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Prosecution launches full probe of MBK over Homeplus scandal

Homeplus co-CEOs Joh Ju-yeon, right, and Kim Gwang-il apologize for the supermarket chain’s shortcomings at a press conference at Homeplus’s headquarters in Gangseo District, western Seoul, on March 14.

Prosecutors launched a full-fledged investigation into MBK Partners for the company’s so-called Homeplus scandal, in which the company allegedly offloaded financial losses onto investors by issuing short-term bonds worth hundreds of billions of won just before filing for court receivership.

Following a probe by the Financial Supervisory Service (FSS), which found preliminary evidence suggesting criminal activity by MBK Partners, relevant documents were forwarded to prosecutors.

A victims’ committee filed a group complaint with the Seoul Central District Prosecutors’ Office against Michael Byung Ju Kim, chairman of MBK Partners, and Joh Ju-yeon, co-CEO of Homeplus, among others on Thursday.

The investigation stems from an unfair trading probe launched by the FSS into MBK Partners. The watchdog suspects that MBK engaged in fraudulent unfair trading by issuing short-term bonds to retail investors despite already being aware of an impending credit rating downgrade for Homeplus.

Financial Supervisory Service Senior Deputy Gov. Hahm Yong-il, speaks during a press briefing on the current issues such as the ongoing investigation on MBK Partners at the regulator’s headquarters in western Seoul on April 1.

The hypermart chain was downgraded from A3 to A3-, one notch above speculative grade B on Feb. 28. The core suspicion is that MBK knew of this downgrade at least as early as Feb. 25 but still went ahead with selling bonds to investors.

“Our inspection and investigation into MBK uncovered significant facts,” said FSS Gov. Lee Bok-hyun on Thursday, adding that his agency would take necessary measures in coordination with the Securities and Futures Commission under the Financial Services Commission and with the prosecution later this month.

Prosecutors are focusing on whether MBK issued asset-backed short-term bonds (ABSTB) as a way to shift losses onto retail investors while preparing for the downgrade and the subsequent court receivership.

MBK Vice Chairman Kim Kwang-il answers questions from lawmakers at a questioning regarding the Homeplus scandal at the National Assembly in Yeouido, western Seoul, on March 18. [LIM HYUN-DONG]

Prosecutors suspect MBK knowingly sold bonds even though it was aware that financial obligations would be frozen upon filing for corporate rehabilitation. If the group issued bonds despite foreknowledge of the credit rating downgrade, it could face charges for using undisclosed information for personal gain in violation of the Capital Markets Act.

Selling bonds while the company still held a higher credit rating would allow MBK to offer lower interest rates to investors. Had the bonds been issued after the downgrade, the group would have been forced to pay higher interest. By issuing them in advance, MBK potentially reaped ill-gotten profits.

It is also considered highly unusual that Homeplus was able to complete preparation for court receivership in just four days after the downgrade — the process typically takes two to three months.

Homeplus CEO and MBK Partners Vice Chairman Kim Kwang-il finishes his responses to the National Policy Committee at a hearing on Homeplus’s management and finances at the National Assembly building in western Seoul on March 18.

The investigation is expected to reach all the way to MBK Partners’ Kim, who holds final decision-making authority and is seen as the architect of the Homeplus scandal. The group became the largest shareholder of the retail giant in 2015 after investing 6 trillion won ($4.19 billion). Of that, 2.7 trillion won was raised through loans secured by Homeplus’s real estate assets.

MBK has repaid interest on those loans by selling major Homeplus locations, but its financial position deteriorated, leading to the downgrade.

Other figures under investigation include MBK Vice Chairman Kim Kwang-il and Homeplus co-CEO Joh. Kim is listed as a co-defendant alongside securities firms like Shinyoung Securities.

Michael ByungJu Kim, chairman of MBK Partners

Political backlash also grows as the scale of losses to retail investors becomes clearer.

Of the 401.9 billion won in ABSTBs that have been frozen, thus preventing payment of either the interest or principal amount following Homeplus’s court receivership, 177.7 billion won was purchased by individual investors.

Lawmakers in the National Assembly’s National Policy Committee have threatened to convene a hearing unless Chairman Kim submits a compensation plan, including a pledge of his personal assets, by April 10.

Kim has begun using personal funds to repay some 2,000 small merchants who have not been compensated for outstanding debts owed by Homeplus. However, given that lawmakers are arguing that he pay 2 trillion won from his own pocket, his gesture is likely to appear more patronizing than sincere.