Samsung chief Lee arrested as South Korean corruption probe deepens

Samsung Group chief Jay Y. Lee was arrested on Friday over his alleged role in a corruption scandal rocking the highest levels of power in South Korea, dealing a fresh blow to the technology giant and standard-bearer for Asia’s fourth-largest economy.

The special prosecutor’s office accuses Lee of bribing a close friend of President Park Geun-hye to gain government favours related to leadership succession at the conglomerate. It said on Friday it will indict him on charges including bribery, embezzlement, hiding assets overseas and perjury.

The 48-year-old Lee, scion of the country’s richest family, was taken into custody at the Seoul Detention Centre early on Friday after waiting there overnight for the decision. He was being held in a single cell with a TV and desk, a jail official said.

Lee is a suspect in an influence-peddling scandal that led parliament to impeach Park in December, a decision that if upheld by the Constitutional Court would make her the country’s first democratically elected leader forced from office.

Samsung and Lee have denied wrongdoing in the case.

Prosecutors have up to 10 days to indict Lee, Samsung’s third-generation leader, although they can seek an extension. After indictment, a court would be required to make its first ruling within three months.

Prosecutors plan to question Lee again on Saturday.

No decision had been made on whether Lee’s arrest would be contested or whether bail would be sought, a spokeswoman for Samsung Group said.

“We will do our best to ensure that the truth is revealed in future court proceedings,” the Samsung Group said in a brief statement after Lee’s arrest.

The same court had rejected a request last month to arrest Lee, but prosecutors this week brought additional accusations against him.

“We acknowledge the cause and necessity of the arrest,” a judge said in his ruling.

The judge rejected the prosecution’s request to also arrest Samsung Electronics president Park Sang-jin.

Shares in Samsung Electronics ended Friday down 0.42 percent in a flat wider market.

Ratings agencies did not expect any impact on the flagship firm’s credit ratings, and said Lee’s arrest would accelerate improvements in management transparency and corporate governance.

SENSITIVE TIME

While Lee’s detention is not expected to hamper day-to-day operations at Samsung firms, which are run by professional managers, experts said it could hinder strategic decision-making at South Korea’s biggest conglomerate, or chaebol.

Samsung is going through a restructuring to clear a succession path for Lee to assume control after his father was incapacitated by a heart attack in 2014.

Decisions that could be complicated by Lee’s arrest include deliberations over whether to reorganize the group under a holding company structure, as well as its plan to abandon its future strategy office, a central decision-making body that came in for criticism during the scandal.

Staff moves have also been in limbo. Samsung, which employs around half a million people, has yet to announce annual personnel promotions and changes, which it typically does in December.

One employee at Samsung Electronics’ chip division said colleagues were unsettled that prosecutors had singled out Samsung. “The mood is that people are worried,” the person said.

However, another Samsung Electronics employee described the situation as business as usual. “It wouldn’t make sense for a company of that size to not function properly just because the owner is away.”

Both employees declined to be identified, given the sensitivity of the matter.

Lee’s incarceration comes as Samsung Electronics tries to get past last year’s disastrous roll-out of its Galaxy Note 7 smartphones, which were prone to fires. It is under pressure for the upcoming launch of its next flagship phone, the Galaxy S8, to be a success.

WIDER IMPACT

Major business groups criticised the decision, worried about the impact on Samsung and the country.

“A management vacuum at Samsung, a global company representing the Republic of Korea, will increase uncertainty and undermine global confidence, posing a big burden on the already struggling economy,” the Korea Employers Federation said.

Lee’s arrest gives a boost to prosecutors who have zeroed in on Samsung to build their case against President Park and her close friend Choi Soon-sil, who is in detention and faces charges of abuse of power and attempted fraud.

Both Park and Choi have denied wrongdoing.

Prosecutors have focused on Samsung’s relationship with Park, 65, accusing the group of paying bribes totaling 43 billion won ($37.74 million) to organizations linked to Choi to secure government backing for the controversial 2015 merger of two Samsung units, a deal that was seen as key to smoothing Lee’s succession.

The prosecution office on Friday accused Lee of bribery not only in seeking to smooth the merger but in the broader process of his succession. A prosecution spokesman did not elaborate.

If parliament’s impeachment of Park is upheld, an election would be held in two months. In the meantime, she remains in office but stripped of her powers.

Her would-be successors praised the decision to arrest Lee.

“We hope it marks a beginning to end our society’s evil practice of cozy ties between government and corporations and move towards a fair country,” said Kim Kyoung-soo, a spokesman for Moon Jae-in, a member of the liberal opposition Democratic Party who is leading opinion polls in the presidential race.

