Samsung Vice Chairman, Lee Jae Yong Faces 12-year Jail Term Over Bribe Scandal

Samsung Vice Chairman, Lee Jae Yong Faces 12-year Jail Term

When Samsung Electronics became the world’s most profitable technology company last month, its de facto leader was in jail.

Lee Jae-yong, vice chairman and heir apparent to Samsung Group, faces charges that he bribed South Korean government officials to solidify his family’s control of one of the world’s biggest business empires. On Monday, prosecutors recommended that Mr. Lee should be sentenced to 12 years in prison.

Samsung, by contrast, appears to be doing just fine without its boss. The conglomerate’s electronics arm made $10 billion in profit last quarter, thanks in part to strong demand for its chips. Samsung has also begun to cast aside the cloud that fell over it last year when its Galaxy Note 7, a high-priced smartphone meant to challenge the Apple iPhone but which showed a proclivity to burst into flames, became one of the technology world’s most spectacular failures.

The question is how long Samsung can travel down both of these paths.

Should Mr. Lee go to prison, or if his reputation is too badly damaged, experts say it remains unclear whether the cadre of professional managers that reports to the Lees can make the strategic decisions needed to keep Samsung on the rise.

“Samsung’s recent performance has little to do with senior management,” said Kim Woochan, a professor of finance at Korea University Business School in Seoul. “It’s riding on the coattails of a rebounding semiconductor industry.”

The trial of Mr. Lee, known as Jay Y. Lee in the West, wrapped up on Monday, with prosecutors also seeking up to 10 years in prison for a group of other Samsung executives. A verdict in the case, which involves South Korea’s former president, Park Geun-hye, is expected in weeks.

Mr. Lee said that he committed no crime but that as a senior figure at Samsung, he felt “responsibility” for the scandal.

“I used to make a pledge to myself that when I am fully in charge of management, I would do things properly, abide by the law and do things right as well as become a businessman respected by society and people,” he said Monday. “I am filled with many emotions that I stand in court before I could live up to my words.”

The company has been coping with the legal problems of its controlling family alongside one of the most notorious product-safety debacles in recent memory. Samsung Electronics halted production of its fire-proneGalaxy Note 7 smartphones last year, recalling millions of the devices at an estimated cost of $5 billion.

Notices at airports banning the phone from flights because of faulty lithium ion batteries became emblems of a company in crisis. In October, Samsung said recall costs and plunging sales had wiped out 95 percent of its phone division’s profits.

None of it seems to have slowed down Samsung in the short term.

“In terms of crisis management, the company has been learning quite fast,” said Yoo-Kyung Park, a specialist in corporate governance at APG Asset Management, a Dutch pension-fund firm that owns Samsung Electronics shares.

Ms. Park credited Samsung Electronics managers for quickly cauterizing the wound left by the Galaxy Note 7. Many Korean companies, she said, would have been more reluctant to acknowledge failure — an approach she characterized as “delay, and deny, deny, deny” — but Samsung scrapped the phone, absorbed the cost and moved on.

Consumers seem to have moved on, too: The Galaxy S8, the next major product to launch after the Galaxy Note 7, is selling well, helping contribute to Samsung’s rebound.

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Lee Jae-yong, known as Jay Y. Lee in the West, in court in Seoul on Monday. CreditPool photo by Ahn Young-Joon

Samsung Electronics is the most valuable part of the sprawling group of Samsung companies, which encompasses businesses as varied as construction and theme parks. Samsung Electronics’ sales expanded 20 percent in the quarter that ended in June, driving net profit up almost 90 percent. The share price also shot up to record highs.

In contrast, Apple, the perennial industry leader, earned $8.7 billion in the same period, though analysts expect Apple’s profit to be larger than Samsung’s for the year.

Analysts say Samsung is also reaping rewards from past investments. A decade ago it plowed money into semiconductors and digital displays, crucial components of smartphones and other modern devices, and today it is the world’s leading producer of both, with revenues to match.

Those investments were ordered by Mr. Lee’s father, Lee Kun-hee, Samsung’s chairman, who is widely credited with building the group into the powerhouse it is today. The elder Mr. Lee has been incapacitated since a heart attack in 2014, leaving Lee Jae-yong as Samsung Electronics’ de facto leader.

A big question for Samsung’s future is whether the Lee family can maintain its hold — and whether that would be good for business.

Even if Mr. Lee is not convicted, South Korea’s new president, Moon Jae-in, has promised to take steps to weaken dynastic control over the conglomerates, or chaebol, that dominate the Korean economy.

Lee Jae-yong is accused of bribing Ms. Park, the former president, to support a contentious merger of two Samsung subsidiaries in 2015 that helped cement his hold over Samsung, putting him in place to succeed his father as chairman. Prosecutors say Mr. Lee and other Samsung executives offered $38 million to Ms. Park and a confidante, Choi Soon-sil. Mr. Lee has maintained his innocence, saying he was a victim of extortion.

The court proceedings, which prosecutors have billed as the “trial of the century,” lasted four months and have been obsessively followed by the South Korean news media and public. Some of its 53 sessions finished after midnight. Fifty-nine witnesses appeared, including Mr. Lee, other Samsung executives and former cabinet members. Ms. Park refused to testify.

Prosecutors on Monday accused Mr. Lee of deflecting blame onto subordinates. Earlier in the trial, Choi Gee-sung, the former chief of Samsung’s Future Strategy Office, testified that he had signed off on donations to foundations controlled by Ms. Choi without informing Mr. Lee.

Mr. Kim, the professor, said the trial and surrounding scandal had shown that, at the very least, Mr. Lee was not fit to run Samsung. But he predicted, based on the history of Samsung and other chaebol whose founders have fallen into legal trouble, that Mr. Lee would try to make a comeback regardless.

“If the shares had fallen, they could have made the argument” that Mr. Lee was crucial to Samsung’s performance, he said. “But this hasn’t been the case.”

Chaebol leaders rarely spend time in prison, despite a history of convictions. Lee Kun-hee was convicted of breach of trust in connection with business deals in the 1990s that allowed Lee Jae-yong to cheaply accumulate shares in Samsung companies, but he was later pardoned.

Mr. Kim said that with political and social scrutiny of chaebol stronger now, the younger Mr. Lee could face a tougher road.

“The entire nation is watching,” he said.

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