Nov. 16 (Bloomberg) -- Lone Star Funds co-founder Ellis Short faces extradition by South Korean prosecutors after a court sought his detention over the buyout firm's management of Korea Exchange Bank.

The Seoul Central District Court today issued warrants against Short and the Dallas-based firm's general counsel, Michael Thomson. ``We have judged the applications meet the conditions needed to seek extradition of criminals,'' the court said in a four-page statement.

``We have offered repeatedly to come to Korea for questioning, as long as we are allowed to leave,'' Short said in an e-mailed statement. ``It is up to the prosecutors to decide whether they really want to determine the truth in this investigation, or simply want to try to intimidate us.''

Kim Ji Ho, a Seoul-based spokeswoman for Lone Star, said she doesn't know the whereabouts of Short and Thomson. Both executives are based in Dallas.

Prosecutors are investigating Lone Star's acquisition and management of Korea Exchange Bank, stalling an agreement to sell the company for a more than $4 billion profit. An extradition request may deter overseas companies in Asia's third-biggest economy, where foreign direct investment has fallen 15 percent in the third quarter from a year earlier.

`Conspiracy Theories'

``This issue of nationalism has been around for some time in South Korea,'' said Bruce Gale, a Singapore-based political risk consultant. ``I wonder whether countries can afford to continue doing this sort of thing when they face increasing investment competition.''

The Seoul court, which had rejected two earlier prosecutor requests for detention warrants on Short and Thomson, refused to issue arrest warrants for Paul Yoo and Cheong Heon Choo, who head Lone Star's Korean units.

The Supreme Prosecutors' Office ``has nothing more than unsupported conspiracy theories, but continues to insist that they should nevertheless put people in jail in order to question them,'' John Grayken, Lone Star's other co-founder, said in a statement distributed by PRNewswire yesterday. ``We will continue to defend our personnel and our organization against this spurious attack.''

Short, 46, who grew up in Independence, Missouri, teamed up with Grayken at Colony Advisors, the real estate company Robert Bass started in 1991. Short is so important to Lone Star that he and Grayken are listed jointly in the ``key man'' clause in Lone Star's fund documents. Should either depart, investors have the right to stop sending money they've committed, according to Robert Lee, an attorney at Jones Day in Chicago.

Key Investors

Grayken and Short raised $8.3 billion for Lone Star's first five funds, which include Brazos Fund LP, started in 1995. They had produced annual returns of 9 percent to 28 percent as of June 2004, according to a Lone Star fund-raising presentation obtained by Bloomberg News.

Prosecutors are examining whether Korea Exchange Bank's value was understated to enable Lone Star to buy the company at an artificially low price. They are also investigating alleged manipulation of the stock of Korea Exchange Bank's Credit Service Co. in 2003 to drive down the share price before absorbing the unit.

The U.S. company and Korea Exchange Bank, South Korea's fifth-largest bank, deny the allegations. A government audit cleared the U.S. firm of wrongdoing in June.

The probe has delayed top Korean lender Kookmin Bank's $7.4 billion acquisition of Korean Exchange Bank, where third-quarter profit fell 90 percent on tax provisions. The deal, which expired on Sept. 16, remains valid until either Kookmin or Lone Star pulls out.

`Negative Impact'

The case may have a ``negative impact on strategic investments in Korea,'' said Henry Seggerman, chief executive officer of New York-based International Investment Advisers, which manages $150 million of South Korean equities.

As suspects, Ellis and Thomson can't be guaranteed being able to leave after questioning.

``They are playing with us by making such absurd requests,'' Prosecutor Chae Dong Wook said.

If convicted of stock manipulation, Short and Thomson could face up to 10 years in prison or a 20 million won fine, the court statement said.

South Korean prosecutors said earlier this year that investigation into Lone Star, the biggest overseas investor in the nation, has been conducted fairly and wasn't aimed at foreigners.

Prosecutors yesterday apprehended Hyundai Marine & Fire Insurance Co.'s president, the second arrest in the case in a week. Ha Jong Sun, an attorney before working at Hyundai, joined former Korea Exchange Bank head Lee Kang Won, who was also arrested in connection with the probe.

Prosecutor Power

Hermes Pensions Management Ltd., manager of the U.K.'s largest pension account, was cleared by a Seoul court of stock manipulation in September after prosecutors failed to prove the London-based fund manager's interview with a newspaper artificially boosted Samsung Corp.'s stocks.

In Korea, prosecutors can detain suspects for as long as two days before a formal arrest. The suspects must be freed unless prosecutors apply for an arrest warrant within 48 hours of initial custody.

Prosecutors sought the detention warrants after Ellis and Thomson failed to comply with an earlier summons for them to appear for questioning.

``We did not comply with that summons solely because of the Prosecutors' threat to put us in jail if we came to Korea,'' Short said in the statement. ``We remain willing to cooperate fully with the Prosecutors' investigation if they abide by international standards of justice.''

To contact the reporter on this story: Sangim Han in Seoul at sihan@bloomberg.net; William Sim in Seoul at wsim2@bloomberg.net.

Last Updated: November 16, 2006 11:15 EST