[EDITORIALS]Where Were the Regulators?

Financial supervisory authorities now must be held accountable for the scandal involving Lee Yong-ho, chairman of G&G, a corporate restructuring company. Evidence has been revealed in the prosecutors' investigation that Mr. Lee's fund raising and management of his slush funds was conducted under negligent supervision by financial authorities.

We can find such loopholes in the authorities' monitoring system by looking into how Samae Indus Corp., a company Mr. Lee acquired, issued and circulated convertible bonds overseas.

For a start, the fact that Mr. Lee easily circulated Samae's convertible bonds in the domestic market, not overseas markets as was approved, generates suspicion. Although the act is not technically illegal, investors who bought Samae's stocks thinking that Samae succeeded in attracting foreign capital incurred losses for which financial authorities must be held accountable. Considering that there had been several recent similar cases in which investors suffered financial damages, financial supervisory agencies should have devised measures to prevent a further spread of such damage.

The bigger problem is that financial authorities failed to detect clear violations of financial rules. If an individual or entity owns more than five percent of a listed company, they must report the fact to the Financial Supervisory Service. The supervisory agency failed to notice that two individuals who each purchased $3 million worth of convertible bonds of Samae, which exceeded a five percent stake, violated the reporting provision four times in January and March.

Another question is why the state-run Korea Development Bank got itself involved in the process of issuing and circulating Samae's convertible bonds. This is not illegal either, but the fact that a state-run bank dealt with securities of a corporation with questionable credibility left room for the issuer to take advantage of the prestige associated with the bank's involvement. By the same token, it must be discovered whether the bank was involved only in circulating Samae's convertible bonds, or, as Mr. Lee contended, was also involved at the stage of issuing of the securities after receiving about $700,000 in advance interest payments.

As Korea's economy grows and becomes more open, it probably is physically impossible for financial authorities to monitor all cross-border financial transactions. If authorities intervene in such transactions too deeply, it could cripple financial transactions, which are particularly sensitive to regulation. But irregular financial transactions must be thoroughly checked to maintain an orderly market.

Around the time Samae's convertible bonds were circulating in the domestic market, the stock market was thrown into turmoil by a rumor that Samae would salvage gold bars from the sea near Jindo Island in South Cholla province. This, it was charged, was merely an attempt to manipulate stock prices. If the supervisory authorities had been following the developments as they occurred, they naturally would have had to pay more attention to the convertible bonds. This is why some question whether the authorities were oblivious to the irregular circulation of Samae's convertible bonds － or if they turned a blind eye to it.

Financial authorities as well as prosecutors must join actively in clearing up the suspicions surrounding Mr. Lee's financial transactions. That is the only way that the Financial Supervisory Service can recover its authority and credibility.