Nomura Faces Penalties for Role in Insider Trading Scandal

Nomura Holdings Inc.’s domestic securities unit should be penalized after employees leaked information about clients’ share sales, Japan’s financial watchdog said following a probe into insider trading.

The Securities and Exchange Surveillance Commission, which is the investigative arm of Japan’s Financial Services Agency, recommended that the regulator take unspecified disciplinary action against the country’s biggest brokerage, the SESC said in a statement in Tokyo today.

The announcement comes less than a week after the domestic unit’s head was named to replace Chief Executive Officer Kenichi Watanabe following Nomura’s acknowledgment that staff leaked information on at least three share sales in 2010. The scandal cost Nomura business managing bond and equity sales, adding pressure on the bank after profit tumbled last quarter.

Nomura Securities Co. solicited clients by offering them privileged information on companies, and failed to prevent unfair trading before public offerings it managed, the commission said. Koji Nagai, who oversees the division, is poised to become CEO of the parent company tomorrow.

Financial Services Minister Tadahiro Matsushita said on July 27 that the regulator will consider administrative action against Nomura based on the SESC’s inspection and the company’s internal review.

Stock Rally

Shares of Nomura rose 1.5 percent to close at 278 yen at in Tokyo today before the watchdog’s statement. They have climbed 13 percent in the four trading days since news of the company’s biggest management shakeup in 15 years emerged.

Watanabe and Chief Operating Officer Takumi Shibata will step down today, the bank said on July 26. Atsushi Yoshikawa, chief of U.S. operations, becomes COO.

Nomura said in June that employees provided information on share sales it managed for Mizuho Financial Group Inc., Inpex Corp. and Tokyo Electric Power Co. to traders who short-sold the stocks before the offerings were announced in 2010.

The bank may have given tips in more than the three cases identified, an SESC official told reporters today, speaking on condition of anonymity due to the commission’s policy. The remarks echo Nomura’s statement last week that there are “high possibilities” of other leaks having been made by employees to clients.

Client Requests

A so-called Chinese wall at Nomura Securities meant to separate sales from other divisions was inadequate, according to the commission, which has been inspecting the unit since April.

Clients asked Nomura staff to provide advance notice of changes to ratings of equities, and in some instances “sell recommendations of individual stocks to hedge funds occurred at a time prior to the public offerings,” Nomura said in a status report on July 26. Some staff acted in a “suspicious” way by frequently using private mobile phones, according to the report.

The regulator this month asked Nomura, Goldman Sachs Group Inc. and 10 other brokerages to provide reports by Aug. 3 on how they handle confidential information. FSA Minister Matsushita today urged that the firms make the reports public.

Incoming CEO Nagai faces the challenge of reviving profit and restoring confidence after clients dropped the company from deals in the wake of the probe.

“Under the leadership of our new management team, the entire firm is working to prevent a reccurrence of similar violations,” Nomura said in a statement today.

State-owned Development Bank of Japan Inc. said on July 3 that it ditched Nomura as lead underwriter of a debt sale because it wanted to avoid “any disruption.” Japan Airlines Co. demoted Nomura as global coordinator of its initial public offering, people with knowledge of the matter said July 18.

Cutting Costs

Nomura’s profit tumbled 89 percent to 1.9 billion yen ($24.3 million) in the three months ended June 30 as investment banking fees and brokerage commissions fell, the company reported last week. Watanabe implemented a $1.2 billion cost-cutting program last year to restrain expenses that swelled after his 2008 purchase of Lehman Brothers Holdings Inc.’s Asian and European businesses.

SMBC Nikko Securities Inc. is the only brokerage that has been punished for leaks so far in the insider-trading probe. The unit of Sumitomo Mitsui Financial Group Inc., Japan’s second-biggest bank by market value, was handed a business improvement order after the SESC found that 23 sales staff told clients about an unidentified company’s plans to sell shares.

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