[Invest&Law] Financial Supervisory Service Dedicates Efforts to Review 'Inflated IPO' Data... Alert on Investigation Scope

SK Hynix Search and Comparison of Internal Data by Pado in Progress
Scheduled to be Transferred to Southern District Prosecutors' Office After FSC Investigation
Attention on Investigation Scope

The Financial Supervisory Service (FSS) and the prosecution have secured and begun reviewing internal documents from SK Hynix in connection with suspicions of inflated IPOs involving the semiconductor design specialist company (fabless) Padu. Industry and legal circles are closely watching how far the scope of the investigation will expand.

SK Hynix Headquarters, Icheon-si, Gyeonggi-do [Image source=Yonhap News]

According to financial authorities on the 8th, the FSS Capital Market Special Judicial Police (Special Judicial Police) and the Seoul Southern District Prosecutors' Office have been working to cross-check materials obtained from the search and seizure of SK Hynix's headquarters in Icheon, Gyeonggi Province, on the 30th of last month with Padu's internal documents. They are trying to verify whether Padu's revenue estimation process was appropriate.

SK Hynix is Padu's largest customer, and based on transaction volumes with SK Hynix, Padu calculated its estimated annual revenue for last year at 120.2 billion KRW and recorded this amount in the IPO prospectus during the KOSDAQ listing process. Financial authorities are investigating on the grounds that this revenue figure was inflated to conceal poor performance.

Currently, the FSS is leading the investigation. The case is expected to be transferred to the Seoul Southern District Prosecutors' Office afterward. If the FSS determines that the charges are clear, it will recommend prosecution.

The suspicion of Padu's inflated IPO arose because during the KOSDAQ listing preparation, Padu reported a high estimated annual revenue and listed under the 'technology special case' but subsequently announced performance that fell short of this. The gap was so large that investors raised concerns that Padu might have deliberately concealed the fact that its sales in the second quarter, when the IPO process was underway, were nearly zero. When preparing for the listing in August last year, Padu recorded an estimated annual revenue of 120.2 billion KRW, but after listing, it announced sales of 59 million KRW in Q2 (April?June) and 320 million KRW in Q3 (July?September), respectively.

The FSS is accelerating the investigation, having conducted a search and seizure of SK Hynix just one month after raiding Padu in March. The FSS described the SK Hynix search as an "investigation of a witness nature to collect objective data."

The two companies are reportedly intertwined through various personnel and material circumstances. Padu's co-CEOs have considerable ties to the SK Group. CEO Lee Ji-hyo is a former Bain & Company consultant who frequently worked with SK Group, and CEO Nam Yi-hyun previously worked as a semiconductor researcher at SK Telecom's Convergence Technology Institute. SK Infosec, a subsidiary of SK Telecom, converted Padu's convertible bonds (CB) into 1.125 million shares in December 2020. Previously, SK Infosec had co-invested with venture capital in 3 billion KRW worth of CBs issued by Padu in 2016 and 2017. When maturity came due, instead of redeeming, they converted the bonds into shares.

There are also expectations that the FSS Special Judicial Police will expand investigative personnel from mid-month to clarify the case. This is because this is the first major case since the FSS Special Judicial Police expanded its size this year, and they are expected to be highly motivated. In the regular personnel reshuffle in January, the FSS increased the Special Judicial Police staff from a base of 26 to 46. In addition to the existing Investigation Team 1 and Investigation Team 2, a Rapid Investigation Unit and a Digital Forensics Unit were newly established.