Abnormal Financial Flows Involving Chungho Comnet and One Asia Partners
"Full Investigation Demanded Over Misappropriation of Company Funds and Breach of Trust"
On December 13, Yong Poong and MBK made these findings public, stating, "This flow of funds appears to have been directed for the benefit of specific individuals, regardless of the company’s interests. Therefore, a thorough investigation and verification of the appropriateness of the fund usage and potential breach of trust are necessary."
According to Yong Poong and MBK, in September and October 2019, the private investment association "Yeorigo No. 1 Fund" (Yeorigo), in which Chairman Choi held a 99.9% stake, became the third-largest shareholder of Chungho Comnet by acquiring approximately a 6.2% stake through an off-market purchase of treasury shares and a third-party allocation of new shares. At that time, Chungho Comnet was facing a severe liquidity crisis due to capital erosion and accumulated short-term debt.
On March 12, 2020, Chungho Comnet sold its wholly-owned subsidiary "Sewon" for 20 billion won to a newly established company, SWNC, which had a capital of 300 million won and had been founded just one month earlier. The CEO of SWNC at the time was Mr. Lee, an associate of former CEO Ji. For the 2019 fiscal year, Sewon recorded an operating profit of approximately 350 million won and net assets of about 8 billion won. More than half of those net assets (about 4.4 billion won) were loans receivable from Chungho Comnet, which was a troubled company. Yong Poong and MBK criticized the deal, saying, "By normal valuation standards, this transaction appears to have been made at an abnormally high price."
According to a disclosure by the Financial Supervisory Service, Korea Zinc is believed to have lent 20 billion won to SWNC at the same time, using Sewon shares as collateral. In other words, the actual source of funds for the Sewon acquisition may have been Korea Zinc’s company funds.
Immediately after the inflow of these funds, Chungho Comnet’s financial condition improved. Its share price, which had been in the 2,000 won range, rose to about 8,000 won by August 2020. At that time, Yeorigo, Chairman Choi’s private investment association, sold its entire stake, realizing significant capital gains. Former CEO Ji’s side also disposed of their shares around the same time.
About a year later, on January 20, 2021, the private equity fund "Arbitrage No. 1," managed by Ji’s One Asia Partners, invested 25.5 billion won in SWNC. Much of Arbitrage No. 1’s funding came from Korea Zinc’s investments. Disclosures show that SWNC repaid its 20 billion won loan to Korea Zinc between late 2020 and early 2021, but SWNC had no substantial business operations, and there is no evidence of a capital increase or additional borrowing.
Yong Poong and MBK, who are contesting management control of Korea Zinc with Chairman Choi, argued that it is highly likely the repayment funds for SWNC came from Korea Zinc’s investment in Arbitrage No. 1. They described this as an abnormal structure in which company funds were used to repay the company’s own receivables.
Yong Poong and MBK stated, "It is clear that Korea Zinc’s funds flowed into Chungho Comnet, SWNC, and Arbitrage No. 1 according to the personal interests of Choi Yoonbum and Ji Changbae, rather than for the benefit of Korea Zinc. The fact that the final destination and recovery of the 20 billion won outflow cannot even be confirmed is a serious problem."
Furthermore, they announced their intention to file a complaint against Chairman Choi for breach of trust and violation of the Act on the Aggravated Punishment of Specific Economic Crimes, including possible use of undisclosed information, and to submit a petition to the financial authorities.
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