CEO Cho Young Chu, Guilty or Not?

KT Freetel, South Korea's second-largest mobile-phone operator, said Chief Executive Officer Cho Young Chu quit after he was taken into custody by prosecutors as part of a bribery investigation.

The company's board of directors accepted the resignation following Cho's arrest, Kim In Tae, a spokesman for Seoul-based KT Freetel, said by telephone. He declined to comment on whether Cho, 52, denies allegations related to bribery.

The resignation of Cho, who's been heading KT Freetel since 2005, forces the wireless operator to search for a new chief executive after the company posted six straight quarters of profit declines. Cho's replacement, to be named within two weeks, will face the challenge of reviving earnings growth in a market where nine out 10 people already own a mobile phone.

“Even if a new CEO arrives immediately, we believe there is increased uncertainty on KTF's ability to address changes in the market, including regulation and competition,” Goldman, Sachs & Company said in a note. “With the resignation of the CEO, we do not expect the market to warm up to the stock anytime soon.”

South Korean prosecutors took KT Freetel's head into custody on Sept. 19 and formally arrested him to question him on allegations that Cho received about 2.5 billion won ($2.2 million) from equipment suppliers, violating his fiduciary duty, Kim Soo Nam, a prosecutor at the Seoul Central District Prosecutors' Office, said by phone.

Merger Delay?

Cho's arrest may delay any merger talks between KT Freetel and parent KT as investors probably won't approve a combination before “corporate governance issues” are resolved, according to Citigroup analyst Sean Lee. Cho's arrest and the probe aren't affecting KT Freetel's operations, the mobile- phone operator's spokesman said.

The arrest of Cho raises concern over “a serious corporate governance problem -- lack of management integrity and transparency in the equipment purchase process,” Citigroup's Lee wrote in a Sept. 21 report.

KT plans to submit an application to the Korea Communications Commission in September to merge with KT Freetel, Edaily reported in August, citing an unidentified KT official. KT shareholders will probably vote on the merger in February, the Korean-language online newspaper reported then.

Since reporting earnings in July, spokesmen at KT have reiterated comments by KT Chief Financial Officer Maeng Soo Ho that the “timing and other details have not been confirmed or decided” on any possible merger with KT Freetel.

KT Freetel shares rose 2.5 percent to 28,900 won at 1:39 p.m. in Seoul, compared with the benchmark Kospi stock index's 0.9 percent advance.

Is Cho's bribery case an issue of a questionable management or governace on KTF's side?