Prosecutors are investigating troubled Tong Yang Group's financial arm for suspected accounting fraud, regulatory sources said Thursday, as part of their probe into the owner family for alleged illegalities that have inflicted heavy losses on retail investors.
The prosecution has launched a probe into Tongyang Financial Services Corp., the money-lending unit of the debt-mired conglomerate, to see if it rigged its books to hide the loans they extended to two key Tong Yang units suffering from cash shortages, according to the Financial Supervisory Service (FSS).
The 38th-largest family-run conglomerate filed five of its affiliates, including Tongyang Leisure Co. and Tongyang International Inc., for court receivership on Sept. 30 after it failed to repay its maturing debts.
The court has approved Tong Yang's request to protect the assets of the five units and ban debt collections from creditors in return for a court-led debt restructuring.
The prosecution launched a probe on Tongyang Financial Services based on the FSS's findings that the firm set aside no reserves against potential losses from the loans it extended to other affiliates.
While it is not illegal to omit specifying loan loss reserves against affiliates, the prosecution sees that as a possibility for an accounting fraud or negligence of duty for the owner family in which they may have coerced the money lender to process the loans.
The FSS and prosecution have also taken note of the fact that Tongyang Financial Services knew that Tongyang Leisure and Tongyang International had negative net worths at the time of the loan extensions, regulatory officials said.