Nomura Holdings admitted on June 29 to sweeping breaches of safeguards on confidential client information and will slash top executives' pay and briefly shut an equity sales desk as Japan's largest brokerage seeks to resolve a damaging insider trading probe.
Nomura said CEO Kenichi Watanabe's pay would be halved for six months to take responsibility for the brokerage's third insider trading scandal since he took the helm four years ago. In the year to end-March, 59-year-old Watanabe was paid 128 million yen ($1.6 million), including options.
A panel of attorneys brought in by the company to investigate the insider trading cases said it found a culture where equity sales staff regularly pumped colleagues for inside information about upcoming share offerings and then shared tips with investors as a normal part of business.
"The work environment appeared to be one in which employees would be willing to do anything to meet sales targets," the report said.
In some cases, members of Nomura's syndicate desk leaked information to sales staff by using a kind of code, the report said. They did so on the mistaken belief that it would not breach compliance standards as long as the literal name of the company involved was not used in phone calls and conversations, it said.
At the same time, the report said some Nomura brokers believed they could convey insider information to funds and other clients as long as they qualified the tip on a coming share issue by hedging it with a qualification like, "This is just a rumor, but..."
In an attempt to contain the damage, the broker said two executive officers - in charge of institutional sales and compliance - would resign from their positions after employees were found to have tipped off clients ahead of three planned share offerings Nomura underwrote in 2010. Those clients then traded on that information in a violation of insider trading laws.
"I apologise for hurting the public trust in the country's securities markets and for causing troubles to so many related parties," Watanabe said, bowing deeply at the start of a packed news conference at Nomura's headquarters in Tokyo.
The probe has been costly for Nomura. Some asset managers have stopped trading with it to meet their own compliance rules and it has lost underwriting business, including being left off the government's sale of $6 billion worth of Japan Tobacco shares, sources with knowledge of the matter have said.
Earlier this month, Nomura confirmed it was the source of leaks on planned share offerings by energy firm Inpex, Mizuho Financial Group and Tokyo Electric Power in 2010. In all three cases, employees in its institutional sales department provided the tip-offs.
The three cases highlighted a major weakness in the "Chinese Wall" safeguard that exists in investment banks to prevent bankers from passing on word of share offerings and other privileged client information to sales staff.
Nomura said it would halt the operations of its institutional sales department for one week starting on Monday, and its syndicate desk, where leaks originated, would be shut down for three days. In addition, pay for Chief Operating Officer Takumi Shibata will be cut by half for five months.
Nomura also said its institutional sales operation consisting of two trading desks - one focused on Japanese investors and one on overseas funds - would be effectively dissolved and put under the umbrella of other departments.
In total, 26 employees were impacted by the company's punishments, including those who saw their pay cut, stepped down or were dismissed.
"Institutional sales veered away from its original mission, often resorting to tips and rumors. It was a culture where profit was above everything else," said Koji Nagai, the head of Nomura Securities.
It was not immediately clear if Nomura's self-imposed penalties would go far enough to satisfy the Securities Exchange and Surveillance Commission (SESC), which will continue to investigate the broker and could recommend additional sanctions as early as next month.
The SESC launched an industry-wide investigation nearly two years ago aimed at stamping out insider trading ahead of public share offerings, a near-endemic problem that had gone unchecked in Japan for years.
The probe on Friday ensnared Nomura's main domestic rival, Daiwa Securities, with the SESC announcing it would fine Tokyo-based Japan Advisory for insider trading on a 2010 share offering by Nippon Sheet Glass. Sources with knowledge of the matter said the SESC determined that Daiwa was the source of the leak in that case. Daiwa said in a statement it would conduct an in-house investigation.
Nomura did not announce it had begun its own investigation into insider trading until June, but officials revealed on Friday it had begun in March when the Inpex case surfaced.
"At first it was just the Inpex case, then as things developed there was another case and then another," said Hideki Nakagome, one of the external lawyers who conducted the investigation. "When we started out we did not intend to make the investigation public."
The SESC sent a team of investigators into Nomura's Tokyo offices in late April after it had grown frustrated with the broker's initial unwillingness to acknowledge that its compliance problems were widespread, sources have said.
The report released on Friday faulted Nomura for stonewalling during the early part of the SESC investigation, saying the broker had been "insincere" in its own fact-finding.
For example, it said Nomura staff had been allowed to say they did not remember details of what happened rather than being confronted with details from a mass of emails, online chats and recorded phone calls collected by investigators.
Prior to the unveiling of Nomura's report on Friday, the broker's stock jumped 3.9 percent to an 8-week closing high of 294 yen, reflecting investor speculation it was moving towards a resolution of its stand-off with the financial regulators.
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