Distrust in the Investigation Review Committee Too? The Far-Fetched Claim That Indiscriminate Prosecution Is Objective

Complaints About “Pro-Samsung” Figures... Then Should “Anti-Samsung” Figures Also Be Excluded?

If the prosecution overturns a system it created itself, it will only be tying its own hands.

The Supreme Prosecutors’ Office’s Investigation Review Committee recently recommended to the prosecution that it “suspend the investigation and not indict” Lee Jae-yong, Vice Chairman of Samsung Electronics. The Investigation Review Committee is made up of 15 members randomly selected from a pool of 150 “review committee candidates” chosen in advance by the prosecution. Fourteen members participated in the deliberation: seven lawyers and Law School professors, and seven others including general professors, journalists, and religious figures. Of the 14 members, 13 excluding the chair voted, and by a margin of 10 to 3 recommended that the prosecution suspend the investigation and not indict.

Political circles are strongly objecting to the committee’s vote. Park Yong-jin of the Democratic Party of Korea is demanding the resignation of Prosecutor General Yoon Seok-yeol. Lawmaker Park Joo-min of the same party and Minbyun have taken the position that they will not accept the committee’s “recommendation not to indict.” It is also reported that the prosecution is preparing indictments against multiple individuals in addition to Vice Chairman Lee Jae-yong.

One reason some cannot accept the non-indictment recommendation is the claim that “the composition of the review committee was not neutral.” They argue that a large number of pro-Samsung figures were included on the committee. But this is not persuasive. If it is inappropriate for people supportive of Samsung to participate in the review committee, then participation by “anti-Samsung” figures should also be called into question. Logically, if the prosecution rejects a 10-to-3 decision made within the “institutional framework created by the prosecution itself,” with committee members acting according to conscience and based on expertise and independence, that can only be self-contradictory.

This was the 9th time the Investigation Review Committee had been convened, and the prosecution had accepted all 8 of its previous recommendations. If so, the natural course is to accept this recommendation as well. For the political sphere and the prosecution to refuse acceptance simply because “the result was not to their liking” is to undermine the rule of law and abandon a practice that ought to be respected.

The prosecution must judge this case according to economic legal principles and basic rules. The prosecution believes that at the time of the 2015 merger of Samsung C&T and Cheil Industries, systematic stock price manipulation (unfair trading and market price manipulation under the Capital Markets Act) took place for the purpose of strengthening Lee Jae-yong’s managerial succession and group control, as he was the largest shareholder of Cheil Industries. It also believes that, in order to secure ex post justification for the merger ratio of “1 to 0.35” between Cheil Industries and Samsung C&T, the accounting standards of Samsung Biologics, a Cheil Industries subsidiary, were changed at the end of 2015 to inflate the company’s value by more than 4 trillion won, in violation of the External Audit Act.

The allegation of “market price manipulation” has a logical flaw. The very premise is wrong: it assumes Samsung could choose a stock price that was most unfavorable to Samsung C&T and most favorable to Cheil Industries for the sake of the merger. But a merger is approved at a shareholders’ meeting, and the merger ratio is determined based on stock price movements over “a certain period.”

The controversy over the alleged “delay in disclosure” of Samsung C&T’s Qatar combined-cycle power plant contract, supposedly intended to manipulate the stock price, also stems from a misunderstanding of the Capital Markets Act. The prosecution concluded that although Samsung C&T had won a 2 trillion won Qatar project in early May 2015 before the merger, it intentionally delayed disclosure out of concern that the stock would rise, and only made a “belated disclosure” at the end of July after the merger. But what it received in May was not a contract award document, but a “limited notice to proceed” for the construction project. Had it been disclosed as though it were a formal contract award, that would instead have constituted a “false disclosure.”

The prosecution also believes Vice Chairman Lee Jae-yong was deeply involved in Samsung Biologics’ accounting fraud. It claims profits were inflated to boost the stock price. But Samsung Biologics’ change in accounting standards was a managerial judgment made in line with the adoption of International Financial Reporting Standards (IFRS), not accounting fraud. Since Samsung Biologics’ stock price surged despite the company being in the red, the prosecution’s claim that “profits were manipulated to boost the stock price” is not persuasive. Stock prices reflect future value and are not bound by a company’s current profit-and-loss position. The prosecution appears to have strongly pursued the investigation by first imposing a frame of “illegal management succession” without concrete physical evidence to prove the charges.

If the prosecution indicts Vice Chairman Lee Jae-yong, it will encounter an “unexpected obstacle.” Activist private equity fund Elliott Management is pursuing an investor-state dispute (ISD) case over the Samsung C&T merger. Elliott, which held more than a 7% stake in Samsung C&T at the time, filed the ISD claim in July 2018, alleging that the government intervened in the merger ratio through the National Pension Service and caused it damages of $770 million. If Vice Chairman Lee Jae-yong is indicted, the prosecution will effectively be siding with Elliott. If the prosecution proceeds with an indictment based on an assumption of guilt, it will in effect be overturning the government’s position in defending the ISD case.

Even if the prosecution accepts the Investigation Review Committee’s conclusion and decides not to indict, Samsung has already suffered considerable damage from being plagued by judicial risk for a long period. Vice Chairman Lee Jae-yong has been exposed to “judicial risk” for no less than 3 years and 7 months since November 2016. If the prosecution maintains an indictment despite the recent rejection of an arrest warrant for Vice Chairman Lee Jae-yong and despite the Investigation Review Committee’s recommendation not to indict, it may be seen as organizational egoism—having investigated for so long, it now wants to “at least get a court ruling” in self-justification. Driving a case toward a predetermined outcome cannot be justice. Because the Investigation Review Committee’s recommendation is the result of deliberative “collective intelligence,” it can reduce the likelihood of grave errors in the prosecution’s judgment. For the prosecution to kick away the deliberation and recommendation of the Investigation Review Committee, an institutional device it created itself, can only amount to hoisting itself by its own petard.

Cho Dong-geun, Emeritus Professor, Department of Economics, Myongji University

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Original title: 수사심의위도 불신? 묻지마 기소하면 객관적이라는 억지

Author: Dong-geun Jo

Date: 2020-07-01

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=20&idx=22888