Another So. Korean Investigation – This Time of Hermes

In the latest of a series of actions against foreign investment firms in this country, South Korea’s Financial Supervisory Service (FSS) has sent the results of its seven-month investigation into Hermes Investment Management to the country’s top financial regulator for further action.

The charges against fund manager Hermes allege that the firm manipulated the stock price of Samsung Corp. for its benefit before selling its entire stake in the company in December 2004. Korean authorities allege that Robert Clements, Hermes’ emerging markets fund manager, gave an interview to a local magazine creating an impression that Samsung was the object of a take-over attempt. After the article appeared, Hermes sold its shares for an illegal gain., the Korean government alleges.

Press reports vary, but the Supreme Prosecutors Office, the country’s top financial regulator, maintains that Hermes made a financial gain of between $28 million and $37 million through unfair stock trading.

“Where the prosecutor goes in moving forward, we don’t really know,” says Tony Watson, CEO of Hermes, “We’re in uncharted territory.”

Watson notes the Prosecutors Office has never prosecuted a non-Korean corporation before. What’s more, Hermes doesn’t officially know what’s going on. Instead, the firm is learning about the government’s activities in the local media.

Watson tells PE Week that Hermes has yet to receive any official confirmation from the government about the actions against the firm.

Hermes, a 23-year-old, U.K.-based firm is controlled by the British Telecom Pension Scheme. It manages pension assets for more than 200 firms worldwide, including $1.74 billion in private equity.

Hermes stance has been that the magazine misquoted its manager. Watson says a transcript of the interview proves that their manager was misquoted. He also says that the interview did not have the affect Korean investigators claim.

One industry observer suggests that the action is merely one of a series of politically motivated events taking place lately against foreign private equity firms. Indeed, South Korean policy makers have come under pressure from local groups to control foreign investment as they reap huge capital gains from short-term investments or by purchasing financial firms that have been rescued with public money.

Earlier this year, for example, Korea’s National Tax Service (NTS) investigated Newbridge Capital based on its acquisition and sale of Korea First Bank. Newbridge, which acquired the bank in 1999, sold the bank to U.K.-based Standard Chartered Bank in the fall of 2004. The $3.3 billion sale earned the private equity firm $1.5 billion.

As far as future plans in Korea, Watson says that Hermes intends to continue investing in Korea. Watson estimates the firm has about $600 million invested in Korea.

“We’ll carry on,” Watson says. “We think that there are good companies here from which our clients will benefit. Inevitably, at some point, the prosecutors will talk to us.”