$4.68B Lone star versus Korea hearing begins in Washington DC

May 15, 2015
Union members of Korea Exchange Bank shout slogans during a rally in front of Financial Services Commission in Seoul, South Korea, Friday, Nov. 18, 2011. The Korean read "Defend, Foreign Exchange Bank." (AP Photo/Lee Jin-man)

Union members of Korea Exchange Bank shout slogans during a rally in front of Financial Services Commission in Seoul, South Korea. The Korean read “Defend, Foreign Exchange Bank.” (AP Photo/Lee Jin-man)

WASHINGTON, May 15 (Yonhap) — An international tribunal began hearing a multi-billion dollar case Friday that the U.S. private equity firm Lone Star filed against South Korea’s government over tax and other disputes surrounding its asset sell-offs in Korea.

The case is the latest — and the biggest — of a series of legal battles involving Lone Star’s investments in South Korea, including the 2003 purchase of a controlling stake in Korea Exchange Bank (KEB), and its sell-off of those assets for large margins.

Lone Star is demanding South Korea pay it nearly US$4.68 billion, claiming it was forced to pay unfair taxes and suffered loss due to Seoul’s delay in approving a profitable deal. It represents the first investor-state dispute filed against South Korea’s government.

The case was lodged in late 2012 with the International Centre for Settlement of Investment Disputes (ICSID) in Washington. After a round of paper-based debates, the case’s first hearing opened at the ICSID office in Washington on Friday for a 10-day run.

Technically, the plaintiffs are eight Lone Star subsidiaries, including LSF-KEB Holdings.

Lone Star claims South Korea should compensate it because the firm ended up selling off the KEB stake for a margin much smaller than what it could have gained from an earlier deal that ultimately fell apart because it claims of Seoul’s delay in approving the contract.

In 2007, the Texas-based firm had agreed to sell its 51-percent stake in KEB to global banking giant HSBC for about 5.94 trillion won (about US$5.4 billion at current exchange rates), but HSBC scrapped the contract a year later amid the global financial crisis.

Lone Star sold the stake to Hana Financial Group for some 3.9 trillion won in 2012.

South Korea rejects Lone Star’s claims, contending it couldn’t hastily approve the deal with HSBC because some legal issues involving the firm were going on at the time, including allegations of stock manipulation in the course of Lone Star’s acquisition of KEB’s credit card unit.

Seoul says any sovereign nation would have done the same in such circumstances.

Lone Star also claims South Korea should reimburse it for the taxes it paid on the proceeds from selling off its assets because it is technically the subsidiaries based in either Belgium or Luxembourg that carried out the transactions and therefore, they should be exempt from taxes under investments treaties South Korea has with the European nations.

But Seoul says the subsidiaries are paper companies and should not be protected by investment treaties.

The case has drawn keen attention in South Korea not only because of the amount of money involved, but also its possible repercussions amid concern that if the country loses in the case, it could spark similar suits by foreign firms.

South Korea has handled the case after forming an interagency team comprising the Office for Government Policy Coordination, the Finance Ministry, the Foreign Ministry, the Justice Ministry, the National Tax Service and the Financial Services Commission.

About 10 South Korean officials have arrived in Washington for the first hearing.

A second hearing is scheduled to take place for 10 days from June 29.

Officials said it is unlikely for the ICSID to make a decision any time soon. Widespread views are that it would be at least a year before the tribunal delivers a verdict.

Unlike ordinary lawsuits, the ICSID’s decision cannot be appealed.

Lone Star’s entry into and exit from Korea has been a target of criticism amid widespread perceptions among South Koreans that the firm made huge profits by taking advantage of the country’s economic difficulties in the wake of the Asian financial crisis in the late 1990s.

Critics and media have often branded Lone Star’s actions as “eat-and-run.”