Ex-High Flying Venture Capitalist Indicted for Embezzlement

Police arrested yesterday Lee Cheol-sang, former president of mobile phone manufacturer VK, on charges of violating stock trade law, embezzlement and collecting assets through breach of trust.

Five others were arrested, including a former senior official at Korea’s largest mobile communications carrier, for receiving hundreds of millions of won from Lee in bribes.

A former head officer of VK’s planning and coordination department was indicted without detention and three other senior members including the vice president were put on the wanted list.

Two months before VK filed for bankruptcy in April 2006, Lee conducted a paid-in capital increase and committed accounting fraud to dupe shareholders, embezzling nine billion won (6.64 million dollars), prosecutors said.

He is also suspected of illegally receiving subsidies for business relocation to provincial area. He filed a false application for moving his company to Daedeok Techno Valley in Daejeon, South Chungcheong Province, in 2005.

Lee is alleged to have taken 1.87 billion won (1.38 million dollars) equal to half of land purchase fees offered by the Daejeon city government and the central government.

A prosecutor said he embezzled 1.3 billion won (959,700 dollars) by setting up a paper company overseas designed to forge trade links and arbitrarily used the corporation’s funds, causing more than 30 billion won (22.14 million dollars) in losses.

Between 2005 and 2006, Lee is suspected to have paid 500 million won (about 500,000 dollars) in bribes to a former executive director at the nation’s largest mobile communications provider to win 10 billion won (10 million dollars) in contracts.

Prosecutors said Lee probably spent most of the misappropriated money on outstanding debts, but did not rule out that he used part of the money to bribe politicians.

The collapse of the once high-flying venture firm is known to have originated from moral hazard. Lee, who was student body chairman at Seoul National University and acting president of the national university student association in 1991, was a key figure of the “386 generation” of student activists.

He set up VK, a mobile telephone company, in 2002 and achieved remarkable success as it made cell phones under its own brand. Faced with a worsening financial crunch in early 2006, however, he reportedly resorted to illegal activities to keep his company afloat.

“Under growing financial pressure, Lee committed a number of crimes such as setting up a paper company abroad to divert the funds, lobbying provincial governments to illegally get subsidies, and carrying out a paid-in capital increase by spreading false rumors,” a prosecutor said.

VK in 2004 boasted sales of 380 billion won (361 million dollars) and profits of 23 billion won (21.8 million dollars) in 2004, but went bankrupt after it failed to repay 1.78 billion won (1.87 million dollars) in debt in July 2006.

The company is under court protection.

mhjee@donga.com