How Nomura Took Care of Its Best Customers : Securities: The Japanese broker got a gangster boss and well-heeled clients into Tokyu shares early, investigators say. It pitched to others late--just before the stock fell.

As a deepening securities scandal continues to rock Japan, investigators are unearthing details of a stock scam that offers a rare glimpse of the shady back alleys behind Japan’s stock exchanges--how Japan’s top brokerage houses appear to play the Tokyo stock market as if they were running a private casino with the odds heavily favoring the house.

The most publicized part of the scandal has been the nearly $500 million that Japan’s top four brokerage houses paid to cover the market losses of their best customers, giving the rich clear favoritism over other customers.

But what has struck far more deeply into the heart of the Japanese Establishment--and what insiders believe played a key role in forcing the recent resignations of the presidents of Nomura Securities and Nikko Securities--are revelations that the brokers had widespread dealings with Susumu Ishii, former boss of the Inagawakai, one of Japan’s largest criminal gangs.

Police are investigating the ties among Nomura, Nikko and Ishii--relationships that emerged in the course of an investigation into Ishii’s investments in America, in which Ishii indirectly used Prescott Bush, President Bush’s elder brother, as an adviser. The Ministry of Finance, which is expected to discipline the brokers for the gangland ties, is also looking into whether the brokers were involved in manipulating the shares of Tokyu Corp., a railroad company with $3 billion in sales.

Although authorities say they won’t publicly reveal details until their investigations are complete, enough has emerged about the case to piece together a disturbing picture.

The story begins with the death on March 20, 1989, of Noboru Goto, the powerful and charismatic chairman of Tokyu Corp. Goto’s strong personal influence, including a long-standing friendship with former Prime Minister Yasuhiro Nakasone, enabled him to keep together the dispersed interests of the Tokyu group--which include 362 affiliated companies with $21 billion in sales--in spite of the family’s small stake.

But a trader at a major American brokerage firm said Goto’s death made the company a good kamo , or duck--a target for speculators and raiders.

About the time of Goto’s death, Yoshinori Watanabe became head of the Osaka-based Yamaguchi Gumi, Japan’s largest gangster group, with support from Ishii, boss of the Tokyo-area Inagawakai gang, according to the Mainichi, a major daily newspaper. To give thanks and to cement the alliance, Watanabe gave Ishii several million shares of Tokyu Corp.

Ishii had long been speculating in stocks. He had accounts at Nikko and at Nomura under several false names, according to press reports quoting Ministry of Finance officials.

Ishii set out to build his position in Tokyu. Although Ishii’s motives are unclear, Hiroshi Okumura, an economist at Ryukoku University and an expert on Japan’s stock market, believes that Ishii planned to “greenmail” Tokyu--intimidate the company into buying back the shares, a common strategy of gangs.

On April 11, a Nikko securities broker visited Ishii at his brick mansion in Yokosuka, outside Tokyo. It is unclear what conversations took place (Nikko says it was a routine visit), but the broker introduced Ishii to officials of a Nikko subsidiary that one week later lent Ishii $145 million to buy Tokyu shares.

A couple of months later, in June of 1989, Ishii sold memberships in a golf course he owned to 12 companies for $260 million. This is one of many unsolved mysteries in the case.

Nomura and Nikko were among corporations that paid $14 million each for membership certificates that investigators believe had no real value. Nomura spokesman Michio Katsumata says that the memberships represented a loan and that Nomura’s subsidiary was told that it would get its money back in a year or so, with 25% interest.

Ishii poured the money from his golf membership sales into more Tokyu shares. The shares, which he initially bought at $11.60 apiece, began to climb. Ishii eventually owned close to 30 million shares, of which about two-thirds were purchased from Nomura and Nikko.

Those holdings represent a small share of the stock. But in Japan, where only limited quantities of a given issue are ever traded, shifts in relatively small holdings can move the market.

By the fall of 1989, other speculator groups were buying Tokyu shares, brokers say. Typically, such groups include politicians, who receive campaign money in exchange for favors. While rumors are swirling about which politicians may have been involved in the Tokyu scandal, no one has been fingered.

The speculator groups buy shares in a single stock in which they expect activity, push the price up and bail out with their profits. By early October, Tokyu shares were trading at $14.50, 20% higher than when Ishii began buying.

After selling millions of shares to gangsters and other speculators, Nomura turned to its more legitimate clients. On Oct. 18, 1989, it told its largest clients that Tokyu was a sure bet.

Takao Oku, then chief of Nomura’s Umeda branch, invited 30 of the branch’s biggest institutional customers to the meeting. At the seminar, Masashi Takai, head of stock trading at Nomura’s Tokyo headquarters, told customers to “buy Tokyu shares now,” according to the Yomiuri Shimbun, Japan’s largest daily. The Nomura executive told his well-heeled audience that the stock “will start rising tomorrow. It will reach 5,000 yen ($36) by December.”

Katsumata of Nomura says that even if the Nomura executive made such a forecast, “nobody would believe a thing like that.”

On Oct. 19, the day after the Nomura seminar, the value of Tokyu shares jumped by more than 10% to $16.50.

Now the speculators and Nomura’s favored clients had positions in Tokyu. Brokers say it also was likely that Nomura had built a large position in Tokyu shares for its own account. It was now time for Nomura to sell the share to individual investors.

Nomura chose Tokyu as one of its “stock picks of the week.” Tokyu was featured in a Portfolio Weekly issue, dated Oct. 30, that was sent to Nomura branch offices. The story advised investors that Tokyu was a good buy because of its property and its “networks,” which include cable television lines.

When Nomura picks a stock for such prominent promotion, says Jun Sakamoto, a former Yamaichi broker and author of a book on securities company misdeeds, it typically sets a sales quota that each branch office is expected to reach. Nomura’s army of thousands of salesmen and saleswomen told customers that Tokyu Corp. was the stock to buy.

Coincidentally, in the same week, Japan’s largest business daily ran a story saying that the Tokyu Group would be buying shares to protect itself from raiders. Nomura ascribes the stock’s movement to that article.

But brokers say it was Nomura’s muscle that moved the market. Nomura had lit the chochin (paper lantern), spotlighting the stock. “When Nomura lit the chochin , it suddenly looked interesting, and we alerted our customers,” said a broker at Yamatane Securities who didn’t want his name used. “We had no idea what was going on behind the scenes.”

At the end of October, Tokyu shares were still trading at $15 to $16. By the end of November, they had shot up to a high of $22.

By pushing stocks to small investors, Nomura was able to generate huge commissions, buying and selling more than $4 billion worth of Tokyu shares between October and December of 1989.

Based on the newly created value, Nomura’s subsidiary lent gangster boss Ishii $116 million between Nov. 7 and Nov. 14.

Soon after, the operation began to unravel. Speculator groups evidently began dissolving their holdings in Tokyu, because its shares began to slide. The decline accelerated in December, as power shifted to a new Bank of Japan governor who began to raise interest rates and publicly warn that he wanted land prices to fall. Nomura gave major clients an opportunity to unload their shares.

Stock speculators and Nomura clients who bought and sold Tokyu shares early in the game made money. Those who invested late--the individual investors whom Nomura exhorted to buy--lost heavily.

A mystery is why Ishii, the gangster boss, didn’t cash in his stock at the peak, when he could have earned a $275-million profit.

The Ministry of Finance says it is investigating Nomura’s trading in Tokyu shares to see whether stock manipulation occurred. Nomura dismisses as “unthinkable” the notion that Nikko and Nomura got together to manipulate the share price of Tokyu upward.

“That may be possible with a small stock, but with a stock that is trading in such large amounts, it is unthinkable,” says Katsumata. “If you put it all together like that, it looks good, but it’s really fiction--this is not a case of manipulation.”

Okumura of Ryukoku University believes that one reason the scandal has been given so much play is high-level corporate anger that the security houses were acting in concert against the interests of Japanese business.

Tokyu says it is annoyed by Nomura’s acts against “corporate morals” and will no longer use Nomura or any of the other three major brokerage houses as its main underwriter.