In the legal community, the view is that whether Chairman Kim Byung-ju of MBK Partners is detained ultimately hinges on when and to what extent he recognized "the inability to repay." In past case law on financial fraud, including the Tongyang Group and LIG Construction cases, courts have used as a key standard for establishing fraud the timing of when the head of the corporations realized the company's prospects for rehabilitation had effectively vanished, and whether, with that awareness, the person was involved in raising funds.
In the so-called "Homeplus Co. affair," Kim is set to undergo a pretrial detention hearing at 10 a.m. on the 13th at the Seoul Central District Court. Kim is accused of issuing a large volume of asset-backed short-term bonds (ABSTB) despite recognizing the possibility of a downgrade to Homeplus Co.'s credit rating, then filing for corporate rehabilitation, causing losses to investors (fraud and violations of the Financial Investment Services and Capital Markets Act). A decision on detention could come as early as late that afternoon.
According to legal sources on the 12th, the biggest issue in this warrant review is whether the criminal allegations against Kim have been substantiated beyond mere suspicion. It is not enough that management was simply difficult; the key is whether prosecutors can prove that Kim directly or substantially participated in issuing ABSTBs while recognizing that repayment was effectively impossible.
Inside and outside the legal community, many also see this matter as structurally similar to the past Tongyang Group and LIG Construction affairs. In both cases, corporations in a liquidity crisis issued corporate bonds or commercial paper (CP), leading to large investor losses, and during trial the "timing and degree of awareness" became the key issue determining whether fraud was established.
The Tongyang Group affair was an incident in 2013 in which Tongyang Group, while hiding its default risk, issued large amounts of corporate bonds and CP, causing losses to investors. There were some 40,000 victims, and the damage was reportedly 1.3 trillion won. For this case, then Chairman Hyun Jae-hyun of Tongyang Group received a finalized sentence of seven years in prison at the Supreme Court.
However, judgments diverged during the trial. The first-instance court fully recognized the fraud charge, finding that then Chairman Hyun raised funds from retail investors without undertaking substantive restructuring, even after receiving an internal report around 2011 that a default was expected. It sentenced Hyun to 12 years in prison.
By contrast, the appellate court recognized fraud only for CP issued on or after Aug. 20, 2013, after it was recognized that restructuring had ultimately failed and repayment capacity had effectively disappeared. It denied the establishment of fraud up to that point, considering that attempts to save the company had continued, and as a result reduced Hyun's sentence from 12 years to seven. The Supreme Court finalized this.
A legal source explained, "It is not enough to simply recognize that a company is in difficulty; case law holds that only issuances made after recognizing that alternatives had effectively disappeared and the company had reached a state of inability to repay constitute fraud."
In the LIG Construction affair, "whether there was direct involvement" emerged as a key issue. In 2010–2011, LIG Construction, which had fallen into a liquidity crisis, issued CP worth more than 200 billion won despite an anticipated inability to repay, causing investor losses. The first-instance court handed down prison sentences, finding that then LIG Group Chairman Koo Ja-won and Vice Chairman Koo Bon-sang were involved across the case, including in accounting fraud and plans to file for rehabilitation.
For then Vice President Koo Bon-yeop of LIG Construction, who was indicted on the same charges, the first-instance court acquitted, citing a lack of direct involvement in issuing CP. But the appellate ruling differed. The appellate court found that CP was issued while Koo, then vice president, recognized the company's internal financial condition and the possibility of inability to repay, convicted, and took Koo into custody in court. The rationale was that even without direct involvement in issuing CP, it is hard to avoid liability if the person recognized the possibility of inability to repay. The Supreme Court also upheld this ruling.
Given this trend in case law, in the Homeplus Co. affair prosecutors will likely need to specifically prove, to secure custody of Kim, when and to what extent Kim recognized Homeplus Co.'s financial condition and the possibility of inability to repay, and whether Kim directly or substantially participated in issuing ABSTBs.
MBK's side said it "will substantiate the case in court," and reportedly prepared more than 100 slides of presentation materials for the warrant review.
Meanwhile, when seeking arrest warrants for MBK Partners and Homeplus Co. management, prosecutors applied the charge of "fraudulent rehabilitation" in addition to fraud and violations of the Financial Investment Services and Capital Markets Act. However, that charge was applied only to MBK Vice Chairman and Homeplus Co. Co-CEO Kim Kwang-il, MBK Vice President Kim Jeong-hwan, and Homeplus Co. Executive Director Lee Sung-jin, and not to Chairman Kim.