Lone Star Funds has announced that it has terminated the agreement to sell its controlling stake in Korea Exchange Bank (KEB) to Kookmin Bank for US$7.3 billion, citing continuing interference from the Korean authorities surrounding the sale.
Lone Star's decision comes after the Korean Special Prosecutor's Office issued arrest and detention warrants against Ellis Short, the vice chairman of Lone Star, and Michael Thomson, its general counsel, in an ongoing investigation into alleged illegalities surrounding the US$1.2 billion purchase of the KEB stake in 2003.
Prosecutors allege that Lone Star executives made false statements about KEB's credit card business to drive down the eventual purchase price.
The prospect that Lone Star will make about US$4 billion out of the deal when it sells the KEB stake has caused public outrage that foreign companies are 'profiteering' from the sale of national assets snapped up on the back of the Asian financial crisis. This anger has been compounded by reports that foreign fund companies have avoided taxes by conducting deals through units based offshore. Lone Star itself was made to pay a 140 billion won (US$150 million) bill for back taxes and fines last year to placate a government that many observers feel is becoming increasingly hostile towards foreign investors.
Lone Star says that it has always been willing to assist the authorities, but now appears to have lost faith in the Korean legal system, surmising that the prosecutors' actions are nothing more than a witch hunt.
"It is outrageous that the SPO would ask the Court again, for the third time in three weeks, to arrest and detain our senior executives in connection with their investigation," said John Grayken, Chairman of Lone Star, last Wednesday.
"The SPO still has nothing more than unsupported conspiracy theories, but continues to insist that they should nevertheless put people in jail in order to question them," he added.
He went on to slam the SPO's claims of a lack of cooperation on the part of the company as "false".
"Mr. Short and Mr. Thomson have repeatedly offered to travel to Korea for further questioning in connection with the SPO's ongoing investigation, provided they are permitted to leave afterwards. In fact, Mr. Thomson has already traveled to Korea multiple times and been interrogated for more than 100 hours," he added.
However, by Thursday, Lone Star's patience with the SPO looked to have finally snapped, as Grayken announced that the KEB deal with Kookmin had been called off.
"We have concluded that we cannot move forward with the sale of KEB to Kookmin Bank due to the continuing investigations surrounding Lone Star's investment in KEB and KEB's subsequent rescue of its credit card subsidiary, which have been extended several times and now have no firm completion date," he stated.
Grayken said that Lone Star would "consider our strategic options," but only after the investigation is finally completed.
"Until then, we will continue to vigorously defend our company and our officers against the Prosecutors' groundless accusations," Grayken explained.
"We appreciate Kookmin Bank's hard work on this transaction and regret that it could not be consummated," he concluded.
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