Samsung Could Face Second Recall as US Probes Burnt Galaxy Note 7

Samsung Could Face Second Recall as US Probes Burnt Galaxy Note 7Samsung could face an unusual second recall of its Galaxy Note 7 smartphones if one that caught fire aboard an airliner this week is a replacement device as its owner says, two former US safety officials said.

The Federal Aviation Administration and the Consumer Product Safety Commission are investigating Wednesday’sincident, when a passenger’s phone emitted smoke on a Southwest Airlines Co. plane readying for departure from Louisville, Kentucky. A flight attendant doused it with a fire extinguisher, and the plane was evacuated without injury.

 

“If it’s the fixed phone and it started to smoke in his pocket, I’m going to guess there’ll be another recall,” said Pamela Gilbert, a former executive director of the consumer agency. “That just doesn’t sound right.”

Samsung has been engulfed in crisis since the Galaxy Note 7 smartphones began to burst into flames just days after hitting the market in August. The Suwon, South Korea-based company announced last month that it would replace all 2.5 million phones sold globally at that point. Samsung said it had uncovered the cause of the battery fires and that it was certain new phones wouldn’t have the same flaws.

The first indications of the existing recall’s financial impact could be seen Friday with the company’s release of earnings that rose at the slowest pace in five quarters. Operating income increased just 5.5 percent to KRW 7.8 trillion ($7 billion or roughly Rs. 46,812 crores) in the three months ended September 30.

China incident
The US safety commission could decide as early as next week on what steps to take, said Gilbert, a partner in Cuneo Gilbert & LaDuca, LLP in Washington. “This is not something you want to leave hanging out there,” she said.

Nancy Nord, a former acting chairwoman of the safety commission, said a second recall doesn’t happen very often.

“Certainly they could do another recall, if it appears this is something beyond an aberration,” she said.

“They need to determine if this was a remediated phone, and if so why did this happen?” said Nord, who is of counsel at Olsson Frank Weeda Terman Matz PC in Washington.

CPSC spokesman Scott Wolfson declined to comment on what action may be taken.

Bloomberg News last week interviewed a customer in China who said his new Galaxy Note 7 had exploded less than 24 hours after it was delivered. The company said it was investigating the incident.

The owner of the phone involved in Wednesday’s incident told investigators it was a replacement Galaxy Note 7, said Captain Kevin Fletcher of the Louisville Metro Arson Squad.

 

Arson squad
“Due to the damage to the phone itself, we have not been able to physically confirm that yet,” Fletcher said during an interview. “We’re in the process of trying to attempt that.”

Samsung and US officials announced the recall after 92 reports of batteries overheating in the US, with 26 cases involving burns.

Samsung, FAA and Consumer Product Safety Commission representatives were in Louisville and working with arson investigators, Fletcher said. The phone remains in the possession of the arson squad, which is trying to schedule laboratory tests on the phone. It hasn’t been determined where or when those tests will occur, Fletcher said.

There was “extensive heat damage” to the phone and the plane’s carpet, he said.

Brian Green, the phone’s owner, told WAVE television news in Louisville that he got a replacement phone at a retail store after receiving an e-mail about the recall. “It was a good phone, by all indications, from all the information Samsung provided,” Green said. “But it just had its issues.”

Billowing smoke
On the plane, he turned the phone off and put it in his pocket. The device made a popping sound and sent “smoke just billowing out of my clothes,” Green said. He dropped it to avoid getting hurt.

Samsung said in a statement Wednesday that it couldn’t confirm that the incident involved the new phone but would have more information after examining the device. The company didn’t offer an update Thursday and a spokeswoman had no immediate reply to a request for comment on the possibility of another recall.

 

The CPSC and Samsung have a range of options, from a broad new recall if systemic flaws are discovered in the replacement devices to no action if they don’t find any broader safety issues.

While the safety agency has legal authority to order recalls, that requires court action and could take months. Instead, it almost always operates in collaboration with companies, as it did with Samsung.

Apple competitor
Samsung had raced to complete the introduction of the Galaxy Note 7 before Apple could unveil its new iPhone 7. The Galaxy Note 7 features a larger battery that can store more power than its predecessor.

 

A battery supplier made the power packs slightly too large for the phone’s compartment, the consumer safety commission said when announcing the recall September 15. As a result, the battery components were sometimes pinched, which could cause a short circuit, according to the agency.

Rechargeable lithium-ion cells like those in the Samsung phones are made with highly flammable chemicals. When they fail, they can generate intense heat or sparks that can ignite those chemicals.

The United Nations International Civil Aviation Organization earlier this year banned bulk shipments of lithium-ion cells from passenger flights after tests showed that they could violently explode even after being doused with fire extinguishers.

Three cargo aircraft have been destroyed in fires linked to lithium battery shipments since 2006.