Kakao’s billionaire founder arrested in stock manipulation probe related to SM stake buy

As expected, South Korean authorities arrested Kim Beom-su, the billionaire founder of tech giant Kakao Corp., on allegations of manipulating stock prices during the company’s acquisition of a stake in K-Pop agency SM Entertainment last year.

Early Tuesday (July 23) morning, the Seoul Southern District Court issued an arrest warrant for Kim, also known as Brian Kim, suspecting him of orchestrating a scheme to manipulate the stock price of SM Entertainment during Kakao‘s acquisition attempt in February 2023, according to multiple news reports out of South Korea.

Last year, Kakao and HYBE were embroiled in a bidding war over SM Entertainment. Kakao emerged as the winner, securing a 39.9% stake in SM. However, the corporate saga didn’t end there as financial regulators in South Korea raided the offices of SM Entertainment in April 2023 amid a probe into potential stock price manipulation by Kakao.

Kakao is accused of colluding with the private equity fund OneAsia Partners to inject 240 billion won (USD $173 million) into the market, inflating SM Entertainment shares between February 16-17 and 27-28, 2023, to prevent competitor HYBE from acquiring them, Korea JoongAng Daily reported.

Earlier this year, Korean regulators approved Kakao’s proposed takeover of SM despite the ongoing probe.

Prosecutors are now alleging Kim aimed to influence the bidding process and outmaneuver HYBE, the entertainment giant behind BTS. Kim has denied any wrongdoing and maintains his innocence, according to reports. However, his arrest poses a threat to Kakao’s stability and future direction.

The Wall Street Journal said Kim could be detained for up to 20 days as prosecutors conduct further investigations before making a decision on an indictment. The court also reportedly deemed Kim a flight risk, and cited concerns that he could tamper with evidence.

On Monday (July 22), Kim faced a 3.5-hour court hearing, two weeks after prosecutors questioned him about his alleged involvement in stock manipulation, Korea JonngAng Daily said.

The arrest is reportedly expected to disrupt Kakao’s business operations, causing delays in mergers and acquisitions, stalling investments, and potentially jeopardizing initial public offerings for subsidiaries. Kakao companies already faced setbacks in investment bids due to Kim’s legal troubles, The Korea Times reported.

Kim’s influence at Kakao extends far beyond his role as founder, wielding significant control over Kakao and its vast network of affiliates. He is the company’s largest shareholder with a 13.32% stake,wholly owns K Cube Holdings, the second-largest shareholder of Kakao with a 10.43% stake, The Korea Times noted. This gives him a combined 23.75% stake in Kakao.

The news outlet noted that Kim’s arrest also threatens the status of Kakao as the largest shareholder in KakaoBank, an online bank in South Korea. Korean law restricts those who have been convicted of a financial crime from holding more than a 10% stake in a bank, Reuters reported.

This puts KakaoBank’s future at risk, as Kim’s potential conviction could force Kakao to reduce its ownership. Kakao currently holds a 27.17% controlling stake in KakaoBank, The Korea Times said. The company could reportedly be ordered to cut its stake to 10%.

“The arrest warrant implies a greater likelihood of Kim facing a guilty verdict. Although it will take a long time before the final court ruling, the fact that Kakao’s management has to divert its resources to address legal risks will adversely affect the company’s ability to discover new growth engines.”

Oh Dong-hwan, Samsung Securities

“The arrest warrant implies a greater likelihood of Kim facing a guilty verdict,” Samsung Securities analyst Oh Dong-hwan was quoted by The Korea Times as saying. “Although it will take a long time before the final court ruling, the fact that Kakao’s management has to divert its resources to address legal risks will adversely affect the company’s ability to discover new growth engines.”

Kakao responded to the crisis by attempting to reassure investors and emphasize continuity. It has stressed that CEO Chung Shin-a will manage the company during this period.

“We regret the current situation, but will do our best to fill the management gap under the leadership of Chung Shin-a, co-chair of the Corporate Alignment (CA) Council,” Kakao said in a text message to reporters cited by The Korea Times.

However, the market reacted negatively to the news. Kakao and its affiliates – Kakao Games, Kakao Pay, and KakaoBank – all witnessed significant stock price declines. Kakao and Kakao Games’ shares closed 5.4% lower, while KakaoBank’s shares finished with a 3.8% loss. Kakao Pay suffered the largest loss on Tuesday, declining 7.8% at market close.

“We regret the current situation, but will do our best to fill the management gap under the leadership of Chung Shin-a, co-chair of the Corporate Alignment (CA) Council.”

Kakao

The upcoming legal proceedings against Kim will likely heavily affect Kakao’s future. A conviction could affect the company’s ability to invest in new businesses, including artificial intelligence. Kakao plans to launch an AI-powered chat app this year. In February, Kakao unit Kakao Brain unveiled a medical GenAI technology called Labeler Project that reads chest X-rays to diagnose 13 diseases, which the company claims has a 90% accuracy rate.

Kakao and SM have also outlined plans last year to expand their US presence, launching an integrated North America division combining SM’s global intellectual property and production capabilities with Kakao’s music distribution network and multi-label system.

With Kim’s arrest, Kakao will likely face increased scrutiny from regulators, further complicating its business operations.

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