Banker on Fast Track Undone by Betting on Slow Horses

By Japanese or American standards, Hirotsugu Mizuno was on a fast track. A whiz kid graduate of one of Japan’s finest universities, he seemed to have it made: a management job, with many promotions, at one of Japan’s most respected banks. He was, some colleagues thought, destined to rise near the top.

But amid this appearance of perfection, Mizuno had developed a minor character flaw: a propensity to gamble on horse racing, and not very successfully at that. Soon after arriving in Los Angeles for a management job at the California subsidiary of Mitsubishi Bank Ltd., Mizuno ran up more than $15,000 in horse-betting losses, according to the bank’s attorney.

Those losses, authorities said, eventually led Mizuno to illegally divert $44.9 million from the bank for four years through more than 100 phony loans, investing most of the embezzled funds in the stock market. But he used his stock profits not to enrich himself, but instead to recoup the initial gambling losses and repay the phony loans--with interest--hoping that the bank would not lose any money and he would not be detected, investigators say.

The alleged pyramid scheme came to light Thursday when Los Angeles County Dist. Atty. Ira Reiner charged Mizuno with embezzlement of bank funds in what is believed to be one of the largest such cases in Southern California in recent years.

Mizuno, who confessed to at least some of his wrongdoing, according to the bank, has not been located by authorities, who believe he is in Japan.

Mizuno’s story, pieced together through documents, reports and interviews with bank and district attorney’s investigators, is a four-year odyssey of an ambitious, hard-driving executive so well respected by his colleagues that few questioned his irregular activities and banking practices. But it is also the story of a man whose fast rise up the corporate ladder eventually led to the discovery of his scheme and his downfall.

Mizuno’s fall in some ways also illustrates conditions at Japanese companies and the pressures facing Japanese executives. Mizuno, now 44, avoided detection for so long in part because he apparently never took vacations longer than a few days, fiercely following a Japanese cultural practice that frowns on taking much time off. Never away from his job for very long, none of his colleagues had a chance to do his job and discover irregularities, the bank’s attorney says.

The case also illustrates the great pains that Japanese companies take to preserve their public image from any hint of scandal. After Mitsubishi Bank uncovered Mizuno’s scam in October, 1984, bank documents show that it discouraged American authorities from prosecuting the case and continued to do so until as late as October, 1985. Prosecutors say the bank wanted to avoid adverse publicity and troubling questions about its internal controls.

Not surprisingly, after the case was made public last week, Japanese newspapers and broadcast stations took the story seriously. The Asahi, one of Japan’s most prestigious newspapers, played the story on the top of its front page.

The story is noteworthy because “there is so little dishonesty in Japan” or among Japanese executives, said Carl J. Bradshaw, a Los Angeles attorney representing Mitsubishi in this case. With his outstanding credentials, Mizuno was among the least to invite suspicion of wrongdoing among his colleagues, Bradshaw said.

What follows is an account of Mizuno’s rise and fall, largely obtained from an October, 1985, report, provided to The Times, of an investigative audit committee appointed by the bank. The audit committee included two bank officers and three outsiders, including Richard M. Dominguez, former state banking superintendent, and Harry J. Volk, retired chairman of Union Bank.

The district attorney’s office based its complaint against Mizuno partly on the findings of the committee, although it said it has yet to do its own extensive investigation. Prosecutors contend that the bank has provided most--but not all--of the documents Reiner’s office has requested.

Mizuno was the epitome of success Japanese-style. He was a graduate of Keio University, known for an outstanding business curriculum that has turned out some of Japan’s top corporate chieftains. Within one month of graduation in 1965, he began work at Mitsubishi Bank, one of the world’s largest and most respected financial institutions. Starting as a loan officer, he was transferred eventually to higher and higher positions.

Mizuno, however, did have an unusual management style. While he was described by colleagues as intelligent and respected, the audit report also said that he had a short fuse and often severely criticized subordinates in front of their colleagues--a rare occurrence in Japanese companies where criticism of others is almost always handled in private, if at all.

A private man with a wife and two children, Mizuno did not reveal much of his personal life and thus few of his colleagues knew of his interest in playing horses, Bradshaw said. But soon after his arrival in Los Angeles in November, 1979--as a deputy manager of Mitsubishi Bank of California--he incurred between $15,000 and $30,000 in betting losses, Bradshaw said.

In September, 1980, he began to tap the bank’s funds to recoup his losses, the district attorney’s complaint alleges. He started small, initially creating two fictitious people in whose names he applied for $43,000 in personal loans, falsifying all the paper work. He used the proceeds to bet again at the track, hoping to win back his losses, plus more to repay the phony loans so that he would not be detected.

Mizuno took great pains to make these fictitious customers appear legitimate, because his loans did have to be approved by superiors in Los Angeles and Tokyo, Bradshaw said. One fake customer, who Mizuno named Takehito Terabayashi, was described by Mizuno on the loan papers as “a very capable CPA whose future is bright” and whose “personal income is good enough to pay the monthly installment.”

