Hyundai Motor Co. Chairman, Chung Mong Koo, was sentenced to three years in prison for embezzling funds that were used for illegal political donations, hindering his ambition to build the world’s fifth-biggest carmaking group.
Chung, 68, was also found guilty of breach of fiduciary duty, Judge Kim Dong Oh of the Seoul Central District Court said. Chung will appeal the verdict. He will be allowed to remain out on bail, Kim said.
Chung will continue to run the Seoul-based carmaker while he appeals, the South Korean company said. Chung’s expansion plans for Hyundai Motor and affiliate Kia Motors Corp. may be hampered by a second trial and court restrictions on his overseas travel.
“It’s a big blow,” said Jung Seong Kook, who counts Hyundai Motor shares among the $530 million he manages at Macquarie-IMM Investment Management Co. in Seoul. “The company’s facing tough competition from the outside and has to take care of its labor problems at home.”
Hyundai Motor and Kia are trying to recover from falling profits as an 8.6 percent rise in the value of the won against the dollar last year hurt their competitiveness against Japan’s Honda Motor Co. and Toyota Motor Corp.
The company’s shares were unchanged at 69,800 won at the close of trading. Shares of Kia Motors fell 0.4 percent to 12,050 won. The benchmark Kospi index rose 0.3 percent to 1,417.95 points.
The perceived risk of debt sold by Hyundai Motor rose 3.2 percent. A credit default swap based on $10 million of Hyundai Motor bonds rose to $48,500 from $47,010 on Feb. 2, according to data compiled by Bloomberg. Traders use the five-year contracts to bet on a company’s ability to repay debt.
Chung, South Korea’s richest man, and his employees set aside 103.4 billion won ($110.5 million) without proper accounting and used 69.6 billion won for illegal political donations, undeclared employee bonuses and to attract an international expo to the city of Yeosu, the judge said. Chung is worth at least $2.2 billion, based on equity holdings.
During his trial, Chung testified that he knew funds were being diverted without proper accounting. He said he was unaware of the purpose.
“I feel an overall responsibility for the creation and the use of the fund,” Chung said on June 15 in his second court hearing. “When I was told that the funds needed to be created, I told our employees to take care of it. However, upon deep reflection, all this is my responsibility as the chief executive.”
Prosecutors asked for a six-year sentence. The judge said he gave Chung a three-year sentence in part because the funds were largely not for personal use. Between 2 billion won and 3 billion won was used personal use, including “living expenses” for Chung and his family, the judge said.
“This won’t hurt the stock much long-term if Chung stays out of prison to manage the company,” said Park Seh Ick, who helps manage $1.3 billion at Hanwha Investment Trust Management Co. “Chung may get his sentence suspended in an appeal.” Park said he plans to increase his holdings of Hyundai Motor shares.
Vice chairman Kim Dong Jin, Chief Financial Officer Lee Jung Dae and Vice President for procurement Kim Seung Nyun, all of whom were charged with embezzlement, received suspended sentences.
“There was a relatively small portion of funds used for the accused’s personal use and the rest was spent on company uses and national events,” Judge Kim said. “Still, the act damaged the company’s transparency and soundness. These practices have to be stopped.”
The won’s rise against the dollar last year and strikes in Korea help reduce the carmakers’ earnings and caused their shares to plunge. Hyundai Motor’s profit slumped 34 percent last year to 1.53 trillion won as a stronger won against the dollar eroded profits from exports and it sold fewer vehicles, including Sonata sedans. Profit at Kia Motors plunged 94 percent to 39.3 billion won.
Kia Motors and Hyundai Motor suffered $2.4 billion in lost production last year because of strikes. The delay of factories in the Czech Republic and the U.S. state of Georgia impeded Chung’s expansion plans.
Hyundai and Kia made up 72 percent of South Korea’s 2.65 million vehicle exports last year, according to the Korea Automobile Manufacturers Association. Automobiles account for about 10 percent of exports from Asia’s third-largest economy. The combined sales of the two companies are equal to about 6.1 percent of South Korea’s $788 billion economy.
Chung lives in Hannam-dong, a hillside residential area in Seoul. The area is also home to Lee Kun Hee, the chairman of Samsung Group, the official residence of South Korea’s foreign minister and the embassies of Spain, Mexico and India. Private security guards restrict access to his neighborhood.
If sentenced to prison, he may serve his term in a 6.6 square meter solitary room, according to the Korean Institute of Criminal Justice Policy.
Last month, seven people were found guilty of taking bribes from Hyundai Motor Group to help one of the company’s units write off debt and an eighth person was convicted of giving bribes on behalf of the carmaker. The court suspended the sentences while the verdicts are appealed. Former South Korean finance ministry official Byeon Yang Ho was acquitted of receiving bribes from Hyundai.
Chung and his son Chung Eui Sun, co-chief executive of Kia Motors, in April said they would donate 1 trillion won including their 60 percent stake in car-shipping unit Glovis Co. to charity. The donation hasn’t been made yet.