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Once a laughingstock for its poorly made cars, Hyundai Motors has in recent years boosted quality and won fans in key markets such as the U.S. and China. But the fast-growing South Korean automaker—the world's seventh-largest when combined with its affiliate Kia Motors—was blindsided last week from an unexpected quarter: its 68-year-old chairman, Chung Mong Koo, was arrested on charges of embezzling $100 million and breach of trust relating to $300 million in company losses.

The arrest of one of Korea's most prominent tycoons sent tremors through the boardrooms of the country's chaebol, the powerful, family-run conglomerates that have periodically been targeted by government prosecutors over allegations of self-dealing and influence peddling. Chung has admitted no wrongdoing, but his arrest looks likely to knock Hyundai's international expansion plans off course. The investigation into Hyundai has already delayed the construction of an auto plant in the Czech Republic, and Kia postponed the groundbreaking for a factory in the U.S.

If convicted, Chung could face jail time, but Korean tycoons have a history of survival. After going to prison for seven months for fraud in 2003, Chey Tae Won, chairman of oil company SK Corp., returned to his post, fighting off shareholder efforts to remove him. Still, Hahm Sung Deuk, a political economist at Korea University, says the arrest of such a prominent executive will act as a powerful warning to other businessmen: "The owners of companies will realize that this time is different." That may be bad news for Chung, but not for Korea's reputation.

• Michael Schuman
• The arrest of the Hyundai's chairman throws the company off course, but it may be good for Korea Inc.