New Trading Scandal Rocks Japan Brokerage

A growing scandal over alleged illegal stock trading battered Nomura Securities Co., Japan’s largest brokerage firm, on Monday as two of its managing directors resigned and its share prices fell.

Japanese media have reported that the allegedly illicit trades benefited a real estate firm linked to sokaiya racketeers--gangsters who specialize in extorting money from corporations through such means as blackmailing executives or threatening to disrupt stockholder meetings.

The allegations recall a 1991 scandal in which Nomura admitted to manipulating stocks, compensating major clients for losses and dealing with gangsters, which led to the resignations of the firm’s chairman and president.

That scandal provoked widespread public distrust of Japan’s securities industry at a time when stock prices were plummeting from their late-1980s peak.

This latest scandal broke Thursday when Nomura said two of its managing directors, whom it did not name at that time, may have made illegal trades benefiting a major client. On Monday, Nomura accepted the resignations of Shimpei Matsuki, responsible for equity business, and Nobutaka Fujikura, responsible for general management affairs.

Japan’s Securities and Exchange Surveillance Commission is investigating the incident, and Finance Minister Hiroshi Mitsuzuka has pledged “severe measures against the company” if the securities watchdog finds that Nomura broke the law.

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Chairman Masashi Suzuki and President Hideo Sakamaki resigned from their leadership positions in Japan’s leading business group, the Federation of Economic Organizations (Keidanren), which said Monday it is considering disciplinary action against Nomura.

Suzuki also resigned Monday as head of the Japan Securities Dealers Assn. His one-year term was to have expired in June.

The scandal at Nomura, which has been building its U.S. presence, is already reverberating internationally. The California Public Employees’ Retirement System said Sunday that it will review its contract with the U.S. unit of Nomura Investment Management Inc., an affiliate of Nomura Securities, for management of about $724 million of pension funds.

Responding to that pressure, Nomura Investment, which is 5% owned by Nomura Securities, said in Tokyo Monday that it has stopped conducting trades through Nomura Securities pending the official investigation. Nomura Investment had been using Nomura Securities for about 20% of its trading.

Nomura Investment’s announcement further depressed Nomura Securities’ share prices, which closed Monday down a total of 7% from Thursday’s close. Securities firms as a group were among the biggest decliners as the 225-issue Nikkei index fell 84.85 points Monday, or 0.47%, to close at 18,113.89.

Fund management affiliates of Sakura Bank Ltd., one of Japan’s biggest banks, also suspended trading through Nomura on Monday.

Nomura’s apparent involvement in another scandal also has broader implications that could bode ill for overall financial reform in Japan.

In November, Prime Minister Ryutaro Hashimoto proposed a set of “Big Bang” reforms aimed at making Tokyo’s financial markets much less regulated and more competitive by 2001. (He named the plan after British reforms carried out in 1986.) It has been expected that more details might be decided as early as the end of this month.

But Hashimoto’s proposed financial deregulation would benefit big, strong firms like Nomura while placing pressure on weaker firms to merge or risk going bankrupt. Some analysts predict that as a result of the new Nomura scandal, the government may have greater difficulty revising laws in ways that benefit big firms.

Finance Minister Mitsuzuka, however, declared that “the ‘Big Bang’ will not be hampered by this.”

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While Nomura has not released details of the alleged illicit trades, some descriptions have emerged in the Japanese media. Yomiuri Shimbun, Japan’s largest-circulation daily newspaper, reported that one case involved shares of Fuji Bank.

On March 15, 1995, after Fuji Bank shares had fallen sharply due to heavy selling pressure, the sokaiya-linked real estate firm purchased 500,000 shares and Nomura bought 4 million shares, all for the same price, Yomiuri Shimbun reported. The massive purchases drove up the bank stock’s price, and the real estate firm then sold its shares for a profit of about $330,000, the newspaper said, quoting unnamed sources.

Japanese media have reported that money may have been funneled to the firm to compensate a racketeer for trading losses.