Prosecutors allege manipulation by Hyundai

Seoul’s benchmark stock index, the Kospi, tumbled 3.5 per cent, or 32.36 points, to 905.52 Wednesday. A good chunk of that drop came in the final few minutes of trading, just as the news broke.

Local television reported the possible arrest of Lee, but a prosecutor at the Seoul district office involved in the case said the prosecution isn’t considering an arrest at the moment. "We need to summon him first for questioning. Whether he will be arrested ornot will be discussed after that," the prosecutor said. "Currently we are unable to locate him."

According to a spokesman for Hyundai Securities, Lee hasn’t come to work since late last week. He couldn’t be reached for comment. Prosecutors said Lee was informed last week that he was prohibited from leaving Korea, though they made the ban public only on Wednesday.

Analysts said that if Lee were to be arrested, it would be a strong indication that the government is cracking down on the mighty financial arms of the top five conglomerates, or chaebol.

Investors have flooded into chaebol-run funds like the Buy Korea Fund since the financial crisis in 1997, in the belief that the top five business groups were unlikely to face defaults. The Korean government has become concerned that the chaebol were using the funds to prop up ailing affiliates and to delay reform of the massive and bloated conglomerates. This led South Korean President Kim Dae Jung last week to force the heads of the top five groups to agreeto measures that would help limit their clout in the financial markets.

Brokers said they fear that the apparent rising pressure on Lee could hurt investor confidence in the stock market. Lee, in a string of seminars this year, has successfully appealed to the patriotism of frugal Korean housewives, who poured money into the Buy Korea Fund.