The Korean prosecution has launched an investigation into activist fund Elliott Management on a charge filed two years ago from the financial watchdog after the U.S. company threatened to file a lawsuit against the government for its interference in the 2015 Samsung group merger.

According to sources on Wednesday, the Seoul Southern District Prosecutors’ Office summoned some Elliott employees to question them on the breach of disclosure rules. It is the first time prosecutors acted upon the case referred to them by financial authorities in February 2016, suspecting the motive behind the fund’s stake raise in Samsung C&T prior to its merger with Cheil Industries.

Elliott disclosed on June 2, 2015 that it was a stakeholder of 4.95 percent in Samsung C&T and opposed the company’s planned merger with Cheil Industries by claiming that the consolidation would only benefit Samsung Group’s heir Jay Y. Lee and his design to cement his control over the group at the expense of small shareholders.

Two days later, it reported that its stake was 7.12 percent, prompting the local financial watchdog to initiate an investigation on the abrupt change in the shareholding.

The financial authorities believed that the U.S. hedge fund might have illegally kept the shares hidden under foreign brokerage houses like Merrill Lynch under a total return swap (TRS) arrangement before an official disclosure. A TRS is a financial arrangement between an investor and a financial institution that allows the latter to buy underlying assets or stocks on behalf of the investor in exchange for commission.

The financial authorities found that Elliott had violated the local disclosure rule by failing to publicly report its purchase of additional stake in Samsung C&T. Under Korean rules, an investor failing to disclose changes in ownership exceeding 5 percent in a listed firm within five days could face a jail term of up to 3 years or a maximum fine of 100 million won ($92,980).

Elliott has been arguing that the deal was not subject to the disclosure rule to deny any wrongdoing. The case has been gathering dust at the prosecution office for two years, but picked up after the hedge fund took procedures to file a damage suit against the government.

The U.S. investor last month sent a notice of intent to the country’s justice ministry to warn of an investor-state dispute settlement before officially filing a lawsuit against the Korean government with the International Centre for Settlement of Investment Disputes (ICSID), claiming that Seoul’s illegal intervention in the merger of Samsung C&T and Cheil Industries incurred significant damages to Samsung C&T shareholders.

Former President Park Geun-hye and former head of the National Pension Fund as well as Lee of Samsung have been found guilty in the lower court on bribery and power abuse related to the two companies’ merger.

By Song Gwang-sup and Choi Mira

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