How to make 200 billion yen vanish

02/24/2012
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The case of the disappearing pension funds

TOKYO (majirox news) — Madoff Securities, run by Bernie Madoff, the infamous fund manager jailed for 150 years in 2009 for his fraudulent asset management scheme, may have a Japanese counterpart.

On Friday, the Japanese Securities and Exchange Surveillance Commission ordered AIJ Investment Advisers Co., founded in 1989, to suspend all operations for a month, following the revelation that approximately 200 billion yen (about $2.5 billion) under management for corporate pension fund clients cannot be accounted for.

AIJ appears to have misled clients about the performance of its investments, claiming cumulative steady returns of up to 240% (including near-impossible returns of 7% and 8% in 2008), and was loved by its clients as one of the few asset managers to report consistent positive returns. However, as was pointed out in a recent publication called Bernie Madoff, the part I didn’t play in his downfall — “there are no sure things in investing.” Such consistency should have raised red flags in the minds of the pension funds’ investment managers, but was not done in some cases. Advantest, the electrical machinery maker quoted on the Tokyo bourse, had between 1 billion and 1.7 billion yen of its pension assets (between 5% and 8% of the total) invested with AIJ.

However, the warnings of other hedge fund professionals that the consistent returns were too good to be true spurred the regulators into action starting in January this year. So far, authorities are unsure as to where the missing money has gone — whether it has been lost in unwise investments or whether, as was the case with Madoff, it was actually invested at all, or simply disappeared into a Ponzi scheme.

The 124 corporate pension schemes (chiefly from the trucking, construction and allied businesses, but with two or three big names, for example Advantest) who invested with AIJ will now have to make additional contributions, or make up the lost money in other ways, given that the money seems to have been lost without hope of recovery.

The Financial Services Agency in their capacity as regulators will start examining all 263 investment management firms in Japan to see if similar losses have occurred elsewhere.

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