Ex-Morgan Banker Proposes Steps to Curb Japan Insider Acts

Former Morgan Stanley banker Tsutomu Okubo.
Tsutomu Okubo, a Democratic Party of Japan member and lawmaker in the Upper House of Japan's National Diet. Photographer: Robert Gilhooly/Bloomberg

Japan’s ruling party will consider limiting the period for public stock offerings to four days to curtail share declines and discourage insider trading, said lawmaker and former Morgan Stanley banker Tsutomu Okubo.

A Democratic Party of Japan working group will discuss truncating the period from the announcement of sales to settlement of the deals from the current minimum 15 days, Okubo said in an interview. The panel, which meets for the first time tomorrow, was set up to examine ways to restore confidence in markets rocked by trading and accounting scandals.

Japanese regulators are investigating short selling by investors who used information leaked from underwriters including Nomura Holdings Inc. before stock offerings were announced. The benchmark Topix Index has lost 16 percent since the securities watchdog revealed the first case on March 21.

“We need to discuss how to make the Tokyo market attractive again,” said Okubo, lead director of the upper house’s financial affairs committee. “We should stamp out this environment that has given investors the desire to conduct insider trading.”

Japanese law requires at least two weeks from the announcement of equity offerings to the conclusion of the transactions, in order to give investors time to decide whether to participate. The period also gives shareholders ample time to sell the stock on concern about dilution, Okubo, 51, said. That fuels the incentive for insider trading as hedge funds and asset managers bet they can sell borrowed stock and buy it back at a lower price, he said.

Confidentiality Rules

Under the proposal, lead underwriters would begin marketing equity offerings before they are announced, on the basis that they and investors adhere to strict rules on confidentiality, with punishments for breaches, said Okubo, who worked at Morgan Stanley for about 10 years until entering parliament in 2004. That would bring Japanese practice in line with markets including the U.S., he said.

“Shortening the period will discourage insider trading as it will reduce the opportunity to reap gains,” Takashi Kaneko, a professor of finance at Keio University in Tokyo, said in an interview. “It will also be good for the issuers because they can increase the total amount of financing as the price won’t become distorted by the short sales.”

Discuss Penalties

The team of 15 DPJ lawmakers will examine current Japanese laws for insider trading and compare them with regulations and punishments in the U.S. and Europe, according to a faxed document sent to Bloomberg. The group will also discuss how to penalize underwriters that provide tips and increase fines for those that trade on them, Okubo said.

“If Japan’s regulations aren’t sufficient compared with those overseas, we need to strengthen them to bolster credibility,” Yasuhiro Sato, chairman of the Japanese Bankers Association, a group that represents the country’s biggest lenders, told reporters in Tokyo today. “Lead underwriters bear a heavy responsibility.”

In the four cases revealed by the Securities and Exchange Surveillance Commission since March, the watchdog has recommended an average fine of 3.7 million yen ($47,000) for the institutions found to have benefited from insider trading. They include a former unit of Sumitomo Mitsui Trust Holdings Inc., Asuka Asset Management Co., and U.S. proprietary trading firm First New York Securities LLC.

The underwriters whose employees leaked the information haven’t been penalized yet.

Nomura Employees

Nomura on June 8 apologized for its employees’ role in leaking information ahead of share sales that the investment bank managed in 2010. The acknowledgment confirmed that it was the unidentified underwriter found by the SESC to have provided information on public offerings by Inpex Corp., Mizuho Financial Group Inc. and Tokyo Electric Power Co.

Mizuho, Japan’s third-biggest bank by market value, announced its 750 billion yen share sale on June 25, 2010. It released the pricing on July 13 and settled transactions on July 21. Mizuho shares fell about 13 percent during the period.

The SESC found that an employee of JPMorgan Chase & Co. gave information on a 2010 offering by Nippon Sheet Glass Co., according to two people with knowledge of the matter. New York-based JPMorgan said on May 29 that it’s “cooperating fully” with the authorities on the matter.

“It’s positive to see the public offering period could be shortened,” said Kaneko, who studies equity capital markets at Keio. “But it may be just a stopgap measure. We need to analyze what the brokerages’ real motivations are for leaking information to their clients, and how to eradicate this.”

Okubo led credit and derivative product business at New York-based Morgan Stanley. He became a managing director in the investment banking department in 2002.

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