Scandal rocks Japanese finance as SMBC Nikko employees are arrested

TOKYO (BLOOMBERG) - Less than 24 hours after four SMBC Nikko Securities employees were arrested on allegations of market manipulation, the Japanese brokerage's chief executive officer took to the stage.

In a hastily convened press conference in central Tokyo earlier this month, Mr Yuichiro Kondo expressed remorse about the matter, bowing deeply and apologising more than a dozen times.

"I am taking it very seriously and reflecting on the fact that multiple employees, including executives, from multiple departments have been arrested," he said. "We have caused a situation that could undermine confidence in the fairness of the market. I am truly sorry."

As Mr Kondo spoke, the four - who include two foreign executives, the now former head of equity Trevor Hill and his deputy Alexandre Avakiants - were starting what could be a long spell in custody, even before any charges are filed. The men deny that they did anything wrong, according to local media reports, and Mr Kondo used language that did not take a position on the allegations.

The arrests have rocked Japan's financial industry and are hurting SMBC Nikko's reputation and bottom line, with major institutional investors and others stopping doing business with one of the country's largest brokerages.

They are also reviving debate about Japan's justice system, which faced strong criticism throughout the saga of another foreigner, former Nissan Motor boss Carlos Ghosn, for being stacked in favour in prosecutors and inhumane in the way it treats suspects. While Ghosn famously escaped from the country before he could face trial, his deputy Greg Kelly was found guilty this month of helping him under-report compensation and given a suspended sentence.

An official at the Tokyo detention centre in the city's north-east suburbs said Mr Hill and the others are barred from receiving visitors apart from their lawyers. A spokesman for SMBC Nikko said the brokerage sincerely apologises for causing inconvenience and concern to customers and other stakeholders.

Mr Kondo's eagerness to apologise so quickly may surprise some people outside Japan, given that his employees have not even been indicted yet, much less found guilty of a crime. But it is not unusual in a country where high-profile arrests often lead to charges and more than 99 per cent of indictments end with convictions.

"In Japan, these kinds of apologies show that the firm acknowledges the seriousness of the potential charges and don't imply an admission of guilt," said Mr Michael Makdad, an analyst at Morningstar in Tokyo.

The four employees are alleged to have used SMBC Nikko's proprietary trading desk to put in large buy orders for certain stocks before the market close in Tokyo. The alleged aim was to prop up prices before the brokerage sold large chunks of those companies' shares outside the open market for institutional clients in what are known as block offers. According to prosecutors, such actions amount to market manipulation.

The four, who also include Mr Makoto Yamada, the former general manager of equity trading, and Mr Shinichiro Okazaki, his former counterpart in structured products, have told prosecutors that their actions were normal business practice, according to local media reports.

"This case is very delicate," said Mr Nobuo Gohara, a former prosecutor who is now a lawyer with Gohara Compliance and Law Office in Tokyo. Prosecutors will need to prove the stock purchases were market manipulation, he said. But if local media reports are right that the four continue to deny wrongdoing, "that's probably because they're very confident they haven't done anything illegal".

The arrests are a sudden escalation of a situation that has been brewing since at least June, when the Financial Services Agency's (FSA) enforcement arm raided SMBC Nikko's offices, according to the brokerage. Now, the matter is with prosecutors, who will weigh whether to file criminal charges not only against the individuals but also SMBC Nikko itself.

An FSA official said the agency will act as necessary based on the status of the investigations, while declining to comment on what steps it might take.

Some large domestic institutional investors, including insurers, have suspended all transactions with the brokerage, according to people familiar with the matter.