Prosecutors sought a 15-year jail term for irregularity-saddled Tong Yang Group chairman Hyun Jae-hyun on charges of instructing his staff to sell fraudulent investment products that led to severe losses to investors.

Hyun initiated the sale of irregular corporate bonds and commercial paper worth 1.9 trillion won ($1.8 billion), which had been issued by the group’s nonfinancial firms, at the group’s brokerage units “without publicizing the risks of investment.”

When the five Tong Yang units filed for court receivership last year, about 46,000 retail investors were assumed to have suffered collective losses of nearly 2 trillion won.

The 65-year-old business tycoon also has been suspected of raking in unfair gains totaling 40 billion won by orchestrating the manipulation of Tong Yang Cement stocks. Hyun has been on trial at the Seoul Central District Court.

The chairman once worked as a prosecutor and is still a registered attorney of the Seoul Bar Association.

Hyun, who was named Tong Yang Group chairman in 1989, actively fostered financial businesses in the group that had been a manufacturing-oriented conglomerate.

The eldest son-in-law of founder Lee Yang-gu played a significant role in expanding Tong Yang as the nation’s 38th-largest conglomerate with 33 business units.

Hyun, however, failed to take preemptive measures against the growing signs of insolvency at the group’s manufacturing subsidiaries. The prosecutor-turned-businessman was eventually indicted by the prosecution.

Further, there are suspicions among market insiders that he sought to exploit six financial affiliates including Tong Yang Securities and Tong Yang Financial Services as illegitimate funding sources for ailing nonfinancial units.

The liquidity crisis at Tong Yang Group has reignited the long-standing debate over the pros and cons of greater restrictions on conglomerates owning financial subsidiaries.

The question of erecting a strict firewall between manufacturing capital and financial units has resurfaced amid mounting allegations that Tong Yang’s owners exploited the group’s financial units as under-the-table funding sources for some of its distressed nonfinancial units.

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