Increased Likelihood of Arrest for Kim Beom-su... Kakao Cornered on All Sides

Kakao and Kakao Entertainment Referred to Prosecutors... Kim Beom-su Faces Imprisonment Decision
Leadership Vacuum Threatens Business, Kakao at a Standstill

Kim Beom-su, founder of Kakao and head of the Future Initiative Center, stands at a crossroads of detention. He is suspected of manipulating market prices during the acquisition process of SM Entertainment (SM). Financial authorities have referred Kakao executives and the Kakao corporation involved in the allegations to the prosecution. Facing an unprecedented leadership vacuum crisis, Kakao is currently in a state of zero visibility.

On the 26th, the Capital Markets Special Judicial Police (Special Judicial Police) of the Financial Supervisory Service announced that they would refer Bae Jae-hyun, Kakao’s Chief Investment Officer, Kang Ho-jung, Head of Kakao Investment Strategy Office, and Lee Jun-ho, Head of Investment Strategy at Kakao Entertainment, to the prosecution with charges. The corporations Kakao and Kakao Entertainment were also referred to the prosecution with charges including violations of the Capital Markets Act.

Kim Beom-su, former chairman of Kakao, is appearing at the Financial Supervisory Service on the 23rd to be investigated regarding allegations of stock price manipulation in the acquisition of SM Entertainment. Photo by Kang Jin-hyung aymsdream@

Although Kim is currently excluded from the referral, he will continue to be investigated. The Special Judicial Police stated, "Among the 18 suspects related to this case, only three individuals and two corporations, totaling five, have been referred to the prosecution first, and the remaining suspects will be swiftly investigated and additionally referred." They added, "During the rapid fluctuations in stock prices, not only was the reasonable investment judgment of general investors impaired causing losses, but also a wrong precedent that 'illegal and unfair practices' can win in acquisition competitions may be set. This case involved organized participation from groups of financial and legal experts, constituting a serious crime that undermines the foundation of the capital market," strongly criticizing the incident.

Inside and outside the industry, it is widely expected that the Special Judicial Police will request an arrest warrant for Kim. On the 23rd, Kim was summoned as a suspect and subjected to an intensive investigation lasting nearly 16 hours, which is interpreted as confirming the necessity of detention for investigation. Given that Financial Supervisory Service Chief Lee Bok-hyun has repeatedly emphasized a "strict response" with strong remarks, it is also anticipated that active measures will be taken.

Kakao faces a crisis of leadership vacuum. If Bae, considered Kakao’s second-in-command, and Kim both become embroiled in legal risks, the Kakao community will lose its central figure. Although Kim has stepped back from frontline management, he remains at the core of leadership. He stepped down as chairman of the board in March last year but continues to serve as head of the Future Initiative Center. As the founder, he plays a role in presenting the vision for the future growth of the entire community. Moreover, upon relinquishing the chairmanship, he declared his intention to focus on the global expansion, which is Kakao community’s top priority. Since the platform outage caused by a data center fire in October last year, raising questions about the responsibility of platform companies, Kim’s role has grown even more significant.

The business is also in a dire situation. With the referral of the Kakao corporation to the prosecution, Kakao’s status as the major shareholder of Kakao Bank has become precarious. Currently, Kakao holds a 27.17% stake in Kakao Bank, making it the largest shareholder. According to the Internet Banking Special Act, industrial capital holding more than 10% of an internet bank’s shares must not have been fined or punished with a heavier penalty under the Tax Offenses Punishment Act, Specific Economic Crimes Aggravated Punishment Act, or Fair Trade Act within the past five years. If a fine or heavier penalty is confirmed for violating the Capital Markets Act, Kakao would have to relinquish 17% of its Kakao Bank shares.

Kakao Entertainment, which was also referred to the prosecution, has faced a sudden halt in its initial public offering (IPO) plans. Decision-making has come to a complete stop due to the absence of key executives. In the worst-case scenario, Kakao could lose control of SM’s management rights. Although financial authorities do not have the power to nullify Kakao’s acquisition of SM, they have been pressuring Kakao daily, stating they will strip away profits obtained through illegal transactions in the capital market. With the entertainment business, which Kakao had been nurturing as a global growth engine, now facing a red light, the entire business structure must be reorganized.

Following the news of Kakao’s referral to the prosecution, its stock price fell to 37,400 KRW during the trading session, marking a 52-week low. Compared to this year’s peak, it has dropped nearly 50%. Amid expectations of a third-quarter “earnings shock” and added legal risks, the stock shows no signs of recovery. Internally, Kakao is reportedly in a state of confusion. As legal risks rapidly shift to Kim, the situation is chaotic both inside and outside the company. Kakao has not issued any statements, citing the ongoing investigation.