Samsung leader indicted for 2015 merger
Samsung’s de facto leader Lee Jae-yong was indicted Tuesday on charges of violating the country’s capital market laws.
On Tuesday, the Seoul Central District Prosecutors’ Office announced the outcome of a 21-month probe into whether the Samsung Electronics vice chairman had broken any laws during the process of cementing his control over the country’s largest conglomerate.
The prosecutors said Lee and other top executives broke laws during the controversial merger of Samsung C&T and Cheil Industries in 2015. The merger strengthened Lee's control over Samsung Group after his father, Lee Kun-hee, was hospitalized in 2014 following a heart attack.
“Vice Chairman Lee and the Future Strategy Office [of the Samsung Group] have meticulously planned to arrange Lee’s ownership succession and strengthen his control over the conglomerate,” Lee Bok-hyun, chief prosecutor of the investigation, said in a press release. “They scheduled the merger between Samsung C&T and Cheil Industries, of which the largest shareholder was Lee, to take place at a specific time which was most advantageous to Lee.”
Lee and nine former and current Samsung executives including Choi Gee-sung, former head of the Future Strategy Office of Samsung Group, were indicted on charges of committing unfair, deceptive trade practices, manipulating stock prices and breach of trust, all violations of the Financial Investment Services and Capital Markets Act. They were also indicted on charges of accounting frauds under the External Audit Act, the prosecution’s statement said.
Chang Choong-ki, former deputy head of the Future Strategy Office, was indicted on charges of having made unfair transactions.
Prosecutors said Lee and his executives disseminated false information while covering up or withholding information unfavorable to Lee during the course of the merger.
By following the plan of Lee and the Future Strategy Office, executives of Samsung C&T violated their duty to protect the interests of the company and shareholders and caused damages to them, the prosecutors said.
After the merger, the accused also committed an accounting fraud to avoid the suspicion that the merger was unfairly designed to benefit Cheil Industries, the prosecution said. To this end, the value of Samsung BioLogics assets was inflated by over 4 trillion won ($3.38 billion), the prosecutors said.
Lawyers for Lee said Tuesday that the prosecution started the probe with the intention to indict Lee. They accused the prosecution of undermining the public trust by indicting Lee. “We trusted the prosecution’s fair decision-making process,” they said. “We cannot accept this indictment.”
Arguing that the merger was a legitimate business process, the lawyers said they will fight in court.
It was the second time for Lee to face a criminal indictment. On Feb. 28, 2017, Lee was indicted and detained by an independent counsel team that probed the abuse of power and bribery scandal that forced President Park Geun-hye from office.
Lee was convicted of bribing Park through a confidante and jailed. He was released by the Seoul High Court in 2018, and the Supreme Court ordered a retrial in 2019. The retrial is still ongoing.
The prosecution made an unprecedented decision to defy the recommendation of outside experts on Lee's indictment. After a validity review of the criminal investigation into the tycoon in June, a panel of experts recommended the prosecutors call off their probe into Lee and not indict him.
After being questioned twice in May, Lee demanded the outside experts’ review to decide the validity of the probe.
The Seoul Central District Prosecutors’ Office spent the last two months deciding whether it should accept the experts’ recommendation or not. After listening to opinions of more outside experts and top prosecutors, the prosecution said it decided to indict Lee and others because of the gravity of the case.
It is the first time that prosecutors went against a review panel’s decision. In each of the eight previous times the process was used, prosecutors respected the experts’ recommendations.
Prosecutors started their investigation after the Securities and Futures Commission first informed them about suspected accounting fraud at Samsung BioLogics in November 2018. Since last September, the probe expanded into suspected irregularities in the merger.
The Future Strategy Office, which began as a private secretariat for Samsung founder Lee Byung-chull in 1959, was suspected of masterminding the merger. It was the central decision-making power until it was shut down in 2017 for its role in the political scandal that led to the impeachment of President Park and first indictment of Lee Jae-yong.
In May 2015, Samsung C&T and Cheil Industries agreed to a controversial merger in which one share of Cheil was traded for about three shares of Samsung C&T. Lee was the largest shareholder of Cheil, owning 23.2 percent, but owned no shares in Samsung C&T at the time.
Because the merger was arranged with a ratio favorable to Cheil, Lee ended up controlling Samsung C&T, the de facto holding company of the Samsung Group.
Prosecutors suspect that Samsung C&T’s value was intentionally driven down in the merger to benefit Lee, while Cheil Industries’ value was inflated.
The prosecution said Samsung BioLogics, an affiliate of Cheil Industries, was suspected of committing accounting fraud in order to avoid any re-evaluation of Cheil in the controversial merger.
The contract drug manufacturer was accused of window dressing its books to record 4.5 trillion won of profit in 2015 after Cheil and Samsung C&T completed the merger.
During the 21-month probe, the prosecutors questioned 300 people, including Samsung executives, shareholders and outside experts. They also conducted 37 raids of 10 Samsung affiliates and 13 raids of executives’ homes. The records of the investigation are about 200,000 pages.
BY SER MYO-JA [email@example.com]