Toshiba Risks Penalty for Raising $8 Billion on False Profit

Updated on
Hisao Tanaka
Toshiba Corp. incoming Chairman and President Masashi Muromachi, left, outgoing President Hisao Tanaka attend a news conference in Tokyo on July 21, 2015. Photographer: Akio Kon/Bloomberg

Toshiba Corp. issued almost 1 trillion yen ($8 billion) of stocks and bonds when it was inflating earnings statements, leaving the company exposed to possible regulatory fines and investor lawsuits.

The Japanese manufacturer sold 333 billion yen of shares in a public offering in May 2009, and issued 640 billion yen of bonds from May 2009 to December 2013, data compiled by Bloomberg show. Toshiba President Hisao Tanaka resigned on Tuesday, telling reporters that the company will take seriously a third-party panel’s findings that executives were involved in systematic overstating of profit.

“Raising money based on false information is fraudulent,” said Etsuro Kuronuma, a professor at Waseda Law School. “Toshiba violated the interests protected by the Financial Instruments and Exchange Act.”

Toshiba said it will correct at least 152 billion yen of pretax profit, based on accounting statements stretching back to the year ended March 2009. The panel’s investigation found that top executives set unrealistic earnings targets, leading to the flawed financial reporting.

“Toshiba raised money knowing that investors were making decisions based on improper financial statements, which is deceitful,” said Mitsushige Akino, executive officer at Ichiyoshi Asset Management Co. in Tokyo. “Market participants feel resentment toward Toshiba.”

Japan’s Financial Services Agency hasn’t alleged any wrongdoing by Toshiba or its management.

Apology Bow

After bowing in apology at a press conference, Tanaka said the company takes seriously the possibility that investors were misled, while adding that he didn’t directly order inappropriate accounting. Hirokazu Tsukimoto, a spokesman for Toshiba in Tokyo, declined to comment on any penalties stemming from the misstatements.

Toshiba’s shares fell as much as 2.7 percent in Tokyo trading on Wednesday, reversing earlier gains, and closed 1.7 percent lower. The stock has tumbled and its bond risk has jumped since May, when the maker of personal computers and nuclear reactors withdrew earnings forecasts, canceled its year-end dividend and widened the internal accounting probe.

Takuji Yano, a spokesman for the FSA, declined to comment on whether the agency will take action against Toshiba. Financial Services Minister Taro Aso said on Tuesday that the matter was “extremely regrettable.”

Japanese Law

Under Japanese law, the Securities and Exchange Surveillance Commission can recommend that the FSA impose fines against a company that sold securities based on a material misstatement. For stock offerings, the fine can total 4.5 percent of the amount issued and for bonds it can reach 2.25 percent, according to article 172-2 of the Financial Instruments and Exchange Act.

That would put Toshiba at risk of being fined as much as 30 billion yen, according to Bloomberg calculations corroborated by Kuronuma. A charge of that size would be the biggest in Japan for misstating earnings, overtaking the 1.6 billion yen imposed on machinery maker IHI Corp. in 2008.

The FSA fined Nikko Cordial Corp. 500 million yen in 2007 after it inflated profit and later sold 50 billion yen of bonds. The brokerage, the predecessor of SMBC Nikko Securities Inc., said at the time that it was restating earnings because “inappropriate accounting” led to errors.

Charges ‘Possible’

Separate provisions in the Financial Instruments and Exchange Act carry criminal penalties for false financial reporting. People who submit false financial statements may face as long as 10 years in prison or maximum fines of 10 million yen. Companies can be fined as much as 700 million yen.

“Criminal charges, civil liability and administrative fines are all possible,” said Tatsuo Uemura, who teaches law at Waseda University in Tokyo. “I suspect that what Toshiba did was window dressing, which goes beyond just inadequate accounting.”

No criminal charges have been brought against Toshiba or its employees. Toshiba’s Tsukimoto said any pursuit of a criminal case is up to Japanese authorities and he declined to comment further.

Nomura Holdings Inc., which was among arrangers of the bond and stock sales for Toshiba, declined to comment. Ernst & Young ShinNihon LLC, the manufacturer’s auditor, will examine the third-party report, assign more accountants and audit the revised earnings, said spokesman Hiroyuki Sato.

‘Padding’ Profit

Toshiba commissioned the committee’s investigation in May. The four-member panel of lawyers and accountants found “organized involvement including top executives,” and said the chipmaker’s improper accounting was conducted for the purpose of “padding” profit.

Shares of Toshiba have dropped 23 percent this year to

393.1 yen, compared with an 18 percent gain in the benchmark Topix index. The price compares with the 333 yen that investors paid for new stock in 2009.

The cost to insure Toshiba’s debt has doubled since the end of April to 105 basis points, credit-default swap data from CMA show.

Read this next:

Standard & Poor’s put Toshiba’s BBB long-term credit rating on a watch for possible downgrade on Tuesday, citing the impact of the earnings revisions on its cash flow and leverage.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE