Lone Star Funds Chairman John Grayken, left, shakes hands with former Hana Financial Group Chairman Kim Seung-yu after agreeing to sell the company’s 51-percent stake in the Korea Exchange Bank (KEB) to Hana at its headquarters in Texas in November 2010. While Lone Star earned more than $4 billion from its deal with Hana, it’s now considering suing Korean financial authorities for dragging out the sale and causing it massive financial damage. Korea Times file

By Kim Tong-hyung, Kim Jae-won

It appears that the conflict between Lone Star Funds and Korean financial authorities will have more false endings than the third “Lord of the Rings” movie.

According to sources here, the American private equity firm is exploring the possibility of suing Korean financial regulators for causing the company massive financial losses by dragging down its attempts to divest of the Korea Exchange Bank (KEB).

Acquiring the bank in 2003, Lone Star walked off with more than $4 billion after managing to sell it to Hana Financial Group earlier this year. However, this was only after the Financial Services Commission (FSC) killed potential deals with the KB Financial Group and global banking giant HSBC in previous years.

Lone Star is already engaged in a messy legal battle with the National Tax Service (NTS) over 391.5 billion won (about $332 million) in capital gains tax it paid on earnings from the KEB deal.

``Lone Star is claiming that they have sustained financial losses because of Korean government policies. They have informed the Korean Embassy in Belgium that they want to discuss the matter with the Korean government,’’ said an FSC official.

``Lone Star seems to be intent on making a case that the policy decisions in Korea were arbitrary and discriminatory.’’

Lone Star signed a deal with HSBC to sell its 51 percent stake in KEB in 2007 for a reported price tag of around $6 trillion won. However, the FSC delayed its approval of the deal after the global financial crisis erupted in 2008 and HSBC eventually bailed. This now has Lone Star claiming that the botched deal cost it more than 2 trillion won, according to the FSC official.

The government is preparing for a scenario in which Lone Star moves ahead with legal action.

The FSC is discussing the matter with other government agencies like the Ministry of Justice, the NTS and the Ministry of Foreign Affairs and Trade and is considering forming a united front against Lone Star should the fight go to court.
Legal representatives of Lone Star were unavailable for comment.

The decision by the Korean government to allow Lone Star to acquire KEB was controversial due to the company’s blurry qualifications as a financial investor, which fueled suspicions that financial authorities were bending the rules to get the troubled bank off their hands.

In the nine years before selling the bank to Hana, Lone Star endured accusations of ``meoktwi’’ (eating and fleeing) after making a killing off once-distressed Korean assets. The legal onslaught it appears to be preparing against the Korean government suggests that the buyout firm retains a bitter feeling of unfinished business here.

The ongoing controversy over Lone Star and KEB is disturbing for Hana, which finds its former Chairman Kim Seung-yu, who was instrumental in executing the KEB deal with Lone Star boss John Grayken, embroiled in an explosive scandal involving the country’s toxic secondary banking sector and President Lee Myung-bak.

In its fight with the Korean tax authorities, Lone Star has said its Belgium-based subsidiary, LSF-KEB, was the listed seller in its deal with Hana and it shouldn’t have to pay capital gains tax under a double taxation avoidance treaty between Korea and Belgium. Belgium doesn’t impose any taxes on capital gains by companies there.

The NTS has been arguing that Lone Star should pay capital gains tax to Korea, claiming that its Belgian subsidiary is merely a paper company and the real entity involved in the KEB deal is the business unit that was established here.