The Securities and Futures Commission (SFC) under the Financial Services Commission referred Samsung BioLogics to the prosecution on Nov. 20 for investigation into its alleged accounting fraud.
The SFC also sent a written penalty notice to Samsung BioLogics and its two accounting firms, Samjong and Ahnjin.
In response, Samsung BioLogics plans to review the documents and file for a court injunction against them.
On Nov. 14, the SFC judged that Samsung BioLogics intentionally committed accounting fraud in 2015 by changing the status of Samsung Bioepis from a subsidiary to an affiliate for no justifiable reason.
The change allowed Samsung BioLogics to inflate the value of Samsung Bioepis from 300 billion won to 4.8 trillion won.
A subsidiary refers to a company under the full control of a parent company, while an affiliate is a company on which the parent company only has a partial control.
Under the Korean accounting rule, different valuation methods are used for a subsidiary and an affiliate. A parent company is required to assess a subsidiary based on its book value while for an affiliate, the valuation criterion is its market value.
The book value of Samsung Bioepis was 300 billion won, but its market value surged in 2015 following the Korean government’s approval of its biosimilars.
Samsung BioLogics decided to treat Samsung Bioepis as an affiliate on the grounds that its increased market value would prompt Biogen, a U.S. company that jointly established Samsung Bioepis together with Samsung BioLogics, to exercise its call option to acquire up to 50 percent minus 1 share of the joint venture.
Samsung BioLogics reasoned that Biogen’s expected exercise of its call option would deprive Samsung BioLogics of its full control over Samsung Bioepis, making the joint venture an affiliate under joint management of Samsung BioLogics and Biogen.
Samsung BioLogics says Biogen’s expected exercise of its call option justified its decision to treat Samsung Bioepis as an affiliate.
Yet this logic failed to persuade the auditors of the Financial Supervisory Service, who were convinced that Samsung BioLogics changed the accounting treatment of Samsung Bioepis for no justifiable reason.
The auditors suspected that the company changed the valuation method simply to inflate the value of Samsung Bioepis, which turned around Samsung BioLogics from a loss-making company into a highly profitable one at one coup.
The SFC sided with the FSS auditors. Accordingly, it referred Samsung BioLogics to the prosecution for investigation, advised the company to dismiss its CEO Kim Tae-han and slapped a penalty of 8 billion won on it.
The commission also imposed a penalty of 170 million won on Samjong, banned it from auditing Samsung BioLogics for five years and recommended it to suspend four accountants from duty. Ahnjin was also suspended from auditing Samsung BioLogics for three years.
Following the SFC’s action, the prosecution is expected to investigate the accounting fraud allegations against Samsung BioLogics.
The prosecution has already started investigation into Samsung BioLogics following the SFC’s complaint against the company filed in July over its failure to disclose Biogen’s call option earlier. Samsung BioLogics disclosed the call option in 2015, while it was granted in 2012.
The prosecution’s investigation could expand into the merger of Samsung C&T and Cheil Industries as Samsung BioLogics’ turnaround played an important role in determining the swap ratio. The outcome of the investigation could affect the succession process of Samsung Electronics vice chairman Lee Jae-yong.
In June 2016, People's Solidarity for Participatory Democracy filed a complaint against Samsung Group’s owner family members, including Lee Jae-yong, former Samsung C&T management and the National Pension Service in connection with the merger.
Samsung BioLogics, Anjin and Samjong are expected to take follow-up measures as the SFC officially notified them of the penalties.
Samsung BioLogics is planning to file for a court injunction against the SFC’s recommendation to dismiss its CEO and its order to restate the financial statements.
If the court accepts Samsung BioLogics’ request for an injunction, the trading suspension imposed on Samsung BioLogics’ stock would be immediately lifted.
Korea Exchange suspended Samsung BioLogics’ stock trading on Nov. 14. It is looking into the matter to determine whether Samsung BioLogics is subject to a review of listing eligibility.