least 25 percent of its total equity capital.

Furthermore, a recent survey conducted by the Financial Economy Institute on 1,000 Korean adults, 83.3 percent of the respondents said the FSC should order Lone Star Funds to sell most of stake in KEB in the market or confiscate the shares.

Meanwhile on Monday, unionized workers of KEB filed a complaint against Kim & Chang, the nation’s largest law firm, for alleged violation of securities trading.

“Kim & Chang had engaged in stock manipulation in collusion with a speculative fund (Lone Star) since September 2003,” the bank’s union said in a statement.

By Kim Yon-se (kys@heraldcorp.com)