[Exclusive] Prosecutors: Former Meritz Securities Employees Assessed Collateral Value of Nonhyeon-dong Business Site... Did Not Solicit Subordinated Investors for CB

Meritz Securities, While Brokerage of CB for All Former Employees,
Assessed Collateral Value of 'Nonhyeon-dong Site' for the CB,
Did Not Recruit Subordinated Investors and Invested Directly

The prosecution indicted six former executives and employees of Meritz Securities' IB Business Division and one former employee of Daol Investment & Securities' IB Department on October 30, stating in the indictment that “during the process of underwriting convertible bonds (CB), the collateral value and loan-to-value ratio of the non-public Nohyeon-dong business site were substantial, so no separate subordinated investors were recruited.” Among the seven individuals brought to trial, six?excluding one former head of Meritz Securities' IB Business Division accused of loan brokerage?are charged with using CB-related insider information for personal gain.

According to the indictment obtained by Asia Economy on the 20th from the Tax Crime Investigation Division of the Seoul Central District Prosecutors' Office (led by Chief Prosecutor Lee Jin-yong), the company issuing the CBs, whose employees of Meritz Securities and Daol Investment & Securities are accused of pursuing personal gain using undisclosed information, is Company A, a KOSDAQ-listed civil engineering and construction company located on Yeongdong-daero in Gangnam-gu. The prosecution's indictment states that around March 2018, Company A was conducting a construction project for an 80-unit apartment and officetel building on four plots in Nohyeon-dong, Gangnam-gu, Seoul. During this process, it borrowed 50 billion KRW from savings banks and planned to issue CBs worth approximately 50 billion KRW in December of the same year to repay the loan.

According to the review materials from the main deliberation on February 21, 2019, secured by the prosecution and included in the indictment, the 50 billion KRW CB issuance by Company A specified “senior tranche: Meritz Securities 34 billion KRW, Meritz Capital 8 billion KRW; subordinated tranche: investors other than Meritz Securities 8 billion KRW.” The review materials also stipulated that as collateral for the CBs, “Meritz Securities and Meritz Capital hold first-priority beneficial rights (120%) on the collateral trust of the Nohyeon-dong business site, while investors other than Meritz Securities hold second-priority beneficial rights (120%) on the collateral trust of the Nohyeon-dong business site, along with waivers of business execution rights.” The review materials estimated the appraisal value of the Nohyeon-dong business site at approximately 82.8 billion KRW under the Sale and Leaseback Development Act, with Meritz Securities and Meritz Capital’s loan-to-value (LTV) ratio at 50.7%. It also analyzed that “the sale price per unit of Meritz Securities’ investment in the Nohyeon-dong business site was significantly lower than the transaction price of nearby sites.”

Typically, when CBs are converted into stocks, they can be immediately liquidated, so most do not require additional collateral or guarantees. As long as the listing is maintained, the conversion right acts as a form of collateral. Therefore, the CBs secured by the Nohyeon-dong business site appear to have had a double safety mechanism. Employees of the securities firms seem to have learned this as internal information and decided to invest using insider information.

The prosecution stated, “Given the substantial collateral value and loan-to-value ratio of the Nohyeon-dong business site, information that principal and interest were guaranteed even for subordinated investors was used to avoid recruiting separate subordinated investors. Instead, family members and acquaintances actually invested funds and acquired approximately 2.5 billion KRW worth of the CBs through a sell-down method.” The prosecution believes that a separate corporation was established, and the CBs were purchased under the names of family and acquaintances through nominee limited companies, with a conspiracy to exercise conversion rights to obtain interest and conversion gains.

Accordingly, the prosecution applied charges of violating the Capital Markets Act to two former team leaders and two team members of Meritz Securities’ former IB Business Division, as well as a former employee of Daol Investment & Securities’ IB Department. The prosecution estimates that the profits these individuals gained from interest, conversion gains, and interest income related to the CBs amount to approximately 1.38 billion KRW.

When asked about the charges of pursuing personal gain through CB issuance as stated in the indictment, the defendants’ lawyers responded that it was “information they could not comment on” and did not provide additional responses by the morning of the 20th. Meritz Securities also stated that “there is no comment to be made” regarding the matter. The first preparatory hearing for this case was held on the 10th, with the next hearing scheduled for March 20 of next year.

Meanwhile, on the 19th, the Tax Crime Investigation Division of the Seoul Central District Prosecutors' Office conducted a search and seizure at Meritz Securities. The prosecution is also investigating allegations of violations of the Capital Markets Act related to the issuance and trading of bonds with warrants (BW) between Ihwa Electric and Meritz Securities. The Financial Supervisory Service has been uncovering a series of improper business practices by securities firms in the trading and brokerage of private placement CBs and BWs and has been referring these cases to the prosecution.