Samsung Heir Lee Summoned as Suspect in Korea Bribery Probe (2)

Jan 11, 2017 4:15 pm ET

(Bloomberg) -- Special prosecutors called Samsung Electronics Co. Vice Chairman Jay Y. Lee for questioning as a suspect in a bribery investigation, deepening an influence-peddling scandal that has already led to the impeachment of South Korea’s president.

The de facto head of the Samsung Group was summoned to appear at 9:30 a.m. in Seoul on Thursday, special prosecution spokesman Lee Kyu-chul said in a briefing. While Lee, 48, was widely expected to be called in for questioning, the fact that he was identified as a suspect was a surprise.

South Korea has been in the grip of a presidential scandal for months, with millions taking to the streets to demand the ouster of President Park Geun-hye. Authorities are looking into whether Samsung and other chaebol business groups made payments to entities controlled by Choi Soon-sil, a Park confidant, in exchange for political favors. The intensifying focus on Lee may jeopardize his ability to succeed his father at the head of Samsung.

“Special prosecutors are mainly after President Park, but in this case, to charge Park with bribery, they have to prove her connection with Samsung,” said Chung Sun-sup, who runs corporate researcher Chaebul.com. “Prosecutors used to overlook the chaebols’ wrongdoings in the past, but this scandal is different because citizens can no longer tolerate the cozy relationship between politics and business.”

Prosecutors are investigating whether Samsung provided support to Choi in exchange for government help in Lee’s efforts to take control of the conglomerate. In particular, they want to know whether the president exerted pressure on Korea’s national pension service to support the controversial merger of two Samsung Group companies, Cheil Industries Inc. and Samsung C&T Corp. The deal, opposed by some investors, was approved in 2015 and makes it easier for Lee to gain influence over the sprawling conglomerate his grandfather founded.

Should the heir apparent end up being prosecuted in the investigation, it would disrupt years of planning for him to take over from his father. The younger Lee is the only son of Samsung Group Chairman Lee Kun-hee and has taken over some responsibilities since his father suffered a heart attack in 2014. While in the long run, Jay Y. Lee may still assume the top post regardless of the investigation’s conclusions, the probe could result in him being sidelined for a number of years to deal with the legal troubles, said Troy Stangarone, senior director for congressional affairs and trade at the Korea Economic Institute of America.

“There could be the potential for a change in leadership, but control would stay in the family,” he said. “At the moment, it’s hard to know what’s going to take place -- if I were them, I would be in a holding pattern.”

When chaebol leaders have gotten in trouble in the past, the controlling family usually takes one of two tactics: promote an executive with no blood relationship to the chairman position to serve as the "caretaker" while the family pulls strings in the background, or give the top position to another relative. In Samsung’s case, Lee’s sisters are possible contenders for the chairman post, said Stangarone. The elder sister, Lee Boo-Jin, who oversees the group’s hotel operations, is the more likely candidate because she has the reputation of sharing a similar business sense with her father, he said. 

Samsung’s offices have been searched as part of the Park probe and Lee faced questions from parliament and prosecutors last year. Two other top Samsung executives were called in on Monday to answer questions about the company’s role. Today, investigators asked parliament to file a complaint against Lee for perjury during parliamentary testimony, without providing further details.

Prosecutors have recovered a tablet PC that they believe belongs to Choi and includes some of her e-mails. They presented the device to reporters at a briefing today and said one e-mail from it indicates Choi received funds from Samsung.

A representative for Samsung Electronics declined to comment. Shares in the Suwon, South Korea-based company rose to a new high on Wednesday, climbing 2.8 percent to 1,914,000 won at the close in Seoul, following an upbeat earnings announcement last week that highlighted the resilience of the company’s business.

When he testified in December, Lee said he never ordered donations to be made in return for preferential measures and rejected allegations he received wrongful government support to push through the merger. Still, Lee, who has been put under a travel ban, confirmed his private meetings with Park and that Samsung had provided a horse worth 1 billion won ($837,000) that was used for equestrian lessons by Choi’s daughter.

When the merger of Cheil and Samsung C&T was originally proposed, shareholders including activist Paul Elliott Singer fought against it, arguing the purchase price was too low and would cement the founding family’s control at the expense of minority shareholders. Samsung responded by saying it was trying to create long-term value for investors and the merger was necessary to sustain growth. 

Korea’s National Pension Service, a $452 billion fund with money from 22 million citizens, was the largest investor in Samsung C&T and voted in favor of the merger, playing a key role in its narrow approval. With the merger, Lee ended up with a 17 percent stake in the combined entity, making him the largest shareholder. The merged company, now just called Samsung C&T, is in turn one of the largest shareholders in Samsung Electronics.

If the allegations are proven, Samsung would face increased liability; Singer could file a civil case for more compensation for the merger. It would therefore be in Samsung’s interest to improve its relationship with the hedge fund, which gives Elliott additional ammunition in its bid to change the tech giant’s corporate governance, said Stangarone.

Special prosecutors have already arrested Moon Hyung-pyo, the former chairman of the pension service. Moon acknowledged that he pressured NPS officials to support the Samsung merger, special prosecutors said last month.

“Samsung wanted to be seen as a victim, but that’s now impossible because Lee is named as a suspect,” Chung said. “When somebody is summoned as a suspect it means prosecutors have obtained definite evidence.” 

(Updates with analyst comments starting in sixth paragraph.)

--With assistance from Jing Cao To contact the reporters on this story: Jungah Lee in Seoul at jlee1361@bloomberg.net, Hooyeon Kim in Seoul at hkim592@bloomberg.net. To contact the editors responsible for this story: Peter Elstrom at pelstrom@bloomberg.net, Reed Stevenson, Molly Schuetz

©2017 Bloomberg L.P.