Insider trading becomes headache for Japan

07/15/2012
By

TOKYO (majirox news) — Japanese financial regulators have started to crack down on insider trading, an illegal practice where the underwriters of new share issues have been provide advance information to customers. The acknowledgment of the apparently widespread illegal practice has further weakened confidence in the world’s second-largest stock market.

In addition to insider trading, scandals such as fraudulent accounting at AIJ Investment Advisors and book-cooking at Olympus Corporation, each hiding losses of over one billion dollars, have caused foreign fund managers to shy away from investments in the already sluggish Japanese equity market.

“There are some deep-rooted issues,” said Financial Services Minister Tadahiro Matsuhita at a press conference last week. “The Financial Services Agency is responding severely and appropriately given the framework and economic conditions, But you can never say you’ve done enough.”

Since March, five cases of insider trading have come to light. At least two clients of Nomura Holdings, Japan’s financial services powerhouse, have taken their business elsewhere. Steps are finally being taken by the authorities and customers to come to terms with this practice.

Takao Saga, commissioner of Japan Securities Research Institute, said, “But, it’s taken a long time. For example, two years ago confidential information was leaked, in three insider trading cases, but the Japanese Securities and Exchange Surveillance Commission took no action. However, this time there is a whistleblower providing concrete evidence, and they have to move on this.”

The details of this fraud are relatively complex, involving shorting of stocks on the assumption that new issues will flood the market and cause a drop in the price. But according to commentators, the laws forbidding insider trading are too lax. The penalties are a mere slap on the wrist, compared to those imposed in other countries.

“Japan is now investigating trades in shares of All Nippon Airways, to discover if insider trading occurred,” Saga said. “The trading volume of ANA shares reached an three-month peak on July 2 that has been described as unnatural, immediately before the news of a 2.6 billion dollar issue was made public. Japan will now take more stringent and tougher penalties against insider trading, like those in other countries, as it needs to do.”

Japan, of course, is not the only country to suffer from massive financial fraud and ignore it for years. The United States Securities and Exchange Commission ignored Bernie Madoff’s pyramid scheme for nearly a decade, and the UK’s Financial Services Agency has only just come to terms with the LIBOR manipulation from at least 2005 through 2009. But in both these cases, penalties were harsh and not merely symbolic.

Japan’s lax attitude of the regulators hardly builds public trust in the authorities. They are increasingly perceived as incompetent or powerless. However, the Tokyo Stock Exchange is planning to set up a new body to screen the underwriters of new issues, in order to prevent a reoccurrence of these insider trading cases and it is certain that the regulators will also be keeping a closer eye on underwriters and book-runners of new issues.

If Japan’s markets are going to regain global trust, the financial regulators are going to have to adopt global standards in dealing with these crimes.

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