South Korea Says Lone Star Funds is Guilty. Lone Star Funds Says, "Nuh-unh."

We never get tired of looking at John Grayken. The Robert Bass protege is one handsome man.

John Grayken, chairman of downtown-based Lone Star Funds (you remember them, right?), must have been up all night. South Korean prosecutors, who've been after Lone Star Funds for months concerning its acquisition and intended sale of Korean Exchange Bank, said yesterday they have preliminarily concluded that Lone Star Funds "colluded with government and bank officials to make it appear that Korea Exchange Bank was insolvent so that it could be sold to Lone Star for less than its fair value," writes the Associated Press.

Lone Star purchased, for $1.5 billion, a controlling stake in KEB in 2003 and looked to quadruple that investment by offloading it to Kookmin Bank, the country's top lender. And, SK prosecutors claimed, Lone Star wasn't going to pay tax on the proceeds, the result of some kind of a tax shelter that South Korean prosecutors and other tax agencies say is very illegal.

Only, the sale never happened: Prosecutors raided Lone Star Fund's offices there way back in March, and the whole deal got so ugly that last month, Lone Star Funds killed the sale of KEB -- not only without admitting it had done anything wrong, but by insisting quite the contrary. This morning, Grayken reiterates his position that the Korean Supreme Prosecutors' Office's (SPO) investigation is little more than a witch hunt:

"After nine months of intensive investigation, there is nothing new in the SPO's latest public announcement. It is the same old broad conspiracy theory that never made any sense and still is not supported by any hard evidence. The only news today is that, once again, the SPO has extended its investigation. It is hard to imagine what more the SPO could hope to analyze or review relating to this investment. It is time for this investigation to be concluded.

As I have stated before, the SPO's assertion that it has factually determined that KEB's financial condition was knowingly manipulated through collusion among KEB's management, KEB's Board of Directors, government policymakers and regulators, and unnamed Lone Star officers, to allow Lone Star to acquire control of KEB at a 'bargain price,' is absurd. There are no such 'facts'. In fact, the actual parties to the transaction -- including Commerzbank of Germany, the Korea Export-Import Bank, and the Bank of Korea -- each of which actually has commercial and banking experience and had no motivation to do anything other than act in its own best interests, with full knowledge of the situation supported the transaction. Moreover, the price paid by Lone Star was at a significant premium to the publicly traded share price at the time."

Whenever it looks like this story's going away, it comes right back. And there are still so many unanswered questions, chief among them: Whatever happened to the two Lone Star execs for whom the SPO issued arrest warrants? --Robert Wilonsky

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