K-pop giant SM Entertainment was raided over suspected market manipulation

The battle between Kpop's largest music labels has taken a new turn.

In February, South Korea's Financial regulators raided Kpop agency SM Entertainment to investigate its involvement in stock price manipulation. Hybe and Kakao Entertainment fought to acquire the music label.

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According to Korea JoongAng Daily, the Financial Supervisory Service of South Korea (FSS), on Tuesday, April 18, searched SM's Seongsu District headquarters and seized stock information as part of an ongoing investigation.

In February, authorities launched an investigation into SM following a petition from Hybe, the label that is behind BTS. Hybe reported a large trading of SM stock that they claim was sold to artificially increase the company's value and make its tender offer fail.

Hybe and Kakao competed to gain a majority stake of SM Entertainment. Hybe's 120,000 won bid (roughly $90 per share) failed because it was below SM stock value at the end of the offer period.

Hybe bowed to the competition in March and claimed that the market was "overheated". Kakao walked away with the prize after claiming a stake of 40% in SM. Hybe holds 8.8% of the SM shares.

Kakao's ability to maintain its takeover win is uncertain. As part of its ongoing investigation, the FSS raided Kakao's offices on 6 April.

Pulse News Korea reported that FSS Governor Lee Bok-hyun said at a March meeting, "Any illegality will be held accountable in the maximum possible extent within the legally and institutionally allowed range."

An internal power struggle within the company was what sparked the external battle for SM Entertainment. The reported feud centered around Lee Soo Man (founder of SM Entertainment, so-called "godfather of K-pop") and his estranged son, former co-CEO Lee Sung Soo.

In October, rumblings of a conflict at the company surfaced when it was announced Lee Soo Man’s contract as chief production would be terminated one year earlier than anticipated.

Early in February, the then co-CEOs Lee Sung Soo (left) and Tak Young Jun (right) announced a "SM 3.0", a new direction of the company via a YouTube video.

Sung Soo stated in the video that Lee's contract as chief producer with SM has ended. However, he expressed his gratitude for his support as a company shareholder. This clearly indicated his uncle's departure from the future vision of the business.

On February 9, tensions grew when Kakao announced that it would acquire a 9.05% share in SM and become its second largest shareholder. This decision was made without consulting Lee Soo Man who, at the time, was the largest shareholder of the company. Lee Soo Man, citing SM's board of directors violation of business law, sued SM in retaliation.

Lee Soo Man is named in the Pandora Papers for tax evasion. His nephew responded with a video in which he said, "He's a kind nephew who grew up in a family with his father a pastor. Lee Soo Man who was named in the Pandora Papers as a tax evader responded to his nephews claims with a video. He said, "He is a kind uncle who grew up with a father who was a pastor." My heart hurts."

Even the Korea Entertainment Producers Association stepped up with a statement on February 20, criticizing SM's leadership for "destroying the Hallyu Legacy" (hallyu is the global surge of Korean culture) and expressing their support for Lee Soo Man, an industry veteran.

Since early this year, the proxy war between uncle and niece has cooled. Lee Sung Soo, his co-CEO and SM's General Board meeting took place on March 31. This was a day when SM held its general board. There had been a broader change in the upper management. Jang Cheolhyuk is the new CEO of SM. He was previously CFO.

In a press release issued on the day of the shakeup, Lee Soo Man stated that "today marks the ending of an era for SM Entertainment which was named after myself." He retains a 3% share in SM. All Kpop reported that Lee Sung Soo had returned to the company as a senior executive.

Investigations into Kakao's and SM’s alleged market manipulation are still underway. Hybe was beaten in the battle for SM artists, but announced recently that SM will be joining its social media platform Weverse.

Hybe, the BTS label, is attempting to consolidate control over K-pop.

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