Japan’s culture of insider trading

A probe into insider trading has thrust the spotlight on the cozy world of Japanese share dealing with US investment banking giant JP Morgan now ensnared in the snowballing investigation.

Criminal convictions for trading on inside information are few and far between in Japan, while for those who are caught, the token punishments are hardly a deterrent – recent fines have come in at around $1,500.

That's the cost of dinner at an upmarket Tokyo restaurant, and a far cry from the west, where huge financial penalties or even jail time are the norm.

In a market where personal relationships are cultivated and nurtured over years, a tip that allows a friend or client to pounce on an upcoming share issue is seen as par for the course in Japan, dealers say.

But the investigation by securities regulators has sparked renewed pressure to crack down on lax regulations over concerns about the nation's flagging corporate governance image, already dented by a string of financial scandals.

'Japan should punish those who leak confidential information,' said Etsuro Kuronuma, a law professor at Tokyo's prestigious Waseda University.

'Even if a brokerage sets internal rules, you cannot supervise your employees all the time... [Leaks] violate the trust of share issuers.'

Japanese brokers routinely disclose material information about share sales that their employer's investment banking arm were consulting on, analysts say.

A so-called 'Chinese Wall' was designed to keep sensitive information from spreading beyond the investment banking side, but the problem persists.

'A broker who got a tip from [the investment banking division of the same brokerage] feels incentivised to tell his clients because he thinks he has impactful information for those clients,' wrote Nicholas Smith, a strategist at brokerage CLSA, in a recent report on the issue.

Both brokers and investment bankers 'stand to potentially profit through higher bonuses if their company makes money as a result of their actions, but neither has traded on the news,' he said.

That legal loophole means Japanese tipsters are 'essentially immune from prosecution as long as they do not themselves trade on the news,' Smith said.

The issue has prompted a call to action from some legislators, with financial services minister Shozaburo Jimi on Friday vowing tighter rules and stiffer penalties.

On Tuesday, Japan's Securities and Exchange Surveillance Commission recommended that Asuka Asset Management be fined for short-selling Nippon Sheet Glass shares after illegally obtaining information ahead of a stock sale that J P Morgan was underwriting.

A sales executive for the US bank – which is already reeling from a shock $2.0 billion loss on derivatives trading – was the source of the leak, Dow Jones Newswires reported, citing an unnamed source.

The SESC did not name the alleged source, but J P Morgan was reportedly a lead underwriter and one of just two taking part, with the other, Daiwa Securities, already saying it was not involved in the inquiry.

The glassmaker called the leak of its share offer 'highly regrettable,' adding in a statement that 'we strongly hope that the authorities will make a thorough investigation of the facts and take strict measures.'

J P Morgan's carefully worded statement took pains to point out that the company as a whole, nor any entire division of it was involved, but fell short of declaring none of its employees had fallen under suspicion.

But, it said it 'takes this matter extremely seriously and will continue to take measures to enhance our internal control'.

'We are cooperating fully with the authorities on this matter,' it added.The SESC recommended a fine of just 1,30,000 yen [$1,650] for Asuka, even though it was alleged to have made more than 60 million yen.

Two other cases involving Sumitomo Mitsui Trust Bank and Japan's biggest brokerage Nomura, which was an underwriter on both share sales, sought fines of just 80,000 yen and 50,000 yen.

'[That is] pocket change in the life of markets,' said CLSA's Smith.

On Saturday, the Nikkei business daily reported that Japanese regulators will now seek help from their US counterparts in probing suspected insider trading by American investors in Tokyo Electric Power's $6.4 billion share sale in 2010. Nomura was lead underwriter on the offering.

A US crackdown on insider trading has seen numerous arrests and convictions including that of hedge fund manager Raj Rajaratnam who was sentenced to 11 years in prison.

Earlier this year, George Soros lost his final appeal against a 2002 French insider trading conviction that saw the US billionaire fined 9,40,000 euros [$1.17 million].

The total fines sought in more than 100 insider trading cases in Japan during the past five years totalled about $2.3 million, with just six instances of criminal charges being laid in the year through March.

The corporate-governance image of the world's third-biggest economy is still reeling from the Olympus affair last year.

The camera and medical equipment was hit by a scandal that sparked lawsuits and the arrest of former executives accused of hiding about $1.7 billion in investment losses.

By Hiroshi Hiyama, courtesy AFP.
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