An Activist's Fall From Grace

Japanese shareholder champion Yoshiaki Murakami has been swept up in the scandal surrounding Internet conglomerate Livedoor

It was a sudden, precipitous fall from grace for Yoshiaki Murakami. Just a couple of weeks ago, Japan's best-known shareholder-activist fund manager was making headlines as he threatened to exert control over yet another major Japanese company in which he had invested. Yet on June 5, it was Murakami himself in the hot seat.

In an overcrowded room full of journalists at the Tokyo Securities Exchange, Murakami bowed deeply as he admitted to illegal insider-trading activity. Allegations of wrongdoing surfaced last week in connection with a long-running government probe of disgraced Internet conglomerate Livedoor, which rattled the Tokyo Stock market to its core back in January (see BW Online, 01/18/05, "High Drama on the Tokyo Stock Exchange").

"I broke the law," said Murakami. "But it was never my intention to do so." The confession was a surprising turn of events for the feisty fund manager, who had built a reputation as a champion of shareholder rights (see BW Online, 11/14/05, "High Season for Raiding").


  Since launching Japan's first hostile takeover bid seven years ago, Murakami has poured billions of dollars of investors' money into Japanese companies. He used those stakes to cajole top executives into enhancing shareholder value and paying higher dividends -- and had raked in returns higher than 20%.

But that profitable run has reached an abrupt end. Murakami, 46, says he will quit as the chief executive of M&A Consulting and MAC Asset Management. His two investment companies will be run by new management. While he considers himself a "pro among pros," Murakami says his lack of legal expertise led to the mistake. Just hours after his press conference, Murakami was arrested and will likely face indictment on insider trading charges. The Tokyo District Prosecutors' Office declined to comment. While Japanese stocks fell in trading on June 5 they were more affected by rising crude oil prices than the Murakami affair.

The scandal could prompt Japanese authorities to try catching scofflaws faster by imposing tougher rules on fund managers. Currently, funds are only required to report their activities quarterly. Authorities already have shut a loophole that allowed fund managers to avoid disclosure rules by engaging in after-hours trading.


  Tighter regulations would follow a recent pattern of stepped-up activity by Japanese financial regulators. In May, Japan's Financial Services Agency slapped a two-month suspension order on one of the country's biggest auditors, ChuoAoyama Pricewaterhouse Coopers, after it failed to catch fraudulent accounting at a client company. Less than two years ago, the FSA dealt a shocking setback to Citigroup (C) by shutting down its private banking operations in Japan.

For Murakami, it was an embarrassing denouement. The former government bureaucrat shot to fame in 1999 when he tried to seize control of real estate company Shoei in the first-ever Japanese hostile takeover attempt. Though almost nobody in the U.S. would blink at such action, Murakami's un-Nippon behavior rankled many in Japan. He has used a mix of confrontational tactics and media grandstanding to pressure Japanese companies into adopting Western management practices -- and hasn't always come out the winner.

His recent attempt to win management reforms at railroad operator Hanshin Electric Railway were thwarted after the company agreed to a merger with a rival railway. Some have even criticized his tactics as unproductive, since it led some companies to gird against takeovers by reviving a practice abandoned in the late 1990s known as cross-shareholding, in which companies bought equity stakes in one another to solidify ties.


  Even so, Murakami's ordeal appears unlikely to have a major impact on merger and acquisition activity in Japan. So far this year, M&A deals have totaled $58.5 billion, according to Thomson Financial. That's only slightly off last year's pace, when the figure surpassed $158 billion. (Murakami's share of that was $1.35 billon last year, and $122 million this year, says Thomson Financial.)

And few investors worry about Japanese backsliding on corporate transparency and improved governance. In fact, thanks to Murakami's exploits, the Japanese public now knows what shareholder activism is, says CJ Wilson, founder of Tokyo-based M&A firm Global Alliance. Even after Murakami exits the scene, "someone will pick up the flag," he predicts.

Tokyo prosecutors' allegations against Murakami focused on his purchase of shares in Nippon Broadcasting more than a year ago. According to Murakami, Livedoor executives told him of their plans to buy a sizable stake in Nippon Broadcasting in fall 2004. That was months before he added to his own shares of the broadcaster to become the broadcaster's top stockholder.


  By early February, 2005, Livedoor had snapped up 35% of Nippon Broadcasting and launched a hostile takeover bid. Meanwhile, Murakami spent the next few weeks trimming his stake from 18% to around 3% -- and making a killing. Between July, 2004, and March, 2005, Nippon Broadcasting's shares gained as much as 20%.

Murakami denied that his decision to trade Nippon Broadcasting shares had been influenced by information from Livedoor executives. "At the time, I completely dismissed it," Murakami says. He says he decided to sign a confession after meeting with prosecutors over the weekend.

Experts say Japan's insider-trading laws are normally difficult to prove and even harder to enforce. But Murakami got tripped up by an obscure regulation, known as Article 167, which makes it illegal to invest in a company if you know that another investor is considering buying 5% of that company's stock.

Under the law, a 5% equity stake is considered a potential takeover bid. "It's a tricky part of the law," says Kunihiko Morishita, an attorney at Tokyo-based Anderson Mori & Tomotsune. "Even legal experts aren't aware of this, so it's possible Murakami didn't know about it." He adds: "This is probably a one-off event." Investors in Japan certainly hope so.

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