Fadu executives accused of "inflated IPO" deny charges, say "technology, not sales, is what matters"

Financial News reported that executives of semiconductor design company Fadu, who are suspected of inflating their IPO price while concealing order suspensions from major clients, denied the charges in court.
On the morning of the 19th, Criminal Division 13 of the Seoul Southern District Court, presided over by Judge Seo Bo-min, held the first preparatory hearing for the trial of Fadu CEO Nam I-hyun, former CEO Jihyo Lee, a vice president identified only by the surname Won, and Fadu as a corporate entity, who have been indicted on charges including violations of the Financial Investment Services and Capital Markets Act.
Prosecutors allege that in 2023, the defendants received multiple notices from major clients, including SK hynix and Space Exploration Technologies Corp. (SpaceX), about drastic reductions or suspensions of orders but failed to disclose this. Instead, they allegedly submitted false explanatory materials to the Korea Exchange (KRX) to pass the preliminary listing review, and then omitted or falsified those notices in the securities registration statement and investment prospectus. They were indicted on December 18 last year. Prosecutors consider the approximately 193.7 billion won in subscription funds raised by inflating the IPO price during this process to be unlawful gains.
Prosecutors stated, "After listing on KOSDAQ with a corporate valuation of 1.5 trillion won, the stock price performed solidly until the announcement of third-quarter 2023 results. However, just three months after listing, the company reported an earnings shock, with second-quarter sales of about 59 million won and third-quarter sales of about 300 million won, and the share price fell 45% in three days." They argued that despite anticipating a decline in revenue due to order suspensions by key customers, the defendants concealed this and pushed ahead with an aggressive listing, thereby harming retail investors.
Fadu, on the other hand, denied all of the allegations raised by the prosecution. Fadu’s attorney argued, "Fadu has been recognized for its high level of technology in the enterprise solid-state drive (SSD) market and secured big tech clients such as Meta and SpaceX. Within seven years of its founding, in 2022, it achieved more than 50 billion won in sales, and as new customers joined, the company began in earnest to prepare for listing." The attorney continued, "The company did not list based on sales or profits, but through a special listing track grounded in its superior technology. Therefore, the 2023 sales figures cited by the prosecution were not factors that affected Fadu’s listing."
The defense went on to say, "The year 2023 was described as the worst year in history for the semiconductor industry, with an abrupt and severe downturn. The defendants estimated 2023 revenue by taking into account various circumstances, including forecasts that the slump in the first half would recover in the second half." The attorney added, "They did not hide poor performance from the Korea Exchange but conveyed it as it was, and their quarterly revenue projections were calculated conservatively. There was no intent or purpose to deceive investors for the sake of listing. The IPO was pursued to raise funds needed for large-scale deliveries to new customers." The defense also emphasized that SK hynix’s share of Fadu’s revenue was significantly smaller than alleged in the indictment and that any plan to suspend orders had not been definitively decided at the time.
Regarding the allegation that Fadu concealed SpaceX’s notice of order suspension, the defense argued, "What investors considered important during the listing process was the fact that Fadu had been recognized for its technology to maintain stable performance even in the extreme environment of outer space and was the exclusive supplier of SSDs to SpaceX. Whether the company supplied an 8TB SSD product and the resulting sales volume were not the core issues."
A former SK hynix executive, Mr. Kim, who was indicted alongside Fadu’s management on charges including breach of trust and taking bribes, also denied the allegations. Prosecutors claim that Mr. Kim was involved in the process of selecting Fadu as an SK hynix partner and in helping the company attract investment, and then received, under another person’s name, unlisted shares worth about 180 million won in an artificial intelligence (AI) software development company from Fadu’s management. Mr. Kim’s attorney countered, "At the time, the defendant worked in the business support division, not in product planning, which decides whether to place orders." The attorney added, "He actually played a leading role in bringing a competitor of Fadu into SK hynix as a subsidiary. Fadu’s products were supplied to SK hynix because they met Meta’s qualification requirements and were price-competitive, and the unlisted shares were given as a token of appreciation for supporting the establishment and operation of that company."
Fadu also argued, in relation to the bribery charges, that materials seized by investigators during searches and seizures constitute illegally obtained evidence. The company claims that special judicial police officers of the Financial Supervisory Service (FSS) broadly seized materials unrelated to alleged violations of the Financial Investment Services and Capital Markets Act, and that the prosecution’s investigation expanded based on those materials, so the evidence should not be admissible.
Fadu was designated on December 19 last year as a subject of a substantive review of listing eligibility, and trading in its shares was suspended for 45 days. After the Korea Exchange reviewed the possibility of delisting and then excluded the company from substantive review, trading resumed on the 3rd of last month. The next preparatory hearing is scheduled for 10 a.m. on the 16th of next month.
psh@fnnews.com Reporter Park Seong-hyun Reporter