Gainesville Sun – South Korean authorities are continuing a high-profile investigation into Lone Star, the Dallas-based private-equity fund, fueling a public backlash against excessive profits made by foreign investment funds.
Just eight years ago, Lone Star was hailed as a savior, pouring money into companies crippled by South Korea’s financial crisis. Today, it appears to be in danger of being run out of town in a flap that could threaten Seoul’s attractiveness to foreign investors.
South Korea is investigating Lone Star for possible wrongdoing involving its takeover of Korea Exchange Bank. Lone Star’s plan to sell the bank, earning a windfall profit of $4.4 billion, has provoked a public outcry, along with its attempts to avoid Korean taxes.
A separate investigation into allegations of embezzlement and bribery resulted in a raid on Lone Star’s Seoul offices and the arrest of three businessmen linked to the fund.
Lone Star’s troubles sit at the center of a growing uproar over the huge and often tax-free profits earned by foreign hedge funds and other investment funds, which like Lone Star are now cashing out of lucrative investments made here during and after the financial crisis. Most experts, however, describe the outcry as just growing pains of this country’s rapid transformation into one of Asia’s most open economies.
“Lone Star was a shock to the system,” said Kim Joon Gi, a professor of law at Yonsei University in Seoul. “Koreans were suddenly asking: How on earth could they make such a killing, and then not pay taxes? And to make it worse, they’re foreigners.”
Behind the uproar is also a sense among many Koreans that foreign investors were given unfairly generous terms after the 1998 financial crisis. They point in particular to the attempts by Lone Star to shelter its profit, the largest ever on a single deal by a foreign investor, from Korean taxes by using international treaties originally designed to prevent double taxation of companies doing business overseas.
[On June 19, government auditors cleared Lone Star of wrongdoing in its 2003 purchase of Korea Exchange Bank, but prosecutors are still investigating, and tax authorities are examining whether they can tax the fund’s earnings. And on Friday, a former executive of Korea Exchange Bank received a one-year prison sentence for bribery.]
While Lone Star has received the most attention, other funds have also come under intense scrutiny.
