Asian investors are reacting this week to a highly unusual and high-profile bribery case that has ensnared the man at the helm of Samsung Electronics (SSNLF) in South Korea.
Jay Lee, 48, is Samsung's vice president -- but its effective leader, given his dad's incapacity due to illness. The younger Lee is being questioned behind closed doors by the special prosecutor's office in Korea as I write. And Lee is doing more than "assisting with police inquiries," as the boys in blue so politely put it in many cases.
Heads of Korean conglomerates are normally treated with kid gloves by the authorities. This time, Lee has been bluntly named as a bribery suspect involving discount horse-riding lessons, questionable business transactions and a potential cost to Samsung and the clients of the massive Korean National Pension Service. He also stands under potential investigation of perjury, if the prosecutors get their way.
I cannot over-exaggerate the shockwaves this sends through corporate Korea, rippling right down to the average person on the street. Lee is the third generation of South Korea's most-prominent power family. His father, chairman Lee Kun-hee, had a heart attack in 2014 and has effectively retired. So the son is leading South Korea's largest and most-powerful conglomerate, and arguably the country's flag-bearing top brand.
South Korea's chaebols, or conglomerates, own corporate Korea. A handful of families have empires spanning everything from electronics to automobiles to port operations and heavy machinery, with asset management and insurance thrown into the mix. You could spend an entire life in Korea shopping for and using only their products and services.
The pension service, the world's third-biggest, voted in favor of the $8 billion merger in 2015 of two Samsung units, Samsung C&T KR:028260 and Cheil Industries, which used to be listed before the merger, and helped the deal gain approval. The merger gave Lee additional control of the parent company and likely came at the cost of stock holders.
Outside shareholders such as Paul Singer from the hedge fund Elliott Management opposed the transaction. The National Pension Service chairman at the time, Moon Hyung-pyo, was arrested in December after acknowledging that he pressured the pension service, often the largest shareholder in Korean companies, to support the merger when he was Korea's minister for health and welfare.
Prosecutors are also looking at the motive behind multimillion-dollar donations made by Samsung to two foundations led by Choi Soon-sil -- a very good friend of Korea's president, Park Geun-hye, who has been impeached and had her powers suspended over that connection. The donations, prosecutors suspect, were bribes demanded by Choi, and they want to know how much Lee influenced the donation decision-making.
Park stands accused of enabling Choi to extort millions in bribes from Samsung and other major Korean corporations, in exchange for political clout. Both Park and Choi have denied the accusations. Although Samsung is the focus of the current probe, the heads of other chaebol, such as Hyundai Motor (HYMTF) , LG Display (LPL) and Lotte Holdings -- which has numerous subsidiaries listed in Korea -- have also been called in for questioning. And these are three among nine chaebol affected. So the prosecutors may move on to other targets, too, once they've dug as deep as they can in Samsung.
Lee told the National Assembly, in testimony, that Samsung did not make the donations voluntarily, suggesting it was a victim of extortion. He also said he wasn't involved in the decision. Hyundai and LG also said they had no choice but to contribute. There has been no statement from Lotte.
But the prosecutor's office claims to have evidence that Lee "received a request for bribery from the president [of the country] and ordered Samsung subsidiaries to send bribes to destinations designated by the president." If so, Lee may have lied to the equivalent of Congress. Whether he is arrested or not is up in the air, according to a spokesman for the prosecutor's office, who said "All possibilities are open."
The case ultimately links to Choi's alleged move to force 53 major Korean companies to pay $69 million to her two foundations. Park, who can't face criminal charges while in office, was purportedly an accomplice. A Samsung conviction would significantly strengthen the case against her.
Samsung was the biggest donor, spooning out $17 million. It then signed a $18 million business contract with Choi and the sports-management company, Core Sports International, that she was running in Germany. That provided training for Korean horse riders for the 2018 Asian games. Conveniently, Choi's daughter, who won a gold medal at the 2014 Asian games, was key among them. Samsung even bought her a horse, Lee told the National Assembly. The conglomerate then gave $1.3 million to a winter sports center. Choi ran that, too, with her niece and nephew.
The prosecutors say they impounded one of Choi's computers and found damning emails that she had exchanged with a Samsung executive outlining the financial support Samsung was giving. (Emails again. Will people never learn? Never put your bribery in writing!)
Choi, who is in police custody, has denied the allegations. Her daughter, Chung Yoo-ra, has been detained in Denmark at the request of Korean authorities, but has denied knowledge of anything her mother was allegedly up to. Samsung has yet to respond. Separately, the elder Lee has previous convictions -- in 2008 he was given a three-year sentence for suspicion of helping his children get a sweetheart deal to give them greater control of Samsung, although he was later pardoned.
This case is a far more serious accusation than those made against J.P. Morgan Chase (JPM) by U.S. prosecutors, leading the bank to pay out a $264 million settlement to make charges go away that it hired "princeling" sons and daughters of influential Chinese politicians and executives. I outlined how outrageous that case seems to me, back in November.
That process -- entirely legal, and the Chinese government not involved -- actually benefitted the shareholders of the banks, if anything. Foreign banks are now at a disadvantage compared with their Chinese competitors. Hardly anyone bats an eyelid when Chinese financials do exactly the same to improve their business.
In this instance, shareholders were disadvantaged by what allegedly happened.
Unfortunately, the sale or divestment of subsidiaries at sweetheart prices to insiders is all too common in Asia. There are byzantine stock-holding structures and cross-holdings that allow company founders to act however they want, taking in public investment after listing, but continuing to treat "their" companies as private empires. External shareholders are typically and deliberately excluded from influencing votes on such moves. They are lucky to get a seat on boards that are frequently hand-picked by the company founder or chairperson from their network of friends and business partners.
It's not the only bribery scandal plaguing South Korea at the moment. The brother and nephew of former United Nations Secretary General Ban Ki-moon have been charged in Manhattan federal court in connection with shenanigans linked to Vietnam's tallest office tower.
The two men, Ban Ki-sang and his son Joo Hyun-bahn, allegedly bribed Malcolm Harris, who claimed to represent an unnamed Middle Eastern country, to push through the sale of Landmark 72 in Hanoi to the Vietnamese sovereign wealth fund. Joo Hyun-bahn denied the allegations; Ban Ki-sang has not been charged.