[Flashback] Accounting Fraud, Family In-Fighting and Succession Transitioning: Lotte Chairman’s Brother Probed Over Stock Trading


Posted by Joel CHUA Yong Sheng, Year 3 undergrad at the School of Business, Singapore Management University

Lotte Chairman’s Brother Probed Over Stock Trading

By Bae Ji-sook

Staff Reporter
Shin Joon-ho, the younger brother of Lotte Group Chairman Shin Kyuk-ho, was questioned as a “person of interest” in connection with allegations that he made profits illegally during stock trading.The Busan District Prosecutors’ Office said Wednesday that the 69-year-old chairman of Purmil, a dairy firm formerly affiliated with Lotte, is suspected of making profits to the tune of 300 billion won by selling his stake in Daesun Distillery in 2007, three years after he purchased it at a price of 60 billion won.
“I will do my best to answer the prosecutors’ questions as earnestly as I can,” Shin said before entering the prosecution’s building. He denied any wrongdoing.
The prosecutors said Shin bought a 98.98-percent stake in the distillery’s stock with 60 billion won from Daesun Chairman Choi Byeong-suk in 2004 and sold it to a private equity fund three years later for 360 billion won. Choi and Shin are in-laws.
According to prosecutors, Shin used Daesun’s assets as collateral to borrow 200 billion won from Cornerstone Equity Partners, an affiliate of the Korea Investment Holdings, in order to fund his takeover of the distillery. This leveraged buyout may have caused Daesun stakeholders to experience losses, the prosecutors said, adding that Cornerstone also may have used illegal means to raise the funds that eventually went to Shin.
They are also tracking how the stock value could have soared 12 times in just three years and where Shin has spent the profits. They suspect some accounting fraud was perpetrated to create slush funds.
Investigators have raided Shin’s house and the headquarters of both Daesun and Purmil.
Shin took over Lotte Milk in 2007, and changed the name to Purmil to gain complete independence from its former mother company. He and his eldest brother are reportedly not on speaking terms after they fought over the takeover of the Lotte confectionary plant site in 1996.

January 13, 2015 1:00 pm

Founder steps in to end dual leadership

KOICHI KATO and TATSURO MIYAZUMI, Nikkei staff writers

SEOUL/TOKYO — Lotte Holdings has removed the eldest son of the conglomerate’s founder from its management. Many believe the move was made to spare the group from a potentially damaging family feud.

Lotte Holdings announced last Friday it had dismissed Shin Dong-joo, known in Japan as Hiroyuki Shigemitsu, as vice chairman at an extraordinary shareholders meeting the day before. He is the eldest son of Shin Kyuk-ho, an ethnic Korean resident in Japan who founded Lotte soon after the end of World War II. He made his company into a confectionery giant in Japan and a sprawling business empire in South Korea.

While the eldest son had been in charge of the group’s operations in Japan, the second son Shin Dong-bin, or Akio Shigemitsu, has been managing Lotte’s businesses in South Korea. A spokesman for Lotte Holdings, a private company, said no information about the shareholders meeting is available to the public.

Known in Japan as Takeo Shigemitsu, the 92-year-old founder appears to have decided to end this dual leadership system apparently to ensure a smooth leadership transition and lay a solid foundation for renewed growth of the group.

The latest announcement concerning Shin Dong-joo, came four days after Lotte Holdings said he had been relieved of posts at three subsidiaries since Dec. 26. His removal from Lotte Holdings’ management shocked many working for the group. “I wonder what is happening,” muttered a bewildered senior executive at the Lotte group in South Korea.

Sibling rivalry?

The Japanese and South Korean operations of the Lotte group are managed separately. There are few human exchanges between the two sides at anything but the highest levels.

Another senior executive at the South Korean Lotte group, one of the biggest family-controlled business conglomerates in the country, said the founder controls personnel affairs at both the Japanese and South Korean units. The decision to dismiss his eldest son from the Japanese holding company’s management must have been the founder’s own, the senior executive added.

Some insiders say there has been a rift between Shin Dong-joo and Lotte Holdings President Takayuki Tsukuda over management policy. A former executive at Sumitomo Bank (now Sumitomo Mitsui Banking), Tsukuda, who also served as president of Royal Hotel, has won the trust of the Lotte founder.

The founder apparently supports Tsukuda’s management strategy over his son’s.

Separate paths

A first-generation Korean with permanent residence in Japan, Shin founded Lotte in 1948 in Tokyo. The company expanded into South Korea in 1967.

Shin put his eldest son in charge of the group’s Japanese operations, composed mainly of the production and sales of confectionery. His second son was entrusted with the management of South Korean operations, which include retail, chemical and other businesses.

With group sales of 83 trillion won ($76.8 billion) in 2013, the South Korean arm is the nation’s fifth largest chaebol conglomerate and far bigger than Lotte Holdings. The Japanese arm of the company has some 400 billion yen ($3.3 billion) in sales.

South Korean Lotte has also a far bigger global presence than its Japanese counterpart. Still, the Japanese unit is important for the overall group.

Lotte Holdings is the largest shareholder of Lotte Hotel, which is at the top of the conglomerate’s business hierarchy. The Japanese company owns 19% of the group’s hospitality arm.

Bad signs

There have been some signs of tension between the two brothers. They competed in 2013 to acquire a bigger stake in Lotte Confectionery, the core company of the group, by buying additional shares.

A senior Lotte executive, however, denies the personnel decision was related to the sibling rivalry. Since  Shin Dong-bin’s stakes in group companies have remained unchanged, despite his dismissal from management posts, the move is not about a leadership struggle, the executive claimed.

