Japan Scandal Hits Smaller Brokerages

A securities scandal extends beyond Japan’s “Big Four” brokerages to at least 18 smaller firms that also reimbursed favored clients for stock market losses, a newspaper reported Sunday.

The small- to medium-sized brokerages voluntarily reported to the Finance Ministry that they paid a total of $146 million in compensation between September, 1987, and March, 1990, the Yomiuri newspaper said.

Earlier, the Big Four brokerages--Nomura, Nikko, Daiwa and Yamaichi--were discovered to have paid $909 million in compensation to 229 corporate customers between September, 1988, and March, 1990.

Under Japanese law, such compensation is not illegal if it is not promised in advance. But it violated ministry guidelines and infuriated investors who were not reimbursed for losses.

As punishment, the Finance Ministry restricted operations of the Big Four for four days earlier this month.

The presidents of Nomura and Nikko also resigned, in part because of their companies’ dealings with a former underworld boss who received $264 million in loans from the brokerages in connection with the purchase of shares in a major railway company.

Yomiuri’s report did not say whether the Finance Ministry will punish the smaller firms. More than five already have had to pay additional taxes after the compensation was discovered, the newspaper said.

Officials of the Finance Ministry and securities companies could not be reached for comment Sunday.

Of the $146 million paid by the smaller brokerages, the newspaper reported that New Japan Securities Co., Japan’s fifth-largest securities firm, paid $102 million to losing clients.

Kankaku Securities Co. and Wako Securities Co. each paid $14.6 million and Kokusai Securities Co. $7.3 million, the report said.

It said the smaller brokerages would make corrected reports on their securities operations to the Finance Ministry this week.

The smaller companies disclosed their compensation payments after the Big Four case forced them to interpret compensation more broadly, the newspaper said. It said the companies repaid clients by selling them bonds at low prices and then buying them back at high prices.

The Finance Ministry said last week that it was looking deeper into the case of the Big Four, specifically at whether any of the brokerages promised compensation in advance and whether payments were more extensive than has been disclosed.