South Korean prosecutors have filed an arrest warrant for Jay Y. Lee, vice chairman of Samsung Electronics Co. and de-facto head of Samsung Group, over allegations for an accounting fraud and an illegitimate merger tied to the group’s suspected plan to tighten Lee’s grip over the country’s largest conglomerate.

The Seoul Central District Prosecutor’s Office on Thursday requested an arrest warrant on Lee, 52, as well as two former executives Choi Gee-sung, former vice chairman and head of future strategy office, and Kim Jong-joong, former president at the office.

The three officials were all charged with audit rule and capital market law violations including unfair trade and stock price manipulation. Kim was additionally charged with suspicion of false testimony.

The arrest warrant comes after Samsung heir was called in for questioning twice last week. Lee was known to have denied all accusations, saying that he was not “informed of [any decisions related to the 2015 merger between two Samsung affiliates] or gave orders.”

The arrest warrant also comes two days after Lee asked the prosecution to form an investigation deliberation committee under the Supreme Prosecutors’ Office on Tuesday to have outside experts judge the validity of prosecutorial investigation and indictment. The prosecution’s arrest warrant is winning strong backlash from the industry given that no investigation team has so far pushed ahead its investigation schedule after ignoring deliberation request. In 2018, a statute that allows the formation of a civil panel to have a public assessment of the validity of cases took effect.

Immediately after prosecutors sought an arrest warrant, Lee’s attorneys expressed “deep regret” over the prosecution’s decision despite the fact that the public assessment about Lee’s cases is ongoing.

The attorneys pointed out that intensive investigation about Lee’s case has been carried out over the past few years, adding that a total 50 search warrants were made and 110 officials have been called in for questioning at 430 separate occasions.

“Vice Chairman Lee and Samsung have fully cooperated with the investigation while silently accepting prosecutorial investigation despite management crises,” it said.

The prosecution has been investigating illegalities in the controversial 2015 merger of the family-owned conglomerate’s two key affiliates Samsung C&T Corp. and Cheil Industries for nearly two years. The merger was seen as a process to tighten Lee’s control over the group through power succession.

Shares of Samsung Electronics closed 0.18 percent higher at 54,600 won ($44.8) on Thursday.

Lee is accused of having made orders to executives to take actions to engineer the merger for succession. He is also accused of taking part in an accounting fraud of Samsung Biologics, then a subsidiary of Cheil Industries, in a suspected bid to tighten his grip over the conglomerate.

Prosecutors suspected that changes to Samsung Biologics’ accounting terms were made to guarantee Lee’s succession and smoother transition from his ailing father Lee Kun-hee at the group following the merger between Samsung C&T and Cheil Industries.

Lee was the largest stakeholder of Cheil Industries with a 23.2 percent ownership. The merger ratio was set at 1:0.35 favorable to Cheil Industries. Prosecutors alleged that Samsung Group intentionally lowered Samsung C&T stock price and overstated Cheil Industries value to meet the merger ratio.

Prosecutors also charged the two officials for violating external audit rules, suspecting that they were involved in the accounting fraud at Samsung Biologics, then subsidiary of Cheil Industries, to ensure the group’s succession plan for Lee.

Samsung Biologics allegedly did not reflect Samsung Bioepis’ call option contract with U.S. Biogen to its accounting. After the 2015 merger, however, Samsung Biologics calculated call option as 1.8 trillion won debt and made changes to its accounting rule to bring 4.5 trillion won worth of profit to its books.

Reflecting call option later caused a valuation loss and erosion, according to prosecutors.

By Kim Hee-rae and Lee Eun-joo

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