Insight: How Japan's securities watchdog found its bite

Mon Aug 13, 2012 5:43pm EDT
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By Nathan Layne and Emi Emoto

TOKYO (Reuters) - With its stock in near free fall, the board of Japan's Nippon Sheet Glass (5202.T: Quote) met in August 2010 to weigh a couple of unpalatable options: suspend planned investments in key markets like China or go ahead with a Tokyo share offering that had somehow leaked to the market.

The board, including then-CEO Craig Naylor, a newly-arrived American, decