Samsung Arm Faces Criminal Probe After Breaking Accounting Rules

(Bloomberg) -- Samsung Group’s biotechnology unit is facing a potential criminal investigation and delisting after South Korea’s financial regulator said that the company “intentionally” violated accounting rules surrounding an initial public offering.

A securities panel of South Korea’s Financial Services Commission said Wednesday Samsung Biologics Co. deliberately overstated the value of affiliate Samsung Bioepis ahead of its IPO in 2016, which raised about $2 billion. The regulator fined Samsung Biologics 8 billion won ($7 million) and recommended the company dismiss its CEO.

FSC Vice Chairman Kim Yong-beom said in briefing that it would ask prosecutors to launch a criminal investigation into the accounting violations while stock trading of Samsung Biologics will be halted. The company will also be under review for delisting. Kim said no companies have been delisted on accounting issues in South Korea so far.

Latest Scandal

The scandal is the latest involving a Samsung Group unit, after Jay Y. Lee, vice chairman of Samsung Electronics Co., was jailed for bribery and released earlier this year. The case threatens to be another potential black eye for the country’s biggest chaebol and may resurrect calls for better corporate governance.

Samsung Biologics, in an email statement, expressed regret over the financial regulator’s ruling, saying it was confident that the company didn’t violate accounting standards. Samsung Biologics said it will file an administrative lawsuit against the decision.

“I don’t think this issue will end in the short term," said Park Sung-shin, fund manager at KTB Asset Management in Seoul. “The issue will be sent to prosecutors, and there is uncertainty whether it will have an impact on the succession issue of Samsung Group."

Samsung Biologics may also see headaches with its earnings.

“The possibility of delisting is extremely low,” said Han Byung-hwa, analyst at Eugene Investment & Securities. “But uncertainties will remain because of some issues such as possible revisions of its financial reports.”

Lost Value

The company has lost $10 billion in market value since it disclosed in May that its accounts were being audited. On Wednesday, its market cap was at $19.5 billion as its shares rose 6.7 percent before announcement was made.

The country’s financial watchdog began auditing Samsung Biologics last year after several lawmakers and a civic group accused the company of improperly changing its Bioepis unit to an affiliate status, a move that they said inflated the company’s value ahead of the IPO. Critics also accused Samsung Group of orchestrating the accounting change to benefit the merger of Samsung C&T and Cheil Industries, which bolstered Samsung heir Lee’s succession plans.

Samsung Biologics has said its financial books were verified by outside accounting firms and fully reflected accounting standards in 2015. The company said it had no reason to “intentionally” manipulate the financial numbers. Samsung Biologics also said its accounting treatment could not have had any impact on the merger of Samsung C&T and Cheil Industries as it was completed before the accounting change.

--With assistance from Jihye Lee.

To contact the reporters on this story: Heejin Kim in Seoul at hkim579@bloomberg.net;Shinhye Kang in Seoul at skang24@bloomberg.net

To contact the editors responsible for this story: Peter Pae at ppae1@bloomberg.net, Jeff Sutherland

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