Kakao’s billionaire founder faces arrest over alleged manipulation of SM Entertainment stock price

Last year’s bitter, high-profile battle between K-pop giant HYBE and South Korean telecom Kakao Corp. over control of SM Entertainment has led to fallout that few could have seen coming at the time.

In the saga’s latest chapter, the Seoul Southern District Prosecutors Office filed a request on Wednesday for an arrest warrant for Kim Beom-su, the billionaire founder of Kakao Corp., whose entertainment division now controls SM Entertainment.

Prosecutors assert that Kim violated South Korea’s Financial Investment Services and Capital Markets Act through his purported involvement in a plot to illegally manipulate the stock price of SM Entertainment, in order to push HYBE out of the bidding for the K-pop agency, according news reports out of South Korea.

Prosecutors allege that Kim and other Kakao executives inflated SM’s stock price by funneling KRW 240 billion (USD $174 million at current exchange rates) into the company through a series of 553 stock price purchases in mid to late February of 2023, and purchasing shares at higher prices, according to a report in the Korea Herald.

Additionally, Kakao failed to report its stake in SM during the bidding war, prosecutors allege. Also accused in the case is private equity fund management firm OneAsia Partners, which prosecutors say colluded with Kim in the stock manipulation, according to Korea JoongAng Daily.

The request for an arrest warrant for Kim comes little more than a week after the Kakao founder endured what JoongAng Daily described as “20 hours of intense interrogation” by authorities, which lasted from Tuesday July 9 into the early hours of July 10, and during which Kim reportedly denied most of the allegations.

“It was a legitimate stock purchase on the market in a bid to expand the company portfolio.”

Lawyers for Kim Beom-su

In a statement to media, Kim’s attorneys at Sejong Law Firm denied that the Kakao founder had done anything wrong.

“We express our regret over the prosecution’s decision to file an arrest warrant. Kim has never ordered nor tolerated any forms of illegal actions tied to the purchase of shares in SM Entertainment,” the statement read, as quoted by the Herald. “It was a legitimate stock purchase on the market in a bid to expand the company portfolio.”

The Seoul Southern District Court is scheduled to review the prosecution’s arrest warrant request this coming Monday (July 22).

SM Entertainment is generally considered to be the second-largest K-pop company, behind only HYBE. Among its more popular acts are aespa, EXO, Girls Generation, Red Velvet, and Super Junior.

During the bidding war last year, SM Entertainment’s stock price soared above KRW 120,000 ($87) per share, the price at which HYBE had purchased 14.8% of SM from its founder, Lee Soo-man, and the fixed price at which it was buying shares from other shareholders, the Herald reported.

The inflated stock price led to HYBE withdrawing from the bidding, and Kakao Corp. ended up taking effective control of SM Entertainment with a 39.9% stake in the company.

However, HYBE filed a legal complaint against Kakao, alleging stock price manipulation, which led to an investigation that included a series of raids on Kakao’s headquarters, as well as the offices of SM Entertainment.

In October of last year, Kakao’s Chief Investment Officer, Bae Jae-hyun, was arrested, and prosecutors in Seoul indicted him on violations of the Capital Markets Act.

Bae is currently standing trial on charges related to the alleged stock manipulation, as is the chief executive of OneAsia Partners, identified only by the surname Ji, JoongAng Daily reported.

Despite the accusations swirling around Kakao Corp.’s takeover of SM, Korean trade regulators approved the deal earlier this year, but with certain conditions designed to ensure that Kakao doesn’t abuse its strong position in the music market.

Among those conditions is a requirement that Kakao-owned Melon, South Korea’s largest music streaming service, be required to distribute music from labels and distributors that compete with SM Entertainment.Music Business Worldwide