Vice Chairman Lee's Allegations Examined... Market Manipulation, Breach of Trust, and Even Accounting Fraud (Update)

Investigation Team: "Organized Capital Market Order Disruption"... "Succession Process Likely Reported and Conducted"

[Asia Economy Reporter Baek Kyunghwan] The prosecution has finally indicted Samsung Electronics Vice Chairman Lee Jae-yong on charges of illicit succession of Samsung's management rights. The prosecution stated that during the absorption merger of Samsung C&T by Cheil Industries, executed as part of the succession process, they confirmed various illegal acts including organized unfair trading practices by Samsung Group, market manipulation, and breach of fiduciary duty.

On the 1st, the Economic Crime Criminal Division of the Seoul Central District Prosecutors' Office (Chief Prosecutor Lee Bok-hyun) announced that it had completed the investigation into the 'Samsung Group illegal merger and accounting fraud case' and indicted a total of 11 key Samsung Group figures, including Vice Chairman Lee, without detention.

The investigation team mentioned that after the prosecution's investigation review committee recommended non-prosecution, they listened to various opinions including critical views from external experts in law, finance, economics, and accounting. They explained the background of the indictment by stating that they thoroughly re-examined the investigation details, legal principles, case handling directions, the majority positions in academia and precedents, the clarity of the facts proven by evidence, and the review results from a chief prosecutor meeting composed of investigation experts.

◆Did Vice Chairman Lee approve?= The prosecution viewed the 2015 merger of Samsung C&T and Cheil Industries and the subsequent accounting changes at Samsung Biologics as actions taken to ensure Vice Chairman Lee's stable succession of management rights. They judged that there were also group-level organized illegal acts such as stock price manipulation and accounting fraud during this process.

In particular, they suspected that before the merger, the stock price of Cheil Industries was artificially raised while Samsung C&T's stock price was lowered, resulting in a favorable merger ratio for Vice Chairman Lee, who held 23.2% of Cheil Industries' shares. After the merger resolution, they believed that the stock prices of both companies were jointly inflated to prevent shareholders from exercising their stock purchase rights, and that all these processes were carried out with Vice Chairman Lee's approval.

During the briefing, the investigation team additionally explained, "Since the succession work and the completion of control were aimed at Vice Chairman Lee's own succession, it is difficult to imagine that reports were not made to him."

They also pointed out the issue of Samsung Biologics, a subsidiary of Cheil Industries, hiding the call option (the right to purchase shares at a predetermined price) held by Biogen, a U.S. joint venture partner of Samsung Bioepis, a subsidiary. After the 2015 merger, by recognizing it as debt and changing the accounting treatment standards, Samsung Biologics recorded a book profit of 4.5 trillion KRW, which was interpreted as an effort to reinforce the appropriateness of the merger ratio.

In response, Samsung has consistently denied the allegations, stating that there were no illegal acts such as market manipulation, and that Vice Chairman Lee neither received reports on nor approved stock price management. Samsung also maintained that the accounting fraud allegations against Samsung Biologics were not criminal as they followed international accounting standards.

◆Prosecution: "Samsung engaged in unfair trading at every transaction stage"= First, regarding various illegal acts during the absorption merger of Samsung C&T by Cheil Industries, the investigation team indicted Vice Chairman Lee, former Future Strategy Office Chief Choi Ji-sung, former Strategy Team Leader Kim Jong-joong, former Samsung C&T CEOs Choi Chi-hoon and Kim Shin, and CFO Lee Young-ho on charges of unfair trading and market manipulation under the Capital Markets Act and breach of fiduciary duty. Former Future Strategy Office Deputy Chief Jang Choong-ki was indicted on charges of unfair trading under the Capital Markets Act.

In particular, Vice Chairman Lee was also charged with violating the External Audit Act. The investigation team confirmed crimes such as accounting fraud by Samsung Biologics to conceal the illegal merger and perjury by the group’s top executives, applying the same charges to former Future Strategy Office Chief Choi Ji-sung, former Strategy Team Leader Kim Jong-joong, and Samsung Biologics CEO Kim Tae-han.

Looking in detail, the investigation team viewed that between May and September 2015, under the succession plan (Project-G4) meticulously prepared over several years to strengthen Vice Chairman Lee's succession and control of Samsung Group, the merger of Samsung C&T (formerly Everland), where Lee was the largest shareholder, by Cheil Industries was promoted under the leadership of the group's Future Strategy Office.

During this process, at every stage of the merger transaction, the investigation team judged that various unfair trading acts and market manipulation under the Capital Markets Act were committed against Samsung C&T investors, including ▲dissemination of false information ▲concealment of important information ▲publication of false favorable news ▲purchase of major shareholders’ stocks ▲illegal lobbying to secure National Pension Service voting rights ▲mobilization of Samsung Securities PB organization, an affiliate ▲market manipulation through concentrated repurchase of treasury stocks.

◆"4.5 trillion KRW accounting fraud also involved Vice Chairman Lee"= Vice Chairman Lee was also charged with false disclosure and accounting fraud under the External Audit Act. The other contentious issue was the 4.5 trillion KRW accounting fraud suspicion at Samsung Biologics, in which Vice Chairman Lee was involved. Samsung Biologics is a key subsidiary of Cheil Industries, and the higher its value, the more justifiable the '1 to 0.35' merger ratio between Samsung C&T and Cheil Industries becomes. However, the prosecution believes that Samsung Biologics intentionally concealed liabilities of its subsidiary Samsung Bioepis to inflate its value.

In 2012, Samsung Biologics jointly established Samsung Bioepis with the U.S. pharmaceutical company Biogen. Biogen was granted a call option to purchase half of Samsung Bioepis shares at a predetermined price. However, the fact that Biogen held the call option was omitted from the accounting books. Call options are treated as liabilities. The prosecution judged that Samsung Biologics intentionally committed accounting fraud to inflate its value.

Earlier, in December 2018, the prosecution raided Samsung Biologics and launched an investigation into suspicions that the merger ratio between Samsung C&T and Cheil Industries was unfairly calculated to facilitate Vice Chairman Lee's succession of management rights. The investigation team suspected that Vice Chairman Lee received reports on these matters and judged that there were circumstances violating the External Audit Act and the Capital Markets Act.

The investigation team stated, "Vice Chairman Lee and the Future Strategy Office meticulously planned to succeed Samsung Group and strengthen control at minimal cost. To this end, they systematically engaged in various unfair trading acts, including dissemination of false information, concealment of unfavorable important information, shareholder purchases, illegal lobbying, and market manipulation."

This content was produced with the assistance of AI translation services.