A South Korean executive of Lone Star Funds has been found guilty and sentenced to prison for manipulating the stock price of Korea Exchange Bank's credit card unit, in which Lone Star owns a controlling stake.
Paul Yoo, the head of the Dallas private-equity company's South Korean unit, was sentenced Friday to five years in prison.
The South Korean court said that Lone Star made a profit of $10.6 million when it and Korea Exchange announced in November 2003 that Korea Exchange's credit card unit, KEB Card Services, would reduce its capital. The capital reduction was intended to drive down the unit's share price to reduce the cost of merging it into Korea Exchange.
The Seoul judge also said Korea Exchange gained $13 million of illegal profit from the move.
Lone Star Funds and Korea Exchange were each fined $26.5 million. The Supreme Prosecutors' Office had sought a 10-year prison sentence for Mr. Yoo.
"The illegal profits that Lone Star Funds and KEB had gained represent a loss [for] minority shareholders of KEB, and the practice undermined the credibility of the country's stock markets as well as the country itself. It's a serious crime," the judge said.
Mr. Yoo and the companies have a week to appeal. Lone Star's Seoul public relations agency said they have not decided whether to do so.
"Completely untrue," Lone Star chairman John Grayken said of the allegations when he testified in the case Jan. 11 to defend his fund and Mr. Yoo.
Friday's ruling was widely expected to prompt South Korea's financial regulators to resume their review of Lone Star's pending sale of its controlling stake in Korea Exchange to HSBC Holdings PLC.
SpecWatch Korea, a civil rights group formed in 2004 by labor unions and a former Korea Exchange union leader, has alleged that Mr. Grayken and Lone Star executives colluded with South Korean bureaucrats and former Korea Exchange officials to make the bank look worse off financially than it really was so that the fund could buy it cheaply.
Lone Star bought a controlling stake in Korea Exchange for $1.2 billion in July 2003. Last September, it signed an agreement to sell its 51% stake to HSBC for more than $6.3 billion.
