South Korea's Samsung business empire makes hundreds of deals each year. But an obscure $18.6 million equestrian agreement it signed two years ago to fund a company in Germany could upend a decadeslong succession process at the conglomerate.
Samsung heir Lee Jae-yong was arrested in February, and is on trial over his alleged role in a corruption scandal that led to former South Korean president Park Geun-hye's impeachment. Three months into the trial, the prosecutors' criminal case is riding on what they describe as a form of horse-trading: an effort by Samsung to channel money for political favors by funding the equestrian aspirations of the daughter of a close friend of the country's former president.
The prosecution's case centers on the funding of Core Sports International GmbH, a small German sports-consulting company prosecutors say was controlled by Ms. Park's close friend, Choi Soon-sil. Core Sports had just one client: Ms. Choi's daughter, Chung Yoo-ra, an equestrian athlete.
Samsung's Mr. Lee is accused of having ordered his company to fund Core Sports. In return, prosecutors allege Ms. Choi colluded with Ms. Park to have the then-president direct the country's pension service to vote in favor of a 2015 merger of two Samsung affiliates that was seen as a critical step in consolidating Mr. Lee's grip on Samsung Electronics Co., the world's biggest smartphone maker.
Prosecutors say they believe they have enough evidence to show Samsung's equestrian sponsorship constitutes bribery. "The equestrian support was for one person, Chung Yoo-ra," said special prosecutor Park Young-soo, at April's opening hearing.
Mr. Lee's defense attorneys have acknowledged Samsung's sponsorship of the German company, but denied the funds were intended to benefit a specific person.
"Samsung did not pay any bribes and did not make any improper requests or seek favors. We believe that the court proceedings will reveal the truth," said a Samsung spokeswoman, reiterating an earlier statement.
Prosecutors have so far put forward 10 witnesses, thousands of pages of emails, texts messages and phone records to detail how Samsung's equestrian sponsorship was allegedly a coverup for channeling funds to Ms. Choi and Ms. Chung for over 10 months.
Ms. Park was removed from office in March by the country's Constitutional Court, following her impeachment over accusations that she colluded with Ms. Choi to extort money from Samsung and other South Korean conglomerates. Ms. Park and Mr. Lee have both denied wrongdoing.
Mr. Lee's lawyers have rejected all allegations against Mr. Lee in court. "Samsung's business activities were not a part of Mr. Lee's succession plan, but regular business activities," said Song Wu-cheol, one of Mr. Lee's lawyers at a hearing, adding that Samsung sponsored the equestrian training at Ms. Park's request "with no strings attached." Mr. Lee has yet to testify in court but at a parliamentary hearing in December, he denied asking the government to support the merger.
Ms. Choi was arrested last year and has been indicted on multiple criminal charges, including bribery and abuse of power; her trial continues. Both Ms. Choi and Ms. Chung have denied wrongdoing. Ms. Choi's lawyer rejected the bribery charge in another trial involving Ms. Choi and Ms. Park. Ms. Choi's lawyers didn't respond to several requests for comment.
A conviction of Mr. Lee could boost the prosecutors' case against Ms. Park, who also faces several charges centering around bribery. It would also throw into question a succession process at Samsung when it is seeking growth in new fields such as biologic drugs and automotive parts.
Mr. Lee, 49, has been the de facto heir of South Korea's largest conglomerate since his father, Samsung Electronics Chairman Lee Kun-hee, became incapacitated after a heart attack in 2014. Samsung declined to comment on the succession situation.
The younger Mr. Lee is in custody and has been absent from his role as the vice chairman of Samsung Electronics since February, when he was arrested. Under South Korean law, he can be detained until the end of August without a verdict, which can be extended. If convicted, he can face at least five years in prison.
South Korea has seen cases of conglomerate heads managing companies from behind bars. While Mr. Lee's absence won't immediately affect the company's business performance, it may complicate decision-making, said Chung Sun-seop, the head of Chaebul.com, a corporate-governance research firm in Seoul.
The prosecutors' case stretches back to August 2015, shortly after South Korea's National Pension Service -- then the biggest shareholder in Samsung C&T Corp., one of the Samsung affiliates in the 2015 merger -- cast a decisive vote in favor of the merger, ensuring its approval. That deal, which strengthened Mr. Lee's control over Samsung Electronics, was opposed by many foreign investors and proxy advisory firms Glass Lewis & Co. and Institutional Shareholder Services Inc., which regarded it as detrimental to Samsung C&T shareholders. Last month, the court sentenced two former South Korean officials tied to NPS each with a 2 1/2 year prison term for abuse of power and embezzlement in connection with the merger. The two officials have appealed the verdict to a higher court.
A spokesman at NPS declined to comment for this article. In December, before prosecutors began investigating the pension fund, NPS said it had voted in favor of the merger "in the view of improving the fund's long-term profit following careful review."
Weeks later, on Aug. 26, Samsung Electronics officials met with Core Sports employees at Frankfurt's Intercontinental Hotel to sign a contract promising the consulting company $18.6 million over a three-year period to train South Korean athletes for the 2018 Asian Games and the World Equestrian Games, according to witnesses questioned during the trial. Ms. Choi was in the lobby of the hotel during the signing, witnesses said.
Under the agreement, Core Sports would use the funds to buy 12 horses and support six athletes, as well as a number of coaches, trainers, team managers and horse managers, according to a copy of the contract reviewed by The Wall Street Journal.
But Core Sports was ill-equipped to carry out conditions of the deal at the time. The company was registered only a day before its deal with Samsung, according to a German commercial registration document presented by prosecutors in court.
Park Sung-kwan, a Germany-based lawyer and one of Core Sports' co-signees for the contract between the German company and Samsung, declined to comment citing attorney-client privilege.
Park Won-oh, a former official at the Korea Equestrian Federation, said the company had only one employee with relevant equestrian experience. But Core Sports paid monthly salaries to Ms. Chung's husband and a friend who watched her pets and ran small household errands, testified another witness who briefly managed the company's accounting.
The prosecutors' case has rested heavily on testimony of Mr Park, the 67-year-old former equestrian official and no relation to Ms. Park. He was also contracted by Samsung to advise the company on equestrian matters.
In his testimony, Mr. Park described how he worked with Samsung and the equestrian federation to devise a training plan that became the backbone for Samsung's sponsorship deal with Core Sports. Mr. Park testified that he went over the contract conditions with Ms. Choi and then relayed her demands back to Samsung.
Mr. Park testified at a court hearing that Samsung appeared to "let Choi Soon-sil do what she wanted -- almost 100%."
Mr. Park said he was perplexed at the time by why a company as large and powerful as Samsung would be so pliable to Ms. Choi's demands, even when it was "doubtful" that Core Sports had the capacity to train Ms. Chung at the time of the agreement.
Mr. Lee's defense lawyers and some witnesses said that Samsung intended for the dressage training project to support more than one athlete, but was prevented from doing so by Ms. Choi.
Ms. Choi's lawyer didn't respond to requests for comment. Last week, Ms. Choi delayed taking the witness stand at Mr. Lee's trial, citing health issues. Ms. Chung said she had no knowledge of what went on between her mother and Ms. Park. "My mother said that I would be one of the athletes out of six funded by Samsung Electronics," Ms. Chung told reporters in May.
Prosecutors are expected to complete witness examinations in the coming weeks, after which defense lawyers can call witnesses to the stand.
(END) Dow Jones Newswires
July 03, 2017 09:42 ET (13:42 GMT)