Japan Seeks to Criminalize Underwriters on Insider Breaches
Japan’s ruling party is seeking changes to insider-trading rules that would allow criminal charges and fines for brokerages and bankers who leak stock offering information, according to a document obtained by Bloomberg News.
The Democratic Party of Japan’s 15-member working group, led by former Morgan Stanley (MS) managing director Tsutomu Okubo, discussed the draft today and will submit a final version to the party by July 31, said Kazuya Kondo, a member of the group, while declining to show the document. The DPJ will then submit a proposal to the country’s Financial Services Agency.
Japan’s Securities and Exchange Surveillance Commission has uncovered five insider-trading cases since March related to equity offerings in 2010. The watchdog has recommended fines for traders who made short sales based on leaked information in those cases, while underwriters who gave them the tips have received no penalties, based on existing rules.
“Insider trading has destroyed credence in the Japanese capital market,” Shinsuke Amiya, a DPJ lawmaker, said in opening remarks at the conference this morning. Amiya is a former vice chairman at Merrill Lynch & Co. (BAC) in Japan. “It’s critical for us to devise policy recommendations to tackle the issue.”
Other DPJ proposals include allowing lead underwriters to market equity offerings under strict confidentiality agreements before share sales are announced, according to the document. The working group is also proposing that pension funds pledge not to invest in hedge funds that have breached insider rules.
The SESC is continuing to inspect Nomura Holdings Inc. (8604), Japan’s biggest brokerage, after finding that its employees gave tips to traders on share sales it managed. As part of its crackdown, the regulator this month asked Nomura, Goldman Sachs Group Inc. (GS) and 10 other brokerages to review how they handle confidential information.
Nomura said on June 29 that it cut top executives’ pay, forced two managers to step down and suspended some operations following an internal probe into leaks ahead of 2010 equity offerings by Mizuho Financial Group Inc. (8411), Inpex Corp. (1605) and Tokyo Electric Power Co.
Lawyers hired by Nomura to investigate the breaches said in a report that sales staff appeared to have been “willing to do anything to meet sales targets.”
The regulators’ probe focuses on a glut of share offerings made when companies replenished capital in the aftermath of the global financial crisis. Japanese companies sold 5 trillion yen ($64 billion) of shares in 2010, the most in four years, according to data compiled by Bloomberg. Brokers faced the challenge of marketing those equities to investors reeling from Europe’s sovereign debt turmoil and other threats.
Investment bankers who managed share sales allowed, and in some circumstances encouraged, the salespeople to pass on tips to short sellers because they created demand by buying back the stock during the public offerings, according to two bankers who worked for equity divisions at firms in Tokyo and asked not to be named because of confidentiality agreements.
Financial Services Minister Tadahiro Matsushita said last week that his agency could be doing more and he ordered officials to consider stiffer insider-trading penalties.
Regulators now impose fines based on profits made from trades, with no punitive penalties attached, while tipsters aren’t subject to fines. The FSA last month fined Sumitomo Mitsui Trust Holdings Inc. (8309) 130,000 yen after a former unit traded shares for clients ahead of two public offerings.
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