[Fact Check] Four Keys to Unlock Lee Jae-myung's 'Daejang-dong Special Favor Allegations' Secret

SPC United for a Single Project
Dividend Structure Differs from Corporations
Hwacheon Daeyu's 1153-Fold Profit
Legality Remains a Key Issue
"Need to Examine Whether Risk Analysis by Risk Type Was Valid at Contract Time"

[Image source=Yonhap News]

[Asia Economy Reporter Koo Chae-eun] The tangled political disputes surrounding Gyeonggi Province Governor Lee Jae-myung's 'Daejang-dong Development Special Favor Controversy' are intensifying. Political terms such as 'power-type corruption set,' 'comprehensive department store of unfairness,' and 'construction-type gate' are rampant. The issue is complex as there are many project entities and stakeholders, and reports are flooding in with a mix of facts and suspicions. Some points raise reasonable doubts, while others are close to political attacks, requiring careful discernment. Here, we have summarized the key issues that need to be addressed regarding the 'Daejang-dong Special Favor Suspicion.'

① 7% VS 50%... Was the shareholder agreement appropriate? = First and foremost, the shareholder agreement structure, which is effectively 'inversely proportional' to the shareholding ratio, is a core issue in the Daejang-dong special favor suspicion. The fact that Hwacheon Daeyu and six specific money trust investors, who are minority shareholders with only 7% of the shares, received dividends of 404 billion KRW is a 'fact.' This amount is more than twice the dividend (183 billion KRW) of Seongnam Urban Development Corporation, the major shareholder of Seongnam-eui Tteul, which owns 50% of the shares.

This is far from the 'common sense' of a joint-stock company where dividends are determined in proportion to investment (shareholding ratio). Accountant Kim Kyung-yul, who first raised this issue, pointed out the 'excessive capital gains compared to the shareholding' as the biggest problem. Professor Seo Jin-hyung of Gyeongin Women's University, who serves as president of the Real Estate Society, said, "Even though it is a public development, the legality of the excessive profit distribution to the private developer should be clarified."

However, there is also a counterargument regarding the uniqueness of the PFV project. According to the financial sector, the dividend structure of a special purpose company (SPC) temporarily formed for a single project differs from that of a 'going concern' joint-stock company. A project finance (PF) official from a commercial bank said, "If the major lenders (banks), developers, and public corporations share responsibility for a single project, the dividend structure is not arranged like a general joint-stock company (proportional to shareholding)." He added, "It can be calculated complexly depending on the structure that bears priority fixed profits and risks, and depending on the market conditions, the private developer may receive a large share of the profits."

② Was the 1,153 times profit on 50 million KRW appropriate? = Another issue is that Hwacheon Daeyu earned an astronomical profit of 57.7 billion KRW, which is 1,153 times the capital of only 50 million KRW. The suspicion has grown especially since it was revealed that key political and government figures such as People Power Party lawmaker Kwak Sang-do, former special prosecutor Park Young-soo's children, and former Supreme Court Justice Kwon Soon-il are connected to Hwacheon Daeyu, owned by former journalist A.

However, judging the legality of this is not easy. The form guaranteeing a 'priority fixed profit' of 550 billion KRW could have been a second-best profit structure in an environment where the real estate market outlook was unpredictable. Lee Jae-myung's camp points out that the real estate market was unfavorable in 2015. A real estate developer said, "In 2015, unsold properties were rampant, and from Seongnam City's perspective, structuring the project to avoid even small losses rather than making large profits was important." He added, "The structure where Seongnam City only took the 'priority fixed profit' and all excess profits went to the private developer ultimately gave the private developer a 'jackpot,' but it would be difficult to accuse Governor Lee's camp of breach of trust over this."

However, there are strong counterarguments. Even in 2015, it was not difficult to expect profits from new town land development in the metropolitan area. Critics argue that instead of setting the fixed profit of 550 billion KRW as a 'base value,' the project structure should have imposed a 'cap' on excess profits, similar to the price ceiling system, so that Seongnam City could share part of the profits.

Professor Shim Kyo-eon of Konkuk University's Department of Real Estate said, "It is necessary to examine whether the risk analysis for each risk was properly conducted in the contract at that time," adding, "Although PF projects declined until 2012, they rebounded afterward, and land development typically yields substantial profits."

③ Was SK Securities a 'blind' trust? = There is also criticism that the investment by journalist A's special associates in SK Securities in the form of a 'specific money trust' alongside Hwacheon Daeyu was effectively a 'blind trust.'

However, the dominant view in the financial sector is that such suspicion is inappropriate. Because it is a specific money trust, it is possible to identify who the financial investors are through investigation. In fact, the opposite concept, unspecified money trusts, have been banned from new contracts since 2004. A real estate developer pointed out, "The issue should not be whether it is a specific money trust, but whether there was collusion or quid pro quo between the financial investors and Seongnam City officials responsible for permits at the time."

Although it is suspicious that a newly established company won the contract too quickly, this is common in the PFV industry. Private developers typically establish new companies a few months before bidding for a single project, usually forming a consortium with reputable firms such as commercial banks as investors.

④ 47.3 billion KRW loan, 35 billion KRW operating fund source is key = Ultimately, the most important issue currently is the allegations of bribery and misconduct involving former journalist A, the major shareholder of Hwacheon Daeyu, who is a key figure in this matter, and former Planning Director Yoo Dong-gyu of Seongnam Urban Development Corporation, who was responsible for the project at the time.

In particular, the police investigation focuses on tracing the use of the 47.3 billion KRW long-term loan used by A and the source of the 35 billion KRW operating funds used by Hwacheon Daeyu. If it is confirmed that the 47.3 billion KRW long-term loan flowed to Seongnam City officials as a bribe for permits, or that part of Hwacheon Daeyu's operating funds originated from bribes for permits, it could be seen as misconduct or special favors, and there could be moral responsibility for Governor Lee's side.

Moreover, it is important to determine whether former Planning Director Yoo, who was in charge of the Daejang-dong project and knew it better than anyone else, engaged in special favors or misconduct such as granting permits in exchange for favors.

Governor Lee's camp draws a line by saying, "Seongnam City took the 550 billion KRW fixed profit, and the rest is the private developer's internal matter," but there is room for controversy. A real estate industry insider said, "If local government officials responsible for permits did not know who participated in the developer for a land development project worth 1.5 trillion KRW or the source of funds, there could be breach of trust controversy." He added, "The involvement of key political and government figures in the developer is suspicious, so special favors or misconduct related to this will be a key issue going forward."