Investigation into Alleged Stock Market Manipulation by Kakao Founder
South Korean prosecutors have filed an arrest warrant for Brian Kim, the founder of Korean internet giant Kakao, as part of an investigation into alleged stock market manipulation. The investigation is related to a high-profile bidding war for SM Entertainment, one of South Korea’s biggest music labels, in 2023.
Kakao’s subsidiary, Kakao Entertainment, became the controlling shareholder in SM Entertainment after winning the bidding war. They were competing against Hybe, the owner of South Korean music agency BigHit, known for signing the popular K-pop boy band, BTS. Kakao had launched a tender offer to buy SM Entertainment’s shares at 150,000 KRW ($115) each, surpassing Hybe’s earlier offer of 120,000 KRW (~$87) per share.
However, Korean prosecutors suspect that the price of SM Entertainment’s shares was manipulated just before the deal was closed. It is alleged that Kakao purchased a significant amount of SM Entertainment’s shares over 553 trades in February 2023, driving up the share price and causing Hybe to withdraw its offer. Kakao is also accused of failing to report these stock purchases to financial authorities.
This investigation is not the first involving Kakao and allegations of stock price manipulation. Kakao’s chief investment officer, Jae-Hyun Bae, was arrested last October under similar charges. He is currently on trial.
If Kakao’s chief information officer and other executives at Kakao Entertainment are found to be in violation of South Korea’s Capital Markets Act, they could face penalties larger than just a fine. The country’s financial regulator may require Kakao to divest at least 10% of its ownership in its online banking subsidiary, Kakao Bank.
Founded in 2006, Kakao is one of South Korea’s largest internet firms, offering various services such as messaging, taxi services, online banking, music streaming, and comics hosting. However, if the company is found guilty of breaching financial laws, it may face significant consequences in the form of divestment and penalties.
South Korea’s online banking regulations state that non-financial companies must not have violated financial laws or fair trade laws in the last five years in order to have more than 10% of the voting rights in mobile-only banks like Kakao Bank.
The outcome of the investigation into Kakao’s alleged stock market manipulation will have implications for the company’s future, potentially affecting its ownership in Kakao Bank. It remains to be seen how this case will unfold and what consequences Kakao will face if found guilty.