Japan probe highlights culture of insider trading

Hiroshi Hiyama
A businessman walks past an electric quotation board flashing key indexes of the Tokyo Stock Exchange. A probe into insider trading has thrust the spotlight on the cosy world of Japanese share dealing, with US investment banking giant JPMorgan now ensnared in the snowballing investigation

A probe into insider trading has thrust the spotlight on the cosy world of Japanese share dealing, with US investment banking giant JPMorgan now ensnared in the snowballing investigation.

Criminal convictions for trading on inside information are few and far between in Japan. For those who are caught, the token punishments are hardly a deterrent -- recent fines have come in at around $1,500.

That's a far cry from the West, where multi-million-dollar financial penalties or even jail time are the norm. Wall Street hedge fund manager Raj Rajaratnam is now serving an 11-year prison term, the longest ever imposed for insider trading by a US court.

But in a market where personal relationships are cultivated and nurtured over years, a tip that allows a friend or client to pounce on an upcoming share issue is seen as par for the course in Japan, dealers say.

"Japan should punish those who leak confidential information," said Etsuro Kuronuma, a law professor at Tokyo's prestigious Waseda University.

"Even if a brokerage sets internal rules, you cannot supervise your employees all the time... (Leaks) violate the trust of share issuers."

The investigation by securities regulators has sparked renewed pressure to crack down on lax regulations, amid concerns about Japan's flagging reputation for corporate governance.

Its image has been dented by a string of financial scandals such as a cover-up of about $1.7 billion in investment losses at camera and medical equipment maker Olympus.

On Tuesday, Japan's Securities and Exchange Surveillance Commission recommended that Asuka Asset Management be fined for short-selling Nippon Sheet Glass shares after illegally obtaining information ahead of a stock sale that JPMorgan was underwriting.

A sales executive for the US bank -- which is already reeling from a shock $2.0 billion loss on derivatives trading -- was the source of the leak, Dow Jones Newswires reported, citing an unidentified source.

The SESC did not name the alleged source, but JPMorgan was reportedly one of only two underwriters taking part. The other, Daiwa Securities, has said that it was not involved in the inquiry.

In a statement, JPMorgan said it "takes this matter extremely seriously and will continue to take measures to enhance our internal control".

"We are cooperating fully with the authorities on this matter," it added.

To the anger of some observers, the SESC recommended a fine of just 130,000 yen ($1,650) for Asuka, even though it was alleged to have made more than 60 million yen.

Two other cases involving Sumitomo Mitsui Trust Bank and Japan's biggest brokerage Nomura sought fines of just 80,000 yen and 50,000 yen.

"(That is) pocket change in the life of markets," Nicholas Smith, a strategist at brokerage CLSA, wrote in a recent report on the issue.

The total fines sought in more than 100 insider-trading cases in Japan during the past five years totalled about $2.3 million. In the United States, Rajaratnam alone must pay more than $150 million in criminal and civil fines.

Japanese brokers routinely disclose material information about share sales that their employer's investment bankers have been consulting on, analysts say.

A so-called "Chinese Wall" is meant to keep sensitive information from spreading beyond the investment banking side, but the problem persists.

"A broker who got a tip from (the investment banking division of the same brokerage) feels incentivised to tell his clients because he thinks he has impactful information for those clients," Smith wrote.

Both brokers and investment bankers "stand to potentially profit through higher bonuses if their company makes money as a result of their actions, but neither has traded on the news", he said.

That legal loophole means Japanese tipsters are "essentially immune from prosecution as long as they do not themselves trade on the news", Smith said.

The issue has prompted a call to action from some legislators, with Financial Services Minister Shozaburo Jimi on Friday vowing tighter rules and stiffer penalties.