Korea Zinc Audit Committee to Review Alleged Diversion of Corporate Funds for Yun B. Choi’s Private Benefit

Logo of Korea Zinc. Korea Zinc’s Audit Committee has agreed to review allegations that corporate funds were diverted to advance the private interests of director Yun B. Choi, as well as related potential conflicts of interest, at its next meeting. The committee will also formally respond to a request that it conduct an independent investigation and report its findings to the board. In a written response sent to Young Poong and MBK Partners on Oct. 22, the Audit Committee stated: “The Audit Committee will thoroughly review the matters raised in the letter at its next meeting and will subsequently communicate its position on the requests for an investigation, review and report to the board.” In its response, the Audit Committee identified two sets of allegations raised by Young Poong and MBK Partners. The first concerns transactions in which Korea Zinc purchased privately placed bonds and commercial paper issued by companies linked to Chang-bae Ji, a close associate of Choi, after which the resulting debts were repaid with investment proceeds from One Asia funds financed with capital contributed by Korea Zinc. The second concerns potential conflicts of interest arising from investments by One Asia funds in four entertainment companies in which Choi and members of his family had already made personal investments or held ownership interests. On October 13, Young Poong and MBK Partners sent a formal letter to the Audit Committee requesting an independent investigation into the flow of funds, the decision-making processes behind the transactions, and the involvement and potential liability of the directors concerned. They also asked that the findings be reported to the board. The first group of transactions under review totals KRW 36.35 billion: KRW 7 billion in privately placed bonds issued by Chungho ComNet, KRW 9.35 billion in commercial paper issued by Young Media ENT, and KRW 20 billion in privately placed bonds issued by SW&C. These obligations were subsequently repaid using proceeds from investments made by One Asia funds in companies connected to the issuers. Young Poong and MBK Partners noted that, even if Korea Zinc’s receivables were formally repaid, the transactions may merely have shifted the risk of loss from Korea Zinc’s balance sheet to investment vehicles funded with Korea Zinc’s own capital. They therefore called for the initial financing, Korea Zinc’s fund commitments, the funds’ subsequent investments and the repayment of the debts to be examined as an integrated series of transactions. At the time of the SW&C transaction, Choi had already acquired shares in Chungho ComNet through Jericho No. 1 Partnership, an investment vehicle in which he held a 99.9% interest. Young Poong and MBK Partners requested an investigation into whether Choi’s prior personal investment influenced Korea Zinc’s decision to provide financing or the funds’ subsequent investment decisions, and whether corporate funds were ultimately used to protect or advance his private financial interests. They also demanded that Korea Zinc pursue a KRW 36.35 billion damages action against Choi and former representative director Jin-soo Noh, who was involved in the financing decisions at the time. The second area of investigation concerns personal investments made by Choi and members of his family in entertainment companies before the One Asia funds subsequently invested in the same businesses. Using capital contributed by Korea Zinc, the One Asia funds invested KRW 29 billion in Arc Media, KRW 32 billion in Hi-Hat, KRW 8 billion in Slingshot Studio and KRW 10 billion in Bespoke Lab—a total of KRW 79 billion. Young Poong and MBK Partners called on the Audit Committee to determine whether Choi disclosed his prior personal investments and the resulting potential conflicts of interest to the board; whether he was involved in Korea Zinc’s commitments to the funds or their subsequent investments; and whether he had prior knowledge of the specific portfolio companies in which the funds intended to invest. Given the deterioration in the financial condition of the investee companies, they also urged the committee to assess the investment losses, determine accountability and identify measures to recover the company’s losses. “The Audit Committee has formally acknowledged the allegations and the request for an investigation, and has committed to reviewing them thoroughly at its next meeting before communicating its position. This review must not become a mere procedural exercise,” Young Poong and MBK Partners said. “It must lead to an independent and substantive investigation that includes securing all relevant records, interviewing the individuals involved, examining whether corporate funds were diverted for private benefit, identifying potential conflicts of interest and determining the extent of any losses suffered by the company.” They added: “As a body constituted on the basis of its members’ independence and professional expertise, the Audit Committee must demonstrate that independence through a thorough investigation that leaves no question unanswered, followed by appropriate and accountable remedial action.”