But the history of South Korea’s family-controlled business conglomerates is littered with tales of bitter power struggles and family feuding.

After Chung Ju-yung, the founder of the former Hyundai group, retired from management, his sons battled for leadership, causing the empire to break up. Today, most companies bearing the name Hyundai are not legally connected to the founding group.

It is widely believed that a similar situation was developing at Lotte.

Down on its luck

Lotte aims to double its sales to around 20 trillion yen by 2018. Its current earnings performance makes that target look unrealistic.

The group’s retail business has been hit by South Korean regulatory restrictions on weekend operations at large-size supermarkets. Its chemical arm has also suffered a decline in earnings due to aggressive competition from Chinese rivals.

A second Lotte World amusement complex opened in October in southern Seoul. Troubles, such as water leaks at an aquarium, have dogged the complex so far. The confectionery business in Japan is also struggling due to steadily shrinking sales of chewing gum, the company’s main revenue source. Gum sales at Lotte, the largest player in the market, have been falling in line with the trend.

Lotte Holdings’ sales for the 12 months through March 2014 plunged by 27% from the previous year to 407.7 billion yen.

It is no wonder that Shin Kyuk-ho, who will turn 93 this autumn, has made the surprising personnel decision. Any power struggle between his sons at this crucial juncture could be incredibly damaging.


South Korea’s tallest skyscraper rises in cloud of fear

3:57am IST

By Joyce Lee

SEOUL (Reuters) – At 92, the man who built South Korea’s biggest retail empire is finally making his mark in the Seoul skyline as the country’s tallest tower takes shape – just as public faith in corporate giants crumbles into safety fears and mistrust.

Shin Kyuk-ho first envisioned a landmark for Lotte Group 28 years ago, when family-run conglomerates, or ‘chaebol’, like his led the rise of South Korea’s economy. Now the plan to build the world’s sixth-tallest skyscraper by 2016 is marred by teething troubles at a newly opened mall and leisure complex at its foot: Visitor numbers have nearly halved, forcing Lotte to cut rents.

It makes no difference that Shin is one of South Korea’s most successful businessmen and that Lotte has no record of major safety blemishes. After a ferry sinking last year that killed 304 people, South Koreans were shocked into a mood of zero tolerance for safety lapses, and the scale of the 3.7 trillion won ($3.3 billion) Lotte World Tower project is matched by the level of public scrutiny.

Korea’s safety obsession comes as many also become less forgiving of the still-dominant chaebol, sensing a high-handed approach towards customers and investors. In a case that spurred resentment, the daughter of Korean Air Lines’ (003490.KS: QuoteProfileResearch) chairman gained widespread scorn – as well as a jail sentence – over a “nut rage” incident, after demanding a taxi-ing jet return to its gate over the way she was served nuts.

“Many people think this place is dangerous. Safety is a concern here,” said Choi Dong-joon, a 33-year-old shopper and resident of Jamsil, an affluent district near the ritzy Gangnam area where the upscale Lotte World Mall opened last October, hosting retail names from Hermes to Celine. “I only came because they have some luxury brands that you can’t find elsewhere.”

As the tower climbs towards its planned 555-metre height (about 1,821 feet), glitches have been found at the giant, six-storey mall next door that would be standard in any major new construction. Still, safety concerns have been magnified over issues as minor as water seepage from an aquarium or vibrations in one multiplex movie theatre caused by speakers in another.

Local and overseas construction and aquarium experts told Reuters the issues at the 4.6 million square foot mall – an area nearly as big as the Vatican – along with the three fatalities recorded so far in the tower’s construction, wouldn’t be considered unusual elsewhere. Seoul city authorities nonetheless ordered the temporary closure of both aquarium and cinema after the minor flaws came to light last December.

Lotte is the country’s fifth-largest chaebol, guided by Shin to annual revenue of more than $70 billion nearly half a century after he founded now-listed Lotte Confectionery (004990.KS: Quote,ProfileResearch) selling chewing gum.

“Lotte World Mall is seeing difficulties as sensitivity about safety has been heightened, and the negative perception appears partially amplified by existing anti-chaebol sentiment,” said Cho Myung-hyun, vice-dean of Korea University Business School.


The planned 123-storey Lotte World Tower – construction has now reached the 99th floor – was designed by architecture firm Kohn Pedersen Fox citing inspiration from traditional Korean pottery and calligraphy brushes. It will host office space, upscale apartments, a six-star hotel and even an art gallery near its summit.

“Only a few ancient palaces are shown to foreign visitors now,” Shin once said of the tower. “We need a world-class landmark to attract them.”

While the tower is due to be completed in 2016, the adjacent mall opened close to an existing Lotte theme park last October with 100,000 visitors a day, now down to 58,000, the company said. With no immediate recovery in visitor numbers in sight, Lotte is now offering a 30 percent discount for retailers on rent due for the past five months.

“We have changed leadership, set up a safety command centre and now receive instant messages from the chief executive down to take immediate measures for the smallest incidents, including when a puddle is found or a customer trips,” said Choi Kyung-in, a managing director of Lotte World Tower and Mall operator Lotte Corp told Reuters.

The aquarium and cinema glitches have been fixed, Lotte said, but both attractions remain shuttered. A Seoul city administration official said it will review Lotte’s findings but has not set a date for possible reopenings.

On the mall’s fifth floor, Sung Myung-yong, manager of a Korean restaurant, is trying to be optimistic.

“Daily sales probably hit bottom in early February, but things are looking up,” she said. “Things are not as bad as media make it seem.”


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