HYBE Bang under financial watchdog’s scrutiny for alleged unfair trading

Bang Si-hyuk, founder and chairman of HYBE Co., the South Korean entertainment giant behind K-pop global sensation BTS, could face investigation by prosecutors for alleged fraudulent activities linked to the company’s 2020 initial public offering.

According to sources on Wednesday, the Financial Supervisory Service (FSS) has secured evidence suggesting Bang may have engaged in deceptive practices involving private equity firms before and after HYBE’s IPO, when the company was still known as Big Hit Entertainment.  

The country’s financial watchdog’s findings show that in 2019, HYBE informed its existing shareholders that it had no immediate plans to go public, eventually prompting some investors to divest of their stakes.  

At the same time, however, the company began a process to go public after Bang allegedly signed a private shareholders’ agreement with local PEFs — STIC Investments Inc., Estone Equity Partners and New Main Equity — to share profits from a future listing, a deal that remained undisclosed until HYBE’s stock plunged immediately after its IPO.

While investors suffered heavy losses from the post-IPO sell-off, Bang reportedly received 400 billion won ($289.3 million) from the PEFs based on the confidential arrangement.

The FSS is conducting a fast-tracked investigation into Bang’s transactions with the PEFs and plans to refer the case to prosecutors for potential criminal prosecution.

At issue is HYBE's alleged failure to disclose the profit-sharing agreement between Bang and the PEFs, which could constitute a violation of disclosure rules under the Capital Markets Act.

If prosecuted and convicted of fraudulent disclosure and illicit gains, Bang could face a prison sentence of five years or more or a life sentence if the profit exceeds 5 billion won, in accordance with the Act.  

An HYBE official denied any wrongdoing, stating that all transactions underwent legal review and were conducted in full compliance with the law.

The FSS declined to confirm whether it is launching an investigation into HYBE or Bang.

Separately, the Seoul Metropolitan Police Agency is reportedly conducting a parallel inquiry into the matter.   

PRIVATE DEAL BENEFITING BANG AND THE PEFS

The probe has gained traction after The Korea Economic Daily exclusively reported last November on the undisclosed private agreement between Bang and the PEFs.

Under the deal, the PEFs, which invested in HYBE in 2018 and 2019, agreed to share with Bang 30% of their exit profits if HYBE went public as agreed.

Should HYBE fail to list within the agreed timeline, Bang was obligated to repurchase the PEFs’ stakes with interest, according to the shareholders’ agreement.

Following the PEFs’ investments, STIC Investments held a 12.2% stake in the Korean entertainment giant, while Estone and New Main Equity jointly owned 11.4%.

They purchased the shares from HYBE’s previous shareholders, including LB Investment Inc., which decided to cash on due to the low chance of the company’s IPO.

In 2019, the old shareholder demanded that HYBE go public, but HYBE replied that it had no immediate plans for an IPO, according to the findings.

But in September of the same year, it requested the financial authority to appoint an auditor, a prerequisite for IPO preparation, and two months later, it signed EY Hanyoung as its auditor to begin the listing process.

HYBE ON A DOWNWARD SPIRAL

On October 15, 2020, HYBE triumphantly debuted on Korea’s main bourse Kospi with its stock price more than doubling from the IPO price of 135,000 won per share.

But soon after the stock hit the intraday high of 351,000 won, it began retreating and ended its first trading day at 258,000 won, 4.4% lower than its opening price of 270,000 won.

The next day, it tumbled 22.3% and then plummeted 60% to the 150,000 won level during the week.

The freefall was largely driven by the PEFs’ massive selloffs of HYBE shares after its IPO.

Of the total 23.6% stake held by the PEFs, 15.1% were free from lock-in contracts, meaning that such shares could be unloaded at any time after the IPO.

STIC, Estone and New Main cashed in on 4.99% or nearly 1.8 million shares of their holdings in HYBE over the four days following the IPO to reap 425.8 billion won.

HYBE stock and its retail investors were left reeling from the fallout of the highly anticipated IPO, which appeared to disproportionately benefit Bang and the PEFs.

At the time, Estone and New Main were reportedly led by individuals with close ties to Bang.   

On Thursday, HYBE shares closed down 2.5% at 272,000 won, underperforming the benchmark Kospi with a 1.9% gain. 

Write to Jun-Ho Cha and Seok-Cheol Choi at chacha@hankyung.com

Sookyung Seo edited this article.