But back at the track, Mizuno was not so smart. He lost much, if not all, of the proceeds from the two initial phony loans, investigators say.

To recoup those losses and repay the older phony loans, Mizuno allegedly created new loans and began siphoning money from the accounts of actual customers. All told, he created a financial treadmill of 135 unauthorized loans and loan renewals. The amount of money misappropriated in the bogus loans and payments eventually totaled more than $946 million, of which $44.9 million was actually embezzled and used by Mizuno in the stock market or elsewhere, according to investigators.

Mizuno also used $1.97 million in bank funds to make a loan under his own name to a business named Tani Farms. Interest payments from that loan went to Mizuno, who used the funds to repay other bogus loans, investigators say.

To avoid detection either by colleagues or customers, Mizuno was extremely meticulous. To prevent actual customers from knowing that he was siphoning loans from their accounts, he would have their monthly account statements sent to him first for forwarding to the customers. That way he could retype the statements, omitting the fraudulent transactions.

Such a scheme meant Mizuno could not be away from work too long and could not afford anyone else stepping into his job, Bradshaw said. When this bookkeeping burden got too difficult, Mizuno consolidated his bogus loans into a fake line of credit with Montana Power Co., an actual utility but never a Mitsubishi customer. Mizuno then could borrow freely from that credit line, with relatively little hassle.

Mizuno also changed his gambling habits. Instead of continuing his losing ways at the track, Mizuno began diverting his fraudulent loan monies into the stock market--with much better results.

Mizuno traded hundreds of stocks, ranging from American blue-chip companies, such as General Electric and Procter & Gamble, to Japanese giants, such as Matsushita Electric and Canon, bank officials say.

He avoided suspicion of his stock trading by representing himself to his brokers, Nomura Securities International and Daiwa Securities America, not as an employee of Mitsubishi but instead as an agent of the fictitious Takehito Terabayashi and of a bogus company he named T&T; International Inc., which he based in Lima, Peru.

Some of Mizuno’s colleagues knew of his stock trading. He often left the office for breaks around 5 p.m.--about the time of the morning opening of the Tokyo Stock Exchange--and colleagues thus would take messages of calls for Mizuno from his stockbrokers.

All told, Mizuno traded nearly $90 million of stocks in four years, netting a profit of about $1.3 million, bank investigators say. At one point, however, he was as much as $3 million ahead, and could have absconded with those profits, Bradshaw said. But Mizuno instead chose to use the profits to try to pay off, once and for all, the bogus loans. No customers ever lost any money, bank investigators say.

But by October, 1984, Mizuno was still short of repaying his bogus loans and other debts. And it was then that he got word that he would be promoted to a post as deputy general manager in the bank’s New York office. Like all loyal Japanese executives, he accepted without question.

Within days of his departure, Mizuno’s scheme was uncovered by a colleague suspicious of why the paper work on an $8-million loan to Montana Power, which Mizuno had hastily written to consolidate all his other fraudulent lending activity, was not included with other paper work that Mizuno left behind, Bradshaw said.

Confronted in New York by Kenji Kyuno, one of Mizuno’s superiors in Los Angeles, Mizuno quickly confessed.

“Yes, I’m sorry. I shamed myself but I did it,” Mizuno told Kyuno, according to Bradshaw.

Mizuno has been charged with seven felony counts, but if he is found in Japan, extraditing him to the United States to face charges could take months, said Frederick G. Stewart, the deputy district attorney prosecuting the case.

Mitsubishi’s actual loss from this bizarre affair is under dispute. Reiner’s office contends the bank lost $4.9 million, but bank officials say their actual, out-of-pocket loss was only $130,000. That is the actual cash amount that the bank’s investigators say they cannot find. They believe that Mizuno used it for personal purposes. However, the loss could go higher, because prosecutors and regulators are unsure whether the $1.97-million loan to Tani Farms can be fully repaid.

The case still raises some troubling questions, including that of the internal controls and vacation policies at Japanese banks. American bank regulators say Japanese banks operating in the United States constantly violate U.S. regulations requiring bank officials to take two-week vacations at least once a year, a rule designed to help expose fraud.

“If he (Mizuno) hadn’t been transferred, he just might have pulled this off,” Bradshaw said.

For its part, Mitsubishi said it has instituted tighter financial reporting requirements in the aftermath of the scandal.

Another question facing prosecutors is whether bank officials, brokers or others were involved in the scam. Mitsubishi says it is convinced that Mizuno acted alone, based on the findings of the audit committee and another audit by the accounting firm Ernst & Whinney and a detailed analysis of the handwriting on Mizuno’s forged loan documents.

Reiner’s office, however, is not so sure. Although it says it has no evidence implicating others, it contends that the bank has withheld key documents involving interviews with Mizuno and other bank employees, as well as Mizuno’s handwritten notes.

The bank denies that it has withheld information and contends that it has cooperated fully in the district attorney’s investigation.

“The bank moved heaven and earth to keep this as quiet as possible,” Deputy Dist. Atty. Stewart said.