What are the charges faced by Kakao founder?

The founder of South Korean tech giant Kakao Corp. was detained Tuesday on charges of stock price manipulation related to the firm's takeover of K-pop powerhouse SM Entertainment last year, prosecutors said.

The Seoul Southern District Court granted the prosecution’s request for a pretrial detention warrant for Kim Beom-su, also known as Brian Kim, on charges of violating the Financial Investment Services and Capital Markets Act, citing concerns about evidence destruction and flight risks.

The prosecution requested the pretrial detention warrant on July 17, citing substantial evidence of his involvement in manipulating SM Entertainment stock prices, including evidence from significant share purchases through Kakao Group affiliates.

The key issue is whether Kim directed, approved or was informed about the manipulation. While Kim may not have directly ordered the actions, he is suspected of being aware of and implicitly condoning them.

Prosecutors have concluded that stock manipulation was approved during Kakao’s Investment Review Committee meetings held in February 2023, involving Kim and Kakao's Chief Investment Officer Bae Jae-hyun.

Prosecutors reportedly obtained material and testimonial evidence supporting Kim’s involvement, including messages between Kakao employees indicating that “Kim directed investments through a private equity fund to secure favorable shares.” Kim's actions are suspected to violate Article 176 of the Financial Investment Services and Capital Markets Act, which prohibits market price manipulation.

The case centers on suspicions that the mobile platform-to-entertainment conglomerate Kakao and its executives manipulated SM stock prices during a bidding war it won against Hybe, the parent company of K-pop superband BTS' management agency BigHit, in February last year.

Prosecutors accuse Kakao of buying 240 billion won ($173 million) worth of SM shares on 553 occasions in February 2023 at inflated prices to thwart a takeover bid by Hybe. Hybe had purchased a 14.8-percent stake from SM’s founder, Lee Soo-man, and proposed buying more shares at 120,000 won each but withdrew its attempt after SM’s stock prices soared.

For instance, on February 16, 2023, SM shares rose by 7.59 percent to close at 131,900 won, a significant increase attributed to the suspected market manipulation.

By March, Kakao and Kakao Entertainment became the controlling shareholder in SM Entertainment after acquiring a 39.87 percent stake.

The conflict between Hybe and Kakao over the acquisition of SM Entertainment, including public tender offers, led the Financial Supervisory Service's special judicial squad to refer Kim and other Kakao executives to the prosecution with a recommendation for indictment in October.

Subsequently, in November, the prosecution conducted a search and seizure of Kakao headquarters in Pangyo, Gyeonggi Province. After eight months, on July 9, they privately summoned Kim ahead of the July 17 arrest warrant request.

Authorities are also investigating Kakao’s connection with Oneasia Partners, an asset management company known for its special ties with Kakao. Oneasia Partners reportedly acquired shares worth 80 billion won during Hybe’s attempt to purchase additional shares, allegedly to support Kakao's in thwarting Hybe's bid.

Head of Kakao Entertainment's Investment Strategy Division Lee Junho recently testified in a related trial that Kakao had collaborated with Oneasia Partners to block Hybe's public purchase attempt.

However, the details related to Oneasia Partners were reportedly not included in Kim's arrest warrant. The omission has led to speculation that the prosecutors may not have fully proven the collaboration between Kim and Oneasia Partners.

Meanwhile, Kakao is also accused of failing to disclose its ownership of over 5 percent of SM shares, violating bulk shareholding reporting regulations.

Kim flatly denies the suspicions. During a meeting of Kakao affiliates last Thursday, Kim said, "I believe the truth will eventually be revealed because I have never instructed or condoned any illegal acts." During his previous questioning, he reportedly claimed that he had been informed about plans to buy SM shares, but not the specific purchase procedures.

If found guilty, the consequences could include substantial fines, imprisonment for involved executives and regulatory sanctions against Kakao, significantly damaging its reputation and hindering its ongoing strategic initiatives, including AI projects and organizational reforms.

At the meeting of Kakao affiliates last week, Kim said it was a “pity” that the situation had occurred while “group members are working together to renovate management and innovate AI-based technology."

Authorities have also questioned other Kakao executives, prosecutors said. Kakao's Chief Investment Officer Bae Jae-hyun, the company itself, and the CEO of Oneasia Partners, surnamed Ji, were earlier indicted on stock manipulation charges. Bae and Ji have been released on bail and are undergoing their first trials.

Since its founding in 2010, Kakao has expanded into a major conglomerate, with holdings that include South Korea’s largest online bank, its leading taxi-hailing app, and KakaoTalk, the nation’s most popular messaging app installed on 90 percent of mobile devices.

The company also boasts a substantial entertainment division, which it significantly expanded last year by acquiring its 39.87 percent controlling stake in SM Entertainment and becoming the agency's largest shareholder.