Korean Prosecutors Seek Arrest Warrant for Kakao Founder Over Stock Manipulation

South Korean Prosecutors File Arrest Warrant for Kakao Founder in Stock Manipulation Probe

South Korean prosecutors have moved to arrest Brian Kim, the founder of internet behemoth Kakao, amidst an investigation into alleged stock market manipulation tied to a high-stakes bidding war for SM Entertainment, one of the nation's largest music labels. This latest development in the ongoing probe aims to uncover potential improprieties in the conduct of Kakao's acquisition tactics.

Allegations of Stock Price Manipulation

The arrest warrant follows a week after prosecutors in Seoul initiated an investigation into Kim's suspected involvement in manipulating SM Entertainment's stock prices. In March 2023, Kakao, along with its subsidiary Kakao Entertainment, secured a 39.9% stake in SM Entertainment, triumphing over rival bidder Hybe, the owner of BigHit Music, which manages the globally successful boy band BTS.

Kakao had offered 150,000 KRW (approximately $115) per SM Entertainment share, surpassing Hybe's earlier tender offer of 120,000 KRW (~$87) per share. A tender offer typically involves a direct appeal to a target company's shareholders to sell their shares within a specific timeframe, with the intention of gaining significant control of the target company.

However, prosecutors suspect that SM Entertainment's share prices were artificially inflated just before the deal's conclusion. Kakao allegedly purchased 240 billion KRW (around $174 million) worth of SM Entertainment shares across 553 transactions in February 2023. This activity reportedly pushed the share price above Hybe's tender offer, compelling them to retract their bid.

Ongoing Legal Repercussions

Kakao faces accusations of failing to report these substantial stock acquisitions to the financial authorities. In a related case, Kakao's Chief Investment Officer, Jae-Hyun Bae, faced similar allegations of stock price manipulation last October and is currently on trial. Following the acquisition, Hybe reduced its stake in SM Entertainment to 8.8% after selling portions of its shares to Kakao.

Potential Regulatory and Business Impacts

Kakao, founded in 2006, is one of South Korea's largest internet firms, known for popular services like messaging app Kakao Talk, Kakao Mobility's on-demand taxis, Kakao Bank's online banking, and Melon music streaming. Should Kakao's executives be found guilty of violating financial laws, the repercussions could extend beyond fines. South Korea's financial regulator might force Kakao to divest at least 10% of its holdings in Kakao Bank due to regulations restricting non-financial companies from holding over 10% in mobile-only banks if they have breached financial or fair trade laws within the past five years.

As this legal drama unfolds, Kakao's future dealings and regulatory compliance are under intense scrutiny, with the potential to reshape the firm's business landscape dramatically.