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Lawmakers want probe of Samsung parent in biotech fraud

Investigation into C&T risks upsetting Lee Jae-yong succession at conglomerate

Samsung group vice chairman Lee Jae-yong, left, visits Mangyongdae Children's Palace in Pyongyang, North Koreain September. Lawmakers have accused Samsung of using BioLogics to smooth Lee's succession.   © Reuters

SEOUL -- South Korean lawmakers are calling on financial regulators to broaden the investigation of accounting fraud at Samsung BioLogics to encompass its parent Samsung C&T, the group's de facto holding company, threatening the succession process put in place by the controlling family.

Politicians from both the ruling and opposition parties have joined forces to press for the inquiry after Rep. Park Yong-jin of the ruling Democratic Party of Korea released documents from C&T that raised questions over the company's role in allegedly inflating the value of its biotech arm ahead of a flotation in 2016.

Some hope that the investigation could be a catalyst for reform of the country's powerful chaebol conglomerates, seen to exercise too much power over the economy.

C&T is, in effect, the holding company for Samsung group companies, and the largest shareholder in BioLogics as a result of its merger with a sister company, Cheil Industries in 2015. It is also the vehicle for the succession of the conglomerate's heir apparent, Lee Jae-yong, the largest shareholder in Cheil Industries.

Rep. Park has released documents which suggest that a C&T task force held discussions with the financial department of Samsung BioLogics in 2015 on how to increase the value of the drugmaker. Together they agreed to value BioLogics at 6.9 trillion won ($6.1 billion).

An accounting scandal at a Samsung biotech unit has unified ruling and opposition lawmakers in South Korea and has sparked talk of reforming the chaebol that have long dominated the country's economy.

Last week regulators ruled that BioLogics had inflated its value by switching the accounting treatment of a joint venture, which resulted in the previously loss-making biotech business returning a profit. This inflated the value of the venture by 4.5 trillion won ($4 billion), they said. The regulator suspended trading in BioLogics and ordered the Korean Exchange to review whether it should be delisted.

"The investigation against Samsung BioLogics' intentional accounting fraud case should not stop here," said Park in a statement. "We need to solve problems further, such as making the financial regulator accountable for its laziness, having the Supreme Court's strict ruling on Vice Chairman Lee Jae-yong as well as an investigation against Samsung C&T's accounting fraud allegation."

In February, the Seoul High Court sentenced Lee to a suspended two-and-half-year jail term for bribery and embezzlement. His case is pending at the Supreme Court.

Rep. Sim Sang-jung of the minor opposition Justice Party agreed with Park, accusing Samsung of using BioLogics to smooth Lee's succession. The three-term lawmaker alleged that Samsung had struck a deal with the previous Park Geun-hye government, asking the National Pension Service to support the merger of Samsung C&T and Cheil Industries.

Cheil was the largest shareholder of BioLogics at the time, and revaluation of BioLogics boosted its value as well, putting it and its largest shareholder -- Samsung scion Lee Jae-Yong -- in a stronger position for the merger with C&T.

"The accounting fraud was used to legitimize an unfair merger ratio between Cheil Industries and Samsung C&T. We believe succession issue of Vice Chairman Lee Jae-yong is behind of all of this corruption," said Sim in a statement. "If Samsung, which represents our country's business, sticks to corruption, we may not move toward a new country. I hope that the Securities and Futures Commission's decision will pave the way for chaebol reform."

Financial Services Commission Chairman Choi Jong-koo, who governs the SFC, said on Wednesday that the SFC will look at whether to widen its investigation into Samsung C&T.

But any investigation into Samsung C&T may take time. Samsung BioLogics plans to take legal action against the SFC over the ruling on accounting fraud. The drugmaker will file a petition with the court to reverse the ruling, arguing that it had followed international accounting regulations to change the status of its research lab.

"It is just about a difference over how to interpret accounting rules," said Samsung BioLogics in a statement. "We changed Bioepis to a related company because we had to reflect a call option given to our joint venture partner Biogen."

Samsung BioLogics established its research affiliate Samsung Bioepis in 2012 in cooperation with U.S. pharmaceutical firm Biogen. Biogen had a 15% stake in the venture with a call option to buy up to 50% minus one stake by June 2018. The company executed the right in June.

Samsung C&T declined to comment on the issue, saying it is a matter for BioLogics, not the company.

Yoon Jin-soo, a director at Korea Corporate Governance Service, said that it was too early to expect an investigation into Samsung C&T to affect the Lee family's succession process because there were still many steps to be taken. "The key of the issue is about a merger [between Samsung C&T and Cheil Industries.] As Samsung plans to take actions [against the regulator], it will take some more time to know what will happen," he said.

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