Fresh scandals over insider trading related to public share offerings by listed companies have hit the Japanese securities services sector. The latest scandals involve a major trust bank and leading securities firms.
The recent series of revelations about insider trading by employees at big financial institutions indicate that this kind of securities violation is pervasive among top professionals in the sector.
The securities regulatory authorities should make exhaustive investigations into these cases and stiffen penalties against insider trading.
A fund manager at the former Chuo Mitsui Asset Trust and Banking Co. (currently Sumitomo Mitsui Trust Bank) has been accused of insider trading by the Securities and Exchange Surveillance Commission. The fund manager learned of a planned public share offering by Mizuho Financial Group Inc. in June 2010 through Nomura Securities Co. By selling Mizuho shares before the deal was announced, the fund manager avoided a loss of about 20 million yen ($250,000) that would have been caused by the fall of the stock price after the announcement.
The securities trading watchdog has advised the Financial Services Agency to impose a fine on Chuo Mitsui.
The institution was also punished with a fine in March for insider trading related to a share offering by an energy company. Nomura Securities was named as the source of information in that case as well, but the brokerage claimed that there had been no problem with its information management.
As for the Mizuho case, however, some pieces of evidence, including in-house documents and e-mails, have been found to show that the information about the banking giant's new share issue was leaked from Nomura's underwriting section to the marketing division, which is in charge of sales to institutional investors. Nomura was the lead underwriter for the issue.
Under the current law, the provider of information in an insider trading case is not subject to punishment. But Nomura's sloppy control of confidential information clearly constitutes a violation of the financial instruments and exchange law, which regulates securities transactions in the capital markets. The commission and the agency should hand out a severe punishment to Nomura.
Nomura bolstered its in-house regulations concerning management of sensitive financial and investment information after an employee at its section responsible for advising on mergers and acquisitions got embroiled in an insider trading scandal in 2008. But the new revelations indicate that these regulations have not been effectively enforced, at least not on employees engaged in daily operations. The company's top management should be held strictly accountable for the failure.
Another institution that has been punished is Asuka Asset Management Co. The hedge fund allegedly committed insider trading related to a new share offering by Nippon Sheet Glass Co., using information about the capital increase by the glass manufacturer obtained from JPMorgan Securities Japan Co.
It has long been pointed out by observers that illegal stock trading based on private information about secondary share offerings by Japanese companies is rampant.
Since many of the dubious transactions have been carried out by hedge funds in other Asian markets like Hong Kong and Singapore, foreign securities firms are suspected to have been involved actively in such insider trading.
The Securities and Exchange Surveillance Commission and the Financial Services Agency need to work closely with the securities regulators of other Asian nations in their efforts to reveal the scope of this problem.
The series of scandals have also put the spotlight on the fact that the penalties for insider trading in Japan are extremely light.
The fines imposed on the two financial institutions caught up in the latest cases came to only 50,000 yen and 130,000 yen.
That's because the fines are based on the fees received by the asset managers involved, not on the profits for the funds gained through the illegal trading.
The imposition of small fines clearly is not an effective deterrence to violations by professionals.
Penalties should also be imposed on funds that have benefited from insider trading. That would encourage them to select law-abiding asset managers.
The authorities should act swiftly to widen the scope of punishment for insider trading to include the beneficiaries, while increasing the penalties for the providers of inside information.
--The Asahi Shimbun, June 1
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