Stock Deal Investigation Targets Daiwa

Major brokerage Daiwa Securities is under investigation by Japan’s Finance Ministry for allegedly violating securities law, in what appears to be another Japanese stock scandal.

When stock recommendations went sour, Daiwa allegedly offered its favored corporate clients special stock deals that guaranteed illegal profits to make up for losses.

The Finance Ministry has opened a probe of Daiwa’s alleged loss-free transactions, which violate Japan’s Securities and Exchange Law.

Daiwa officials said Monday that the company did cover losses of 20 to 30 customers totaling about $69.4 million (10 billion yen), but these were not guaranteed loss-free deals.

The officials said Daiwa had not promised any compensation for loss to the customers but decided to cover some to maintain good relations.

The Daiwa scandal is the latest load of the stock market’s dirty laundry that the media have hung out for the public to see.

Last month, police arrested a Nomura Securities employee and a Kawasaki city employee. The Nomura employee is suspected of selling prelisted stock to the Kawasaki official in return for managing a larger share of the city’s pension fund.

But at the top of the list was the Recruit affair, the worst postwar political scandal.

A number of politicians reaped large profits by buying stock in a real estate unit of Recruit Co. before the shares were listed and then selling the stock after it started trading on the over-the-counter market.

Public outrage over the Recruit scandal caused a few prominent politicians to step down from office and was a major reason that the ruling Liberal Democratic Party lost its majority in July’s upper house elections, according to polls and political analysts.

General elections are expected in February and--if not hushed up--the Daiwa affair may be taken as yet another symbol of Japan’s elite doing favors for one another, with the ruling party looking on benignly, if not actually taking part in the process.

“The last thing the Finance Ministry wants in pre-election times, when people are still goosey about Recruit and minor scandals, is to create more of a stink than they have to,” said one veteran analyst.

“If they (the Finance Ministry) said this is illegal, it could be really scandalous and affect the elections like Recruit,” said Hitoshi Yamamoto, president of Morgan Grenfell International Asset Management Co.

Brokers say loss-free trades abound because they are difficult to prove and stock regulations in Japan are often loosely enforced.

“Anyone in the securities business should not find this a surprise,” said strategist Craig Chudler at Smith New Court.

“In Japan the (broker’s) relationship with the corporation is always the most important thing,” said Yamamoto. “There is no chance brokers will make a guaranteed return agreement with private investors, only institutional investors,” he said.

“It (the Daiwa scandal) is one of the things that bubbles to the surface providing a relatively clear view of the way these things are done in Japan,” said Perry Gary, a senior manager at AMRO International (Asia) Ltd. “It is not a Daiwa affair so much as it is an example of an establishment affair. It goes back to the structure of Japanese society.”

The society’s longtime practice of guaranteed returns stems from a web of give-and-take relationships, such as when a bank employee rewards a new customer with a Paddington Bear piggy bank.

“If you have big business you help your customer and if there are losses you try to erase them,” said one analyst.