South Korean prosecutors today (Jan. 16) issued an arrest warrant for Jay Y. Lee, vice chairman of Samsung Electronics and heir to the Samsung conglomerate, on charges of bribery and embezzlement. The warrant, which still requires court approval, marks the most high-profile allegation of corporate involvement in the corruption and influence-peddling scandal surrounding president Park Geun-hye.
According to Reuters, South Korean special prosecutors allege that 48-year-old Lee had paid a total of 43 billion won ($36.4 million) in bribes to Choi Soon-sil, the close confidante of Park who is at the center of the scandal. Korea’s legislature voted last month to impeach Park after weeks of sustained protests.
Choi held a cult-like grip over Park, and reports suggest Samsung took advantage of her influence over the president and the administration. In December NPR reported that Samsung was suspected of paying up to $3 million dollars on equestrian training for Choi’s 20-year-old daughter, 20-year-old Chung Yoo-ra, of which $850,000 went to a new horse. It also allegedly paid $18 million to Core Sports International, a German-registered consulting firm owned by Choi. Samsung Electronics CEO Park Sang-jin, perhaps not coincidentally, served as president of the Korean Equestrian Foundation.
In exchange for the payments, prosecutors allege, president Park swayed Korea’s National Pension Service to vote in favor of a controversial $8 billion merger between two Samsung subsidiaries, Samsung C&T and Cheil Industries. The merger effectively gave Lee more control over Samsung Electronics, the company’s crown jewel. In December, Korean prosecutors arrested Moon Hyung-po, chairman of the National Pension Service, for his alleged involvement with the deal.
In a statement, Samsung said:
It is difficult to agree with the special prosecutor’s decision, because Samsung did not make contributions in order to receive favors. In particular, we find it hard to accept the special prosecutor’s argument that Samsung has made improper requests related to the merger of Samsung affiliates or the leadership transition. We believe the court will make the appropriate judgment on this matter.
Dozens of Korea’s biggest companies and richest businessmen have been drawn into the Park corruption scandal, which began to unfold in October. Lee, though, would be the biggest of the names involved. As the effective top figure at Samsung, he presides over a company whose sales in 2012 accounted for 23% of South Korea’s GDP. The country’s central bank said in October that the exploding-smartphone fiasco at Samsung could hurt Korea’s exports. Prosecutors admitted that they were considering the potential economic impact of arresting Lee.
Arresting Lee now would also upset the company’s pending leadership transition. Lee is the son of Samsung founder Lee Byung-chul. He currently serves as chairman of Samsung Electronics, but has been on track for several years to take over the entire Samsung Group. At the same time, Samsung is recovering from the exploding Galaxy Note 7 crisis, which cost the company billions of dollars in lost profits, and is also facing a proposal from an activist hedge fund to restructure the company.
Samsung Electronics’ share price has taken a beating. On Friday, after Lee endured a 22-hour questioning session with prosecutors, Samsung Electronics dropped 1.78% from the previous day’s close. It ended today down an additional 3.66%, according to FactSet data.
The company’s share price weathered the storm of the Galaxy Note 7 fiasco and continued to rise as investors saw promise in the company’s component business. But uncertainty over Samsung’s leadership could put an end to that rally. The company announces fourth-quarter earnings on Jan. 23.