Were There Blind Spots In Nomura's Oversight?

Max C. Chapman Jr. and Edward A. Cerullo, who are close pals, have a lot more in common these days than being former senior executives at Kidder, Peabody & Co. Cerullo, Kidder's fixed-income chief and Chapman's protege during the 1980s, resigned under pressure on July 22 in the wake of Kidder's trading scandal. Chapman, chief executive of Nomura Securities International Inc., is also under growing pressure from his firm's Japanese owners (BW--May 30).

Now his troubles may be intensifying. Nomura and possibly Chapman himself may be hit by the New York Stock

Exchange with a failure-to-supervise charge, according to several sources with close knowledge of the situation. The NYSE is investigating whether Nomura failed to adequately supervise a trader by permitting the firm to violate net capital rules, sources say. These are Securities & Exchange Commission rules that require securities firms to maintain minimum levels of capital as reserves against possible losses.

DEPOSITION DERBY. The Big Board declined comment. Nomura, which has hired Gary G. Lynch, a partner at Davis, Polk & Wardwell, to handle the matter, says the NYSE "is inquiring into the regulatory interpretation and characterization of certain proprietary trades that ceased over a year ago." Nomura spokesman P. J. Johnson adds that it has more than $400 million in excess net regulatory capital and believes "supervision was adequate at all times."

Chapman faces additional questions about his employment status. Nomura told BUSINESS WEEK for its May story that the firm had given Chapman a three-year extension of his contract, which was to expire in September. Nomura announced the extension to employees on May 19. In fact, say several sources, his contract was not renewed. Nomura declined comment.

The NYSE investigation, according to these sources, centers around a Thai trader, Chaiyarn Ieamsuri, a 17-year Nomura veteran. To date, the NYSE has taken over a dozen depositions on the matter, including one from Chapman. Ieamsuri couldn't be reached for comment.

During the fiscal year ending March, 1993, say the sources, Ieamsuri did a series of highly profitable trades totaling about $225 million. Sources give the following account. Nomura essentially loaned money to Mexican dealers who put up Mexican securities as collateral. But the trades were structured as "buy-sellbacks," which are essentially repurchase agreements or repos, whereby Nomura agreed to buy the securities and then sell them back to the dealers after a specified time period at a markup. The trades were profitable because Nomura's cost of funds was much lower than the high yield the firm received from the Mexican securities.

REAL REPOS? There were just two problems, sources say. First, Federal Reserve regulations at the time didn't allow firms to lend against Mexican debt. And NYSE rules require a firm doing a repo to reserve capital equal to the value of the trade. That, however, would have depleted Nomura's capital so much that the firm would have been in net capital violation.

In July, 1992, Nomura's compliance staff questioned the trades with Chapman in a meeting in his office. The compliance staff raised the issue of whether the buy-sellbacks were really repos. But no action was taken. It wasn't until the fall of 1992 that the NYSE determined in a routine examination that these trades were really repos and gave notice to the SEC that Nomura was in capital deficiency, sources say.

One thing seems sure about this chain of events: negotiations about renewing Chapman's contract will be lively.

Leah Nathans Spiro, with Linda Himelstein, in New York

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