insider trading in Japan
Yesterday’s Financial Times outlines a judgment made last week in a Japanese insider trading case. The newspaper misses what I think is the main story, however.
the recent verdict
An institutional portfolio manager at Chuo Mitsui Asset Trust and Banking was found guilty of receiving, and acting on, insider information about an upcoming issue of new stock by a publicly listed company. The PM made ¥14 million ($170,000) for his clients by trading on the tip.
–the PM’s employer, Chuo Mitsui, was fined ¥50,000 ($600)
–there was no requirement of forfeiture of profits illegally made
–no penalty of any type either for the portfolio manager who received the tip or the broker who gave it.
The article goes on a bit about how, in the mysterious way Japan works, the nominal fine may have sent a powerful symbolic message that therefore the penalties may be more severe than a foreigner might suppose. I think the nominal penalties do send a message, though not in the way the FT believes.
Oddly enough, the newspaper contrasts this fine with the ¥1.15 billion ($14 million) fine levied against Yoshiaki Murakami for trading on inside information about a half decade ago. But it doesn’t realize that this contrast is the real story.
the Murakami saga
Mr. Murakami is a naive former civil servant who believed traditional Japanese corporations badly needed restructuring. He formed an asset management company about ten years ago. Its purpose was to be a gadfly that could prompt corporate/social change, while making money for clients at the same time. One of Mr. Murakami’s targets–his last–was Nippon Broadcasting System.
Mr. Murakami bought a very large position in NBS. He approached the company with suggestions about how to improve very weak corporate results. He also asked for a board seat.
Management ignored Mr. Murakami. It called on the “usual suspects”–suppliers, customers, domestic institutional investors–for support by buying NBS stock themselves, or at least by refusing to sell to Mr. Murakami. Effectively isolated, Mr. Murakami approached a somewhat sketchy internet entrepreneur, Takafumi Horie of Livedoor, for aid.
Livedoor told Mr. Murakami in a private meeting that it intended to build a stake in NBS itself. The declaration made Mr. Murakami an insider of Livedoor. Despite this–he later claimed he didn’t understand the implications of his inside knowledge–Mr. Murakami bought more NBS.
Livedoor subsequently launched a hostile bid for the company. It failed. During the battle, Mr. Murakami realized that traditional holders of NBS wouldn’t tender their stock, so he sold his for a ¥3 billion ($36 million at today’s exchange rate) profit.
Mr. Murakami was charged with insider trading and found guilty.
penalties for Mr. Murakami?
–a ¥1.15 billion ($14 million) fine
–forfeiture of all profits from selling NBS, which amounted to ¥3 billion ($36.5 million)
–two years in jail, later commuted to three years of probation.
why the sharp differences in the two cases?
Why should the punishment for insider trading be so startlingly different in these two cases?
Two factors stand out to me:
–the lesser one is that the Murakami case involved much larger amounts of money–although that doesn’t explain why there was no censure of the Chuo Mitsui portfolio manager or of the broker, and no forfeiture of illegal profits.
–the real difference, I think, is that Mr. Murakami was not part of the establishment. Worse, he was a critic of the traditional social order. By exposing its failings, he threatened the status quo. In contrast, both the broker and the Chuo Mitsui portfolio manager were working within the shadow system of favors and obligations that the establishment uses to feather its own nest and keep itself in power.
the real story
That’s the real story here–stubborn defense of the traditional economic order, even after two decades-plus of resulting economic stagnation.