Regulator’s action against Lone Star Funds raises legal issues


Hana Financial Group continues to face a hurdle in its plan to acquire Korea Exchange Bank from Lone Star Funds despite a court’s ruling that the U.S.-based equity fund engaged in stock manipulation.

Over the past month, the Financial Services Commission has been in the preliminary stages of ordering Lone Star to sell a large portion of its stake in KEB following the court’s verdict on Oct. 6, which may pave the way for Hana Financial to take over the bank.

But action at the current stage could draw serious problems in terms of criminal responsibility as the prosecution has been investigating the FSC on whether it neglected the duty of probing Lone Star’s shareholder eligibility.

The prosecution’s investigation also involves allegations that Lone Star hindered the FSC from legitimately probing its eligibility by not reporting documents verifying the fact that the fund was a non-financial investor in 2003.

In addition, the Constitutional Court, which decided to accept the petition from a group of small shareholders of KEB, has instructed the regulator to submit related documents for Lone Star’s eligibility.

The small investors argue that “the FSC did not take punitive measures against Lone Star though the fund has been found to be a non-financial investor (at least) since 2005.”

Non-financial investors are barred from owning a commercial bank under the nation’s banking laws.

On Sunday, an FSC official declined to comment on the possibility that the regulator will choose to order the fund to dispose of KEB shares, irrespective of the ongoing investigation on Lone Star and the FSC from the prosecution and the Constitutional Court.

He only confirmed that the Financial Supervisory Service, an executive arm of the FSC, has been reviewing whether the fund is a non-financial investor over the past few months.

The issue is whether the FSC will make public the outcome of the FSS’s probe under the scenario that the executive arm regards the fund as a non-financial investor.

Though the court had ordered the FSC to disclose the eligibility documents, the case is pending at the Supreme Court with a series of appeal from the regulator.

Several FSC officials reportedly said the issue of a non-financial or financial investor is insignificant, insisting the difference is ordering stake sale of “41.02 percent stake under the stock manipulation” and “47.02 percent stake on the assumption of ruling that the fund is a non-financial one” of the fund’s 51.02 percent stake in KEB.

But their argument could be an attempt to evade the regulator’s policy failure in 2003 when then government-run KEB was handed over to Lone Star, according to protestors against the FSC’s move to allow the Hana Financial-KEB merger.

“Should any authorities find that Lone Star was a non-financial one in 2003, the fund’s acquisition of KEB may be withdrawn and Hana-Lone Star deal could hold no validity,” a source said.

The preliminary deal between Hana and Lone Star will expire on Nov. 30 while the FSC is allowed to order the fund to sell KEB shares from Oct. 8 for the stock rigging case.

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