In 2003, the credit card industry in South Korea was in shambles. 10% of all South Koreans were credit delinquents and one in four card holders were making late payments. The Korean Exchange Bank (KEB) faced bankruptcy because of its credit card business. No domestic companies expressed an interest taking over the bank. So, Dallas-based Lone Star Fund took a gamble and purchased a 50.3% stake in KEB for $1.2 billion.

Lone Star Fund succeeded; and, on March 22, 2006, Kookmin -- South Korea’s largest bank -- agreed to purchase Lone Star’s stake in KEB for $6.6 billion. A few days later KEB announced that it had earned more than $1 billion in annual profits in 2005. Lone Star fund had reason to celebrate both the turnaround of the bank and the sale of its majority interest in KEB for a substantial gain. But its celebration would be short-lived.

One week later, 60 South Korean prosecutors raided the Seoul offices of Lone Star, issued an arrest warrant for Steven Lee the former head of Lone Star’s South Korean office, and barred 10 employees of Lone Star Advisors and Hudson Advisors Korea from leaving the country. Kang Chan-woo, the prosecution spokesman, announced, "prosecutors were investigating tax evasion, embezzlement and other allegations."

Lone Star Fund was not required to pay taxes in the sale of its interest in KEB because Lone Star had made the purchase of its KEB interest through its Belgium affiliate. South Korea and Belgium have a treaty that prevents double taxation. Lawmakers, civic groups and government officials have launched public attacks on the Dallas-based Lone Star Fund because its owners stand to receive over $4 billion in profits from the sale to Kookmin Bank and are taking advantage of an existing tax loophole to avoid paying any taxes on the gain to the South Korean government.

Owen Blicksilver, Lone Star spokesman, told AP, "Lone Star is cooperating fully and looks forward to the conclusion of the investigation." Nevertheless, prosecutors have set a dangerous precedent if the government disallows this deal. This will demonstrate that foreign investors who earn substantial profits in Korea do so at their own peril.

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