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SMBC Nikko May Be Excluded From Japan Air IPO Underwriters

Japan Air May Exclude SMBC Nikko as IPO Underwriter After Breach
The carrier was delisted from the Tokyo Stock Exchange in 2010 and emerged from bankruptcy in March 2011. Photographer: Tomohiro Ohsumi/Bloomberg

Japan Airlines Co., the carrier planning an initial public offering this year, may exclude SMBC Nikko Securities Inc. as a lead underwriter for the sale after regulators said the brokerage breached domestic securities law.

“We are now carefully considering how to respond,” Ryu Shimizu, a spokesman for state-backed Enterprise Turnaround Initiative Corp., said when asked by telephone today if SMBC Nikko would be disqualified following a Securities and Exchange Surveillance Commission recommendation that the company be penalized. He declined to comment further.

ETIC, the fund holding about 97 percent of Japan Air’s voting rights after a government bailout, has said it can disqualify underwriters from the sale of Japan Air stock as a matter of policy. SMBC Nikko, a unit of Sumitomo Mitsui Financial Group Inc., was found to have illegally solicited investors to buy shares prior to the announcement of a client’s public offering in 2010, the SESC said on April 13.

Kiyoo Kuniyoshi, a Tokyo-based spokesman for SMBC Nikko, declined to comment. Taro Namba, a spokesman for Japan Airlines, deferred questions about the offering to ETIC.

The turnaround corporation, which must sell its stake in Japan Air by January 2013, is seeking an IPO for the airline of 500 billion yen to 1 trillion yen ($6 billion to $12 billion) as soon as September, two people familiar with the matter said in January. The carrier was delisted from the Tokyo Stock Exchange in 2010 and emerged from bankruptcy in March 2011.

Regulatory Scrutiny

Japanese regulators have increased scrutiny of trading surrounding public equity offerings in response to investor criticism alleging that leaks on financing plans are eroding confidence in the stock market.

The SESC said on March 21 an employee at Chuo Mitsui Asset Trust & Banking Co. traded on information linked to a share sale by Inpex Corp. after obtaining non-public information from an employee of one of the deal’s lead underwriters. Nomura Holdings Inc., Goldman Sachs Group Inc., Mizuho Securities Co. and JPMorgan Chase & Co. managed the energy company’s share sale.

Nomura was involved in an insider-trading case connected to Inpex’s 2010 equity offering, a person with knowledge of the matter said on the same day.

Other investigations involving Japan share sales include Nippon Sheet Glass Co. and Tokyo Electric Power Co. for possible insider trading, the commission said.

Can Disqualify

ETIC can “disqualify or suspend” a share sale manager after awarding a mandate, taking into account how the brokerage is executing its operations, it said in a statement seeking interest from potential lead underwriters on July 1.

Last July, ETIC selected five Japanese brokerages, including SMBC Nikko, as arrangers for the Japan Air sale to domestic investors. It chose Bank of America Corp. and Morgan Stanley to manage the offering overseas in January. Nomura and Daiwa Securities Group Inc. are global coordinators.

The SESC this month recommended the Financial Services Agency penalize SMBC Nikko after it found 23 salespeople disclosed information to 34 clients before an unidentified company’s IPO announcement. Shozaburo Jimi, Japan’s financial services minister, said on April 17 the FSA will “respond severely” to SMBC Nikko’s breach.

The FSA houses the SESC and is responsible for penalizing companies found to violate Japan’s finance rules.

Separately, Japan Housing Finance Agency, which had hired SMBC Nikko, Nomura and Goldman Sachs to sell 10-, 15- and 20-year bonds next month, dropped SMBC Nikko, the agency said on its website on April 17, following the SESC’s penalty recommendation. The housing agency appointed Mitsubishi UFJ Morgan Stanley Securities Co. as an underwriter, replacing SMBC Nikko, according to the website.

Takashi Yoshihira, a manager in the agency’s market operations department, said SMBC Nikko was replaced for “various reasons,” declining to comment further.

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