The Korean prosecution will look into the US-based hedge fund “Elliot Management” which revolted the merger between Samsung C&T and Cheil Industries. The charge is that Elliot Management violated Five-Percent Rule, which describes that anyone who has a large number of stocks should disclose it.
According to Korean financial regulators and the financial industry on February 23, the Securities and Futures Commission under the Financial Services Commission will resolve a plan to punish Elliot Management in a regular meeting on February 24. Earlier, the Capital Market Investigation and Supervision Committee, an advisory organization for the Securities and Futures Commission, passed the original plan to report Elliot Management to the prosecution by a landslide. Financial regulators will report charges against the hedge fund to the prosecution and turn over investigation materials to them on the commission’s decision.
The Special Investigation Team at the Financial Services Commission judged that it violated the Five-Percent Rule for Elliot Management to secretly increase its equities by misusing a total return swap (TRS), a derivative during a process to purchase Samsung C&T stocks last year.
Last year Elliot Management fought for votes in a general shareholders meeting, taking issue with the merger between Samsung C&T and Cheil Industries only to lose the deal. At that time, Elliot Management explained that the hedge fund held 4.95 percent equities (7,732,779 shares) in Samsung C&T until June 2, last year, but additionally acquired 2.17 percent (3,393,148 shares) in the following month.
But financial regulators reached a conclusion that adding equities that Elliot Management virtually had a strangle hold on via a TRS contract, Elliot Management should have made a public disclosure of its massive stockholding not on June 4, but at the end of May last year.
They think that although it is up to an investor to utilize a TRS in terms of financial investment, it goes against the purposes of the public disclosure system to ramp up equities via TRS contract, while taking into account hostile M&As or aggressive participation into management.
“A public disclosure rule to disclose a fact of owning equities of five percent or more aims to let a company to execute its right to defend itself from hostile M&As or interruption into management activities,” said a representative at the Financial Services Commission. “If Elliot Management’s act is allowed, general investors will lose proper chances for investment.” Financial regulators’ study on precedents in the US and Germany found many cases to throw the book at those who expanded their stakes by way of TRSs.
It was the first for Korean financial regulators to find expedients of using TRSs and punish those responsible for that. It is forecast that the prosecution will take and review the case in terms of legal principles and decide whether or not to look into the case.
But the prosecution may suspend the indictment as they will not be able to go ahead with the investigation into the case. This is because those who in this case are all out of Korea and the prosecution will be able to ask them questions or grill them only when they fly back to Korea.
But a dominant view is that it is likely that the hedge fund Elliot Management will refuse to see prosecutors to such an extent that they will be stigmatized as people wanted by the police. Therefore, it is predicted that the Korean prosecution will have a long and heated legal battle with Elliot Management.
“Elliot Management does not find any problems in the part that Korean financial watchdogs called foul,” said a representative at Elliot Management. “We will decide how to address this situation after seeing Korean financial regulators’ final decisions.”