Lone Star

Lone Star Funds (론스타) is a worldwide private equity firm based in Dallas, Texas, that specializes in purchasing distressed companies and assets in financial difficulties. It also purchases under-performing and non-performing loans from banks.

Lone Star has affiliate offices in London, Tokyo, Dublin, Brussels, Luxembourg, and Frankfurt. Its general partner is a Bermuda-based entity headquartered in Hamilton. John Grayken is the company's founder and chairman.

Key words
Lone Star Funds, private equity, tax haven, Conspiracy theory, shareholder eligibility

Operations in Korea
When Korean economies was in financial difficulties during the so-called "IMF Crisis", foreign capital was badly needed regardless of its nature. As for the financial technocrats and regulators, Lone Star was an appropriate partner in weathering the financial crisis because Loan Star was well experienced in handling distressed assets in the United States and abroad. Lone Star had good track records in asset management and turn-around of distressed companies with a huge amount of capital at hand.

Accordingly, Lone Star was invited to the Korea Asset Management Corp. (KAMCO) which was required to sell the astronomical volume of non-performing loans with collateral assets as soon as possible. In 2003, Lone Star Fund IV was a successful bidder of the Korea Exchange Bank (KEB) in financial difficulties, and has taken over the management of KEB.

After Lone Star had made a turnaround of KEB and sufficiently recovered invested funds from the bank's profits, it tried to sell the majority of KEB stocks to Hong Kong and Shanghai Banking Corp. in 2008, later to Hana Financial Group Inc. in 2010.

Finally, in November 2011, Lone Star was deprived of the management of KEB by the Financial Services Commission (FSC) because Lone Star Korea's CEO stationed in Korea was involved in stock manipulation of its affiliated credit card company, and sentenced to three-year inprisonment by the Supreme Court and Seoul High Court.

Endless Controversies
However, Lone Star has been at the center of legal debates and controversies because the following questions cannot be easily answered:
 * Is it really a financial institution or a mere private equity fund? In other words, is it eligible to control a Korean Bank?
 * Who invested in Lone Star Funds? Is it true a number of Korean VIPs involved in this notorious fund as an underground rumor says?
 * Is this US fund oriented to predator-like merciless colletion of invested funds?
 * Is its top management guided by an invisible organization as argued by the "Conspiracy" theorists?
 * Why are the Korean financial regulators soft-spoken about Lone Star?
 * Is the National Tax Service (NTS) entitled to collect the huge amount of corporation tax from the allegedly tax haven-headquartered private equity funds?

Sale of KEB shares to Hana Financial Group
On January 27, 2012, the FSC finally endorsed the deal between Hana Financial Group and Lone Star Funds to trade KEB shares. The FSC ultimately has not accepted the opinion among a group of lawmakers and the KEB union that Lone Star has been ineligible to own the bank and the merger deal is invalid. In a statement, the FSC reaffirmed its earlier ruling that "Lone Star cannot be regarded as a non-financial investor" that is barred from controlling a Korean bank on the ground that Lone Star is a non-financial investor under the relevant laws.

Though the FSC agreed that Lone Star could be classified as a non-financial investor as its non-financial assets surpassed 2 trillion won ($1.75 billion) at the end of 2010, it argued that it is inappropriate to take disciplinary measures against the Lone Star, saying, "It is impossible to probe a great number of units of Lone Star in overseas markets."

Citing the two main issues, illegal stock manipulation and the argumentative view over the fund’s shareholder eligibility, a group of lawmakers and civic groups called for regulators to take punitive action against Lone Star. But the FSC has continued to argue that there is no legal ground for the stern action on the buyout fund.

First ISD to be filed under Korea's FTA
On November 22, 2012, Lone Star reportedly filed a request for Investor State Dispute (ISD) against the Korean government with the International Center for Settlement of Investment Disputes (ICSID) in Washington DC claiming that it lost money because of Seoul’s interference in its sale of KEBank to Hana Financial Group.

Lone Star notified the Korean government in May 2012 that it would initiate arbitration proceedings if it failed to reach an agreement with the government within six months. Lone Star sold its 51 percent stake in KEB to Hana Financial Group for about 3.9 trillion won (equivalent to U$3.6 billion) in January.

The National Tax Service (NTS) subsequently withheld a 10 percent capital gains tax amounting to 391.5 billion won on the proceeds of the sale. Lone Star insisted the tax should not be charged on the sale because KEB was sold by its subsidiary in Belgium, a country with which Korea has a double-taxation avoidance treaty, which was acknowledged by NTS as a tax dodge. The issue is whether Lone Star had a permanent establishment in Korea, as argued by NTS, which conducted business by its representative stationed to Korea.

Lone Star filed suit against the Namdaemun Tax Office in the Seoul Administrative Court seeking a refund of the 391.5 billion won tax withheld.

Lone Star also argues the Korean government was responsible for its failed attempts to sell KEB in 2006 and 2008, which resulted in the shrinking price tag of KEB from 6,334.6 billion won to 3,915.6 billion won. So the difference at least two trillion won (around U$2 billion) could be sued for compensation.

The Korean government is represented by Bae, Kim & Lee (법무법인 태평양) and Arnold & Porter while Lone Star by Shin & Kim (법무법인 세종) and Sidley Austin. Legal experts say it will take at least three years to reach a final ruling.