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Embezzlement scandal

Investors prepare loss claim for Osstem's fraud case

A law firm may file a class-action suit against Osstem Implant, following the arrest of the suspect

By Jan 06, 2022 (Gmt+09:00)

The suspect of the 0 million embezzlement scandal was arrested at his home near Seoul on Jan. 5, 2022
The suspect of the $160 million embezzlement scandal was arrested at his home near Seoul on Jan. 5, 2022


Minority investors are preparing to file a class-action lawsuit against Osstem Implant Co., which on Monday revealed itself the victim of the largest-ever embezzlement scandal for a listed South Korean company, totaling 188 billion won ($160 million).

A Korean law firm Hannuri on Jan. 6 started inviting minority shareholders in the country's largest dental implant maker to seek compensation for their investment losses caused by the suspension of its share trading.

The move comes after the suspect of the fraud case, the company's finance team manager, was arrested at his residence in Paju, north of Seoul, on Wednesday night. He had hidden in a four-story building owned by himself.

Osstem pressed charges against him on Dec. 31, 2021, when its management was notified of the embezzlement. 

"Osstem Implant played down this embezzlement case as a personal deviation, but it was most likely due to the company's lax internal oversight and untransparent accounting systems," said a Hannuri official.

Depending on factual findings, the fraud case could be subject to class-action lawsuits for false entries on books and compensation for losses arising from the stock trading suspension, as well as a derivative lawsuit brought on behalf of other shareholders, it noted.

The 45-year-old employee, identified only by his family name Lee, is alleged to have transferred the money, equivalent to 92% of the company's equity capital, to his banking and brokerage accounts. He is also accused of manipulating the company’s accounting books.

The money he allegedly stole from the company is nearly double the operating profit of 98.1 billion won the implant maker earned in 2020 and two-thirds of its cash and cash equivalents as of end-September 2021. 

During a police investigation, the suspect has admitted to most of the allegations related to the embezzlement, according to the police officers.

The law firm also argued that Osstem Implant's CEO and Chairman Eom Tae-gwan could be held liable for the fraud case. Eom endorsed the company's third-quarter financial statement released on Nov. 15, 2021, saying there was neither false nor materially omitted information on the quarterly report.

ANY ACCOMPLICE?

The suspect joined Osstem in 2018 and has been working as a senior manager of the company's finance team.

His attorney on Thursday claimed that a top-level official of the Kosdaq-listed company was also involved in the case, running counter to the company's argument that the employee perpetrated the fraud alone.

Investors prepare loss claim for Osstem's fraud case


Before going into hiding on Dec. 30, 2021, the employee handed down three buildings in Paju, 30 kilometers north of Seoul, to his wife, younger sister and an acquaintance, respectively, according to the police.

He was also found to have purchased a total of 851 gold bars weighing 1 kilogram apiece, estimated at 68 billion won, at the Korea Gold Exchange's branch in Paju between Dec. 18 and 28.

Police froze his brokerage account with the balance of 20 billion won. But they failed to secure all of the gold bars bought by Lee, confiscating some of them from his home during his arrest.

STOCK INVESTMENT LOSSES

In October of last year, Lee made headlines after building up a 7.6% stake in Kosdaq-listed Dongjin Semichem Co.

Having spent 143 billion won buying the Dongjin shares, he cashed out most of his shares in the fine chemical and electronic materials company as of Dec. 30, according to a filing by Dongjin.

The divestment, however, resulted in 11.7 billion won losses, showed calculations by Market Insight, the financial market news outlet of The Korea Economic Daily.

His remaining 1.07% stake in Dongjin Semichem is worth 23 billion won ($19 million) based on Thursday's closing price. 

Osstem's CEO Eom on Wednesday issued an apology for the fraud scandal and pledged to avoid repetition of such an incident. 

But investors expressed doubt about its internal control systems. Although having a top executive of a global accounting firm EY and a former executive of the Korea Exchange as outside directors, the dental care products maker failed to prevent the fraud case. 

The embezzlement scandal also took a toll on equity-traded funds (ETFs) and retail funds. Market makers, or liquidity providers, are quoting lower prices for ETFs having shares in Osstem Implant in their portfolios, assuming the stock will be delisted.

For instance, Mirae Asset Global Investments Co.'s ETF investing in medical device companies was traded at 19,215 won on Thursday, or 0.79% lower than its net asset value.

Hana Bank, one of the country's top four lenders, stopped accepting new money from investors for its 77 retail funds holding at least one share of Osstem Implant. 

Write to Sul-Gi Lee, Hyung-Gyo Seo, Da-Eun Choi and Ye-Jin Jun at surugi@hankyung.com

Yeonhee Kim edited this article.

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