May 24, 2024

DealBook: Japan Widens Inquiry Into Insider Trading

Tsutomu Okubo, head of the Democratic Party’s financial affairs committee, said regulators were scrutinizing suspicious trading.Robert Gilhooly/Bloomberg NewsTsutomu Okubo, head of the Democratic Party’s financial affairs committee, said regulators were scrutinizing suspicious trading.

TOKYO — A government investigation into insider trading in Japan has extended onto the trading floors of some of the largest Wall Street companies, including Goldman Sachs, UBS and Deutsche Bank.

A governing party committee has asked regulators to scrutinize suspicious trading activity before at least 12 public offering announcements over the past three years, said Tsutomu Okubo, head of the financial affairs committee of the Democratic Party. The committee has been working with regulators to stiffen insider trading laws in Japan.

Among the trades being investigated are those made by Goldman clients who bet against All Nippon Airways just days before the airline’s stock offering last month. A company’s share price tends to drop when a new share issuance is announced, especially by a struggling company, because it dilutes shares without much prospect of a boost to business from the capital that is raised.

The push for more disclosure came as Japan’s Financial Services Agency metered out a strikingly lenient censure of Nomura for leaking sensitive information to clients ahead of public share offerings.

Nomura has been issued a business improvement order under which it would be required to take measures to bolster its internal compliance, and periodically report to regulators on its progress, the agency said in a statement Friday.

Two top executives of Nomura, the largest investment bank in Japan, have already resigned after acknowledging that in three cases, its sales staff had tipped off its mutual fund customers about stock offerings that the bank was handling for its corporate clients.

Some experts had called for far stricter measures, including temporary termination orders for Nomura’s offending businesses.

The country’s financial services minister, Tadahiro Matsushita, said that while he called on Nomura to ‘‘bear heavy responsibility’’ over its repeated leaks of information, the agency also saw Nomura’s management reshuffle as a sign the firm was prepared to clean up its act.

He strongly hoped Nomura ‘‘will press ahead with reforms to rebuild its company structure fundamentally,’’ Mr. Matsushita told reporters.

The Nomura scandal has further undermined faith in Japanese stock markets, experts say, which remain some of the world’s most depressed after the global financial crisis.

‘‘The reckless pursuit of short-term profits by a handful of actors is destroying the reputation and value of the entire market,’’ said Mr. Okubo, a former managing director at Morgan Stanley.

Governments across the globe are cracking down on insider trading. In Britain, the Financial Services Authority has become far more aggressive, bringing a rising number of insider trading cases, while U.S. government prosecutors in New York City have charged at least 70 people with illegal trading over the past three years.

In Japan, Mr. Okubo said that his committee was interested in trades made by funds, brokerage firms and asset managers before a string of public share offerings, beginning in 2009. The committee obtained data from the Tokyo exchange on short-selling — in other words, betting against stocks — that occurred before a list of public offerings. Mr. Okubo said he had forwarded that list to the Securities and Exchange Surveillance Commission.

Among the offerings on the list is the $2.6 billion issuance announced by All Nippon Airways on July 3. Filings made with the Tokyo exchange show short-sale positions on the stock taken out in the name of Nomura, starting June 25, eight days before the announcement, and in the name of Goldman beginning a day before.

In approximately three years before the All Nippon offering, neither Goldman nor Nomura made filings of short-sale positions on All Nippon shares. The trading volume of those shares jumped before the issuance announcement, reaching a three-month high the day before, according to separate Tokyo Stock Exchange data.

Both Goldman and Nomura, who were underwriters for All Nippon’s issuance, confirmed that the trades had been undertaken on behalf of clients but declined to comment further. They denied that information on the issuance could have leaked from their investment banking divisions to those clients.

Also on Mr. Okubo’s list are short positions taken in the name of Deutsche Bank and UBS on shares of Nippon Sheet Glass before its $500 million stock offering, announced Aug. 24, 2010. Both Deutsche and UBS first filed short positions, most likely on behalf of clients, starting Aug. 6, according to Mr. Okubo and the exchange filings. Neither bank filed short positions on Nippon Sheet Glass in the year before that, the data show. The banks declined to comment. Neither bank was involved in underwriting the offering.

Analysts warn against assuming that all shorting activity made before a public offering is based on insider information. ‘‘It is not rocket science to pick out companies that are in danger of issuing equity,’’ Nicholas Smith, Japan strategist at CLSA Asia-Pacific Markets, wrote in a note to clients in May.

‘‘Shorting stocks on credit analysis that indicates that an offering is in the offing is a legitimate — and valuable — part of the pricing mechanism of financial markets,’’ Mr. Smith said. ‘‘What is not legitimate is trading on leaks of nonpublic information.’’

But Mr. Okubo insisted that many of the trading patterns were suspicious. He said it was crucial that regulators learn who was behind the short-selling leading up to recent offerings, much of which remained unaccounted for.

Nomura has not faced any insider trading charges because, unlike the United States, Japan does not punish tipsters, as long as they do not trade on the information. But a string of the bank’s clients have decided to take their business elsewhere since the scandal, prompting the bank to reshuffle its management and promise an overhaul of its internal compliance in a bid to regain the confidence of investors.

Nobutoshi Yamanouchi, a partner at the Tokyo office of the law firm Jones Day, said financial regulators badly needed to convince global investors that the authorities had the power to break into the cushy inner circle of Japanese finance and root out insider trading. The extent of regulators’ actions against Nomura was crucial, and little short of a business termination order could convince investors that Japanese regulators were serious about a crackdown, he said.

‘‘They need to be able to show that they can make Japanese markets attractive for everyone again, not just for a select group of insiders,’’ Mr. Yamanouchi said.

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