Article: Samsung accounting fraud is the last "puzzle piece" of the Lee Jae-yong succession

Source: SBS News

A Samsung subsidiary (Samsung Biologics) is accused of accounting fraud.

According to the Securities and Futures Commision of the KSE, Samsung Biologics (Samba) is accused of embezzling over 4.5 trillion KRW (~$4.2 billion). If the allegations are confirmed after the prosecution's investigation and trial, the investors will suffer tremendous damage and the stock market will be affected.

The reason why there's a lot of interest in this issue is because there is a suspected connection between Samba's accounting and the transfer of management rights for Samsung Electronics Vice Chairman Lee Jae-yong. In particular, the prosecution seems to be investigating suspicions that Samba's accounting was the "last puzzle piece" to complete the succession work involving the Vice Chairman.

On April 29th, a judge from the Seoul Central District court issued an arrest warrant for two executives Yang Sang Moo and Ae Mo from Samsung Biotech for allegedly submitting counterfeit materials to the financial authorities. They're also accused of destroying evidence and deleting the problematic notebooks, cell phones, and work laptops.

According to reports, the two executives are confessing to some of the crimes but no confirmations on whether they will be prosecuted.

Police are also investigating suspicions of organized crime at the corporate level specifically involving Lee Jae-yong, Vice Chairman of Samsung Electronics.

Suspects Sang Moo (left), Biotech Group Manager (middle) and Ae Mo (right) arriving for questioning on the 29th. They're suspected of forgery and destruction of documents.

Below is a brief summary of the relationship between Samba Accounting misappropriation and Lee Jae-Yong's succession.

Samsung Vice Chairman Lee Jae-Yong (right)

• In May 26, 2015, Samsung announced a merger of their subsidiary 'T' with Cheil Industries (C) to form a new company 'Samsung C & T'. The key to the valuation of the merger was the 'fair merger ratio' essentially how much to evaluate the value of the two companies' shares. For example, if Cheil (C) shares were valued at 100KRW/share vs. T shares at 200KRW/share then the shareholder of the merged company C&T is obliged to take 2 shares. This merger is then advantageous for Cheil shareholders as their stocks would appreciate (going from $1 to $2) when entering the new company vs. T shareholders whose stock would depreciate.
• At the time of the announcement, the merger ratio for Cheil and Samsung was 1 to .35 meaning the value of one share of new company C&T was equal to .35 shares of Cheil. As a result, Cheil Industries was valued at 3 times the original valuation. Lee Jae-yong had a lot of shares of Cheil Industries so as a result of the merger his stock highly appreciated to 3x the original price.
• Some of the former shareholders of the old samsung (T) opposed the merger saying the merger ratio is too favorable to Cheil. But the agency that was responsible for determining the merger ratio, National Pension, explained that the ratio might seem unfavorable to T but this would be offset by the advantages "synergies" of the merger. Out of the 12 investment committee members, 3 abstained and 1 gave an neutral opinion. The resolution passed with an 8/12 vote.
• Park Youngsoo, who was the former head of the National Pension (agency that decided the merger ratio) claimed that the "synergies" reported by the research team had been manipulated at the investment committee meeting.
• On top of this issue another material call option liability was allegedly left out of the books of Cheil Industries thus reporting favorable financial statements for the merger.
• The prosecution believes that Samsung used "segregation accounting" to solve both problems at once for a favorable result for the Samsung Vice Chairman.

Additional Source: Yong-il