US activist investor faces probe over Samsung spat

US activist investor faces probe over Samsung spat

US activist investor Paul Elliott Singer's Samsung saga may not be over yet.

Korea's financial authorities are moving to seek a prosecutorial investigation into Elliott Associates, a $27 billion hedge fund run by Singer, for a suspected breach of a local disclosure rule regarding its purchase last year of a stake in Samsung Group's construction unit.

Through a 7.12 per cent stake in Samsung C&T, the fund had mounted a high-profile and ultimately unsuccessful campaign to block its merger with the group's de facto holding firm Cheil Industries. Samsung narrowly won the proxy vote battle in a case that foreign investors saw as a test of shareholder activism in Korea and local media as an attack from a foreign vulture fund chasing a quick profit.

"The Securities and Futures Commission is to hold a vote Wednesday (on whether to report the case to the prosecution,)" an official at the Financial Services Commission said Tuesday. The SFC, a subunit of Korea's financial regulator that oversees and investigates market abuses, has been looking into the Elliott case since December.

Observers see a transfer to the prosecution as likely, given that an advisory board last week voted overwhelmingly in favour of the move. The SFC's five commissioners have a track record of upholding the advisers' opinion.

In June 2015, Elliott disclosed that it raised its stake in Samsung C&T to 7.12 per cent from 4.95 per cent and planned to stop the merger with Cheil Industries, which it said would only serve the best interests of Lee Jae-yong, the group's heir apparent, not ordinary shareholders.

The SFC, after its own investigation, concluded that the US fund may have breached the local rule that requires all investors to issue a public disclosure within five days of acquiring a stake of more than 5 per cent in a listed company. It suspects that the fund may have secured a stake exceeding 5 per cent in Samsung C&T well before the June announcement.

The point of possible legal contention is that the newly purchased shares were in possession of foreign brokerage houses such as Merrill Lynch under a total return swap arrangement with Elliott before June. The total return swap is a type of derivative, but Korean regulators perceive it as an attempt to illegally "park" shares before an official disclosure.

Violation of the 5 per cent rule is punishable by up to 3 years in jail or a maximum fine of 100 million won ($81,100).

The Samsung-Elliott war exposed concerns about shareholder rights and corporate governance in Korea, where business is dominated by family-controlled conglomerates known as chaebol.

With the victory, Lee, the son of the ailing Samsung Group chairman Lee Kun-hee, consolidated his control over Samsung Electronics, the group's crown jewel. The merger between Samsung C&T and Cheil Industries was completed in September.

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