Japan Punishes Daiwa Securities Over False Reports

The Finance Ministry sent a clear warning to Japan’s securities industry Tuesday when it punished the nation’s No. 2 broker for filing false reports.

The ministry ordered Daiwa Securities not to raise funds for itself in the market for the time being as punishment for the reports, which hid stock dealing losses, a ministry official said.

The ministry also asked Daiwa’s investment service division, responsible for the reports, to voluntarily refrain from business for two days, he said.

Analysts said that although the punishment was considered lenient, the ministry went one step beyond its usual slap on the wrist.

“Some kind of penalty in some manner was expected,” said Tadashi Kawakami, a senior trader at broker Merrill Lynch Japan. “It was a little stricter than expected, but no big surprise for anybody.”

The Daiwa division at the center of the scandal was reported by the Japanese media as having tried to boost stock sales to corporate customers by guaranteeing against losses on their investments.

The ministry official said four Daiwa directors in charge of the guilty division will be demoted. All directors on the board will accept a 10% cut in bonuses for the current business year, and 12 directors will accept short-term salary cuts.

Daiwa President Masahiro Dozen and Chairman Yoshitoki Chino will not assume public positions in trade or other organizations for one year, the official said.

“(I) apologize for filing false business reports to hide stock dealing losses on behalf of the company,” Dozen told a news conference.

He declined to say how much money Daiwa would lose as a result of the ministry’s punishment but pledged to strengthen management control.

Brokers say guarantee agreements, usually unwritten, abound because they are difficult to trace and restrictions in Japan have been loosely enforced in the past.

Under such agreements, if an investment recommended by a securities company goes sour, the broker agrees to make up the losses elsewhere.

Analysts said the ministry had taken an important step in trying to define vast gray areas in the securities industry. “It is trying to set standards with this case,” said Craig Chudler, a market strategist at Smith New Court.