Lone Star's Korean deal 'illegal'

The sale of KEB has been surrounded in controversy

Texan private equity firm Lone Star's 2003 purchase of Korea Exchange Bank (KEB) for $1.5bn (£760m) was illegal, South Korean prosecutors have said.

Former finance ministry official Byeon Yang Ho is alleged to have taken bribes and conspired with bank boss Lee Kang Won to drive down its price.

They are accused of colluding with Lone Star to cut the price by $900m. Lone Star and Byeon Yang Ho deny the claims.

Depending on a court verdict regulators could end up declaring the deal void.

"We confirmed that the sale of Korea Exchange Bank was conducted abnormally without following regulations and due procedure, and the sale price did not reach the adequate level," the Supreme Prosecutor's Office said in a statement.

Economic collapse

According to the prosecutors, Byeon Yang Ho and Lee Kang Won worked with Lone Star to understate the assets of the bank and inflate its debts before selling it at a bargain price.

The investigations have already caused Lone Star to pull out of a $7.3bn deal to sell its 51% stake in KEB, the nation's fifth largest bank, to Kookmin Bank.

Its original deal to buy KEB followed the Korean economic crisis of 1997, after which the government encouraged private equity funds to take stakes in some of the country's debt-laden banks.

By early 2004, foreign investors owned about 30% of Korea's banking industry, up from 1% in 1997.