Lone Star details problems in KEB exit

The Dallas-based firm has released a scathing 21-page memo detailing what it calls 'arbitrary and discriminatory conduct' by Korean regulators for allegedly obstructing Lone Star’s ability to exit the troubled bank.

Months after finally concluding its highly troubled investment in the Korean Exchange Bank, Lone Star Funds has released a memorandum detailing its frustration with South Korean regulatory agencies who they said obstructed possible exits over the life of the investment.

The memo goes on to say that Lone Star and its affiliates “suffered billions of euros” in damages as a result of what it characterised as”arbitrary and discriminatory conduct” on the part of regulators.

In a letter dated 12 May to South Korean President Lee Myung-bak, Lone Star director Michael Thomson wrote: “The Korean government has engaged in a continuing pattern of arbitrary and discriminatory conduct toward Lone Star that has substantially and materially impaired the ability of Lone Star to dispose of its investments in KEB”.

This conduct, Thomson writes, includes the breach of trade agreements between Korea and Belgium, where six subsidiaries of Lone Star with holdings in the bank were headquartered.

“Korean regulators acted in clear disregard of their legal authority. They were driven, not by legitimate, legal considerations regarding the propriety of the would-be purchasers, but by a desire to avoid accountability and appease a public that was angry over the profits that the seller, Lone Star, stood to make,” according to the memo.

In May, Lone Star announced that it intends to file an arbitration against the South Korean government for its “unlawful interference” with the firm's rights as a majority shareholder in KEB. 

“Korean financial and tax regulators responded with a series of illegal actions that resulted in billions of Euros of damages to Lone Star’s investors,” John Grayken, chairman of Lone Star Funds said in a statement. “We have reviewed this matter carefully with Korean and international legal experts and have been advised that we have compelling legal claims. Therefore, while we sincerely hope that the South Korean government will engage in good faith discussions to resolve these claims, if the dispute cannot be resolved amicably, Lone Star will file for arbitration.”

Lone Star declined to comment beyond the release. 


Lone Star acquired a 51 percent stake in KEB in 2003 for KRW 1.383 trillion (€1 billion; $1.24 billion). The bank was struggling at the time of the firm’s investment, according to the memo, and Lone Star’s involvement resuscitated KEB. However, the Korean public held an unfavorable view of the firm, whose actions were viewed as considered exploitive after Lone Star tried to sell the bank in 2006.

“The Korean public labeled Lone Star ‘meoktwi,’ or ‘eat and run’ foreign capital, which supposedly bought Korean assets at fire sale prices only to re-sell them shortly thereafter at substantial profits,” the memo said.

Lone Star contends that Korean regulators relented to public pressure to drive down the firm’s possible returns by holding up its sale of the bank on four separate occasions; three aborted exits to Kookmin Bank (2006), DBS Bank (2007), HSBC (2008) as well as its final sale to Hana Financial Group, which was completed earlier this year.

In each instance, Korea’s Financial Services Commission either delayed or refused to issue a clearance that would have allowed the exit to go through, claiming that ongoing investigations into Lone Star’s acquisition of KEB prevented them from approving the deals. Even in the case of Hana, it took almost a year after the deal was first approved by the Fair Trade Commission in March 2011 for the FSC to make its approval. The delay forced Lone Star to lower its price for the bank, according to the memo.

Despite its problems, Lone Star managed to generate a positive return on the investment through a series of dividends, according to reports. And Fund IV, the vehicle through which the firm acquired KEB, was generating a remarkable 30.5 percent internal rate of return since its inception as of 31 December, according to Fresno County Employees Retirement Association documents.


During its period of investment, Lone Star was also subject to tax audits and assessments the firm considered arbitrary and in violation of Korea and Belgium’s trade agreements.

“Under the terms of the Korea-Belgium Tax Treaty, the capital gains realised by a Belgian entity from the sale of shares in a Korean corporation may not be taxed in Korea; Belgium retains the exclusive right to tax such gains,” according to the memo. “Nevertheless, based on a number of unsupported and far-fetched allegations, including that Belgium was a tax haven or that the Lone Star companies were mere conduits that served no purpose other than obtaining improper tax benefits, the NTS (National Tax Service) refused to honor Korea’s binding obligations under its treaty with Belgium.”

Belgium’s government eventually got involved, requesting a mutual agreement procedure in an effort to settle the disagreement. This request was denied, according to the report.

The NTS imposed approximately €540 million in taxes on Lone Star over the course of the KEB deal, which Lone Star claims was done in blatant disregard of the rights of its Belgian shareholders and the Korea-Belgium Tax Treaty.