It's hard to imagine a worse p.r. nightmare for Korea's idolmakers, whose stock-in-trade is bubblegum groups crooning heavily synthesized love ballads to a largely underage audience. The investigation comes at a time when K-pop is on an impressive roll. The $300 million domestic market is the second largest in Asia, topped only by Japan's massive $2.9 billion in album sales last year. K-pop has broken across borders: teenagers from Tokyo to Taipei swoon over performers such as singer Park Ji Yoon and boy band Shinhwa, buying their CDs and posters and even learning Korean so they can sing along at karaoke. BoA this year became the first solo artist in more than two decades to have a debut single and a debut album reach No. 1 in Japan, according to Oricon magazine, Japan's leading music guide. "Korea is like the next epicenter of pop culture in Asia," says Jessica Kam, a vice president for MTV Networks Asia. "It's the next Japan."

Music executives have reacted to the crackdown with a mixture of fear and indignation—some say privately they are victims of a government witch-hunt designed to take the heat off the scandal-plagued administration of South Korea's President Kim Dae Jung. (A government spokesperson said the investigation "has absolutely nothing to do with the Blue House.") Park Jin Young, one of Korea's leading songwriters and producers, worries the public might get the wrong idea, saying K-pop "isn't more polluted than other fields." Says James Hwang, executive director of Doremi Music Publishing and chairman of the Korea Music Publishers Association: "After Korean companies are killed and foreign companies dominate, what will happen? The politicians don't think that far."

While it's unlikely to shut down the idol factories, the investigation could sap the industry of its vitality. Caught up in the probe is Lee, SM Entertainment's founder. Sometimes called the man with the Midas touch, Lee was the first to see that Korea's increasingly affluent teenagers yearned for homegrown idols they could call their own. A former singer himself, he created in 1996 the seminal Korean boy band, H.O.T., still the biggest-selling local group ever with 10 million CDs sold.

Lee's masterstroke: the industrialization of the starmaking process. When he founded SM Entertainment—which is listed on Korea's KOSDAQ stock market—in 1989, Korea had no real rock 'n' roll tradition, no history of struggling garage bands trying to get discovered by sending demo tapes to radio stations and record labels. In other words, Korea had very little musical raw material to work with. Lee helped change that by cloning talent. Sifting through hundreds of raw audition tapes or sometimes picking kids off the street, he put aspiring idols through a rigorous course of singing and dancing that typically lasted two years or longer. With an eye on the Asian market, he added language training. The all-girl trio S.E.S., currently one of Lee's hottest properties, includes Eugene, who can sing in English, and Shoo, who sings in Japanese. Lee currently has about 70 would-be idols under his wing.

Because of his clout with the media, Lee, who could not be reached for this story, is the starmaker competitors fear most. He's at the center of a controversy over the alleged exploitation of youthful musicians by production companies that sparked an ongoing investigation by the Korea Fair Trade Commission (see "Show Me the Money"). H.O.T. fans are among his biggest critics—they hold him responsible for the breakup of their beloved band last year following a contract dispute with SM Entertainment.

Three band members quit the company in protest, forming a new group, J.T.L. But an executive with the band's new management company, Yejeon Media, says getting television stations to play its new music video was difficult, despite the group's large following. The blame fell on Lee, who was accused of blocking the band's access to the airwaves. Hundreds of teenagers barraged SM Entertainment with angry e-mails; some threw eggs at the company's headquarters in southern Seoul. On a fan website called HateSuMan, a posting described Lee as a snake who had fallen into a basket full of money. The incident "damaged the band a lot," says J.T.L. singer Tony An.

The commission is due to release a report on the industry next week. But far more worrisome is the investigation by the prosecutor's office, which threatens to put everyone's dirty laundry on public display. Until news of the probe broke, some production company executives freely acknowledged that bribery is considered to be a business expense—euphemistically called "p.r. fees." Traditionally, cash is handed over at a meal or in pricey nightclubs where young women serve drinks, chat and sing karaoke with male customers in private rooms. Sometimes an envelope stuffed with money is slipped in beside a cake in a gift box. Some bet big on golf and intentionally lose. In an investigative news program that ran on MBC television in January, an anonymous entertainment company manager described how he borrowed a TV director's car keys, located the vehicle in a parking lot and left a shopping bag filled with cash next to the driver's seat. Or you just go out for cocktails with your TV buddies. "Sometimes we spend $3,300 drinking with four or five guys, production directors. I have the receipts right here," says a music industry insider, tapping his pocket. "Sometimes we don't have time so we just give them $1,600. We are not proud of it."

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