Samsung Chief Sentenced To 5 Yr Jail Term, For Bribery & Embezzlement

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Seoul: A court in South Korea on Friday reportedly sentenced Samsung’s de-facto chief Jay Y. Lee to a five-year jail term, according to local media. The sentencing followed a trial where he was accused of paying bribes to gain government favors for the conglomerate.

According to local news agency Yonhap, the court said Samsung Electronics vice chairman Lee gave bribe to get support from ousted President Park Geun-hye. It also reportedly said Lee embezzled 6.4 billion Korean won.

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Reuters reported previously that prosecutors have demanded a 12-year jail sentence for Lee and that he also faces charges of embezzlement and perjury. Lawyers expect an appeal that could go all the way to the Supreme Court, with a final ruling likely in 2018, according to Reuters.

Samsung C&T shares were down nearly 1.5 percent in the afternoon session, recovering slightly from an earlier drop of more than 2 percent. Samsung Electronics shares were down 1 percent.

Lee, the 49-year-old scion of the family behind South Korea’s largest chaebol, was taken into custody and held by authorities since February. Chaebols are South Korea’s large, family-run conglomerates that have historically played an important role in the country’s economic development.

The special prosecutor’s office accused Lee of bribing a close friend of former President Park Geun-hye to gain government favors for Samsung.

That allegedly included a government approval in 2015 of the merger between Samsung C&T and Cheil Industries. The merger was opposed by Samsung C&T shareholder Elliott Associates, which said the deal greatly undervalued the company and overvalued Cheil Industries.

The deal was part of a corporate restructuring program that was driven by the Lee family to consolidate power, particularly over the prized flagship brand Samsung Electronics, and to avoid paying excessive inheritance tax. Following that merger, the next step was to consolidate both Samsung Electronics and Samsung Life Insurance under the control of Samsung C&T, according to Park Sangin, a professor of economics at Seoul National University.

“But that was not completed yet because of the whole scandal of ex-President Park Geun-hye,” Park told CNBC’s “Capital Connection” on Friday.

Both Lee and Samsung denied any wrongdoing in February. The official stance was that Samsung admitted to giving money to foundations at the center of a corruption scandal that ultimately saw President Park removed from power, but the company maintained it received nothing in return.

Samsung also dismantled its corporate strategy office that handled key decisions for the conglomerate in light of the scandal. Top Samsung executives, including Vice Chairman Choi Gee-sung and President Chang Choong-ki also resigned.

Experts previously told CNBC that the verdict on Lee was unlikely to affect Samsung’s day-to-day business. That was because Lee is not the global face of the brand, according to one analyst.

In July, the flagship brand Samsung Electronics reported a second-quarter operating profit of $12.67 billion due to a boom in its memory chip business. Samsung also remained the world’s top smartphone vendor by shipment and earlier this week, it unveiled its newest Galaxy Note 8 handset.

But a guilty verdict could cast fresh light on the future of chaebols that have long enjoyed close relationships with South Korea’s political elite.

“It’s meant to be a lesson to chaebol heads in general that they can no longer expect a three-year sentence, which is then instantly set aside in favor of a five-year-long parole,” Hank Morris, Asia advisor at Argentarius Group, told CNBC’s “Squawk Box” on Friday. “The Moon administration would want to have the court reflect that it is a new era.”

When President Moon Jae-in came into power, he had pledged to rein in the vast influence that chaebols wield in South Korea.

Chaebols control vast networks of companies through a circular holding structure and their control typically exceeds cash-flow rights — that means families often wield undue influence over group companies in spite of small direct shareholdings.

While those conglomerates have been responsible for propping up South Korea’s economic growth in the past, many citizens have long demanded political authorities curtail their power.

Previously, many chaebol chiefs had been let off with light sentences for crimes including embezzlement, tax evasion and fraud.

Lee’s father, Lee Kun-hee, had a three-year suspended sentence in 2008 and was fined 110 billion Korean won for embezzlement and tax evasion. But in 2009, he was pardoned.

Former Daewoo Group chairman, Kim Woo-jung, was given a 10 year sentence in 2006 for financial crimes, but he was pardoned in 2007. The Daewoo chaebol was dismantled by the government in 1999.

Friday’s verdict could signal to chaebol leaders that they should rely more on professional management, according to Morris. “It is a means of signalling that, perhaps in the future, the government will not look so favorably on family management, particularly where they have shown to be incapable of upholding the laws or outright incompetent in business terms.”