Fighting fraud in Japan

Press, 11 July 1988, Page 20

Fighting fraud in Japan

From the “Economist,” London

st,” London

FRAUD thrives in Japan. The third-biggest tax-evasion case connected with stockmarket dealings has just been uncovered. Mr Isao Nakaseko, the owner of a small Tokyo electronics company, Meidenko, is accused by the taxman of failing to declare SNZ2B million in profits from stockmarket dealings between 1983 and 1986. Some may have come from insider trading and stock manipulation. The Finance Ministry and the Tokyo Stock Exchange have called out their sleuths.

Japan has just rewritten its virtually non-existent regulations to curb insider trading. For the first time, an insider is being defined by law, and the Securities Industry Association has drawn up guidelines to be applied from July 1 for the way members use price-sensitive corporate information. Foreign securities firms complain that one of their biggest disadvantages is that they operate outside Japan’s information

net. Pressure from the American authorities in particular has led the Ministry of France to revise the rules. One of the areas of most flagrant abuse of insider information has been the newissues business. In Japan the share price of a company expected to announce an issue of, say, new shares usually rises because the securities house underwriting the issue tends to “support” the stock price to help the fund-raising. Under new rules introduced last month, a stock can be traded for the first time only when sell orders match buy orders. At

present, proportional allotment is made when sell orders reach half the number of buy orders. The price-range restrictions for the first day’s trading are being abolished. Buy orders will be limited at public offerings before trading to fewer than 1000 shares per investor. Ministry officials think these new rules will make it harder to ramp the market. The Japanese have long had a different attitude to price-sensi-tive information from that of Western firms. For example, staff in Japanese securities houses are often involved in both the underwriting and marketing of new securities.

Internal rules are now being drawn up at the biggest securities houses to erect Chinese walls, and to set up supervisory departments to oversee them. But, as one analyst says, “the distinctive feature of Chinese walls is that they have large round holes for gates.” Copyright—The Economist