Buyout firm scraps sale of Korea bank amid inquiry

SEOUL -- US private-equity group Lone Star Funds said yesterday it was terminating a contract to sell its controlling stake in a South Korean bank, scrapping a deal worth billions of dollars amid a high-profile probe by prosecutors.

Lone Star bought a controlling stake in distressed Korea Exchange Bank in 2003 for $1.5 billion. In May, the Dallas-based buyout fund signed an agreement to sell its entire 70.9 percent stake to Kookmin Bank, the country's top lender, in a deal valued at more than $7 billion.

The sale had remained unconsummated, however, as prosecutors allege that Lone Star colluded with former KEB management and government officials to make the lender's financial health appear worse than it actually was to lower the purchase price.

"We have concluded that we cannot move forward with the sale of KEB to Kookmin Bank due to the continuing investigations surrounding Lone Star's investment in KEB and KEB's subsequent rescue of its credit card subsidiary," John Grayken, chairman of Lone Star Funds, said in a statement.

Prosecutors are also investigating allegations that KEB and Lone Star were involved in manipulating the stock price of KEB's credit card unit in 2003 ahead of the bank's merger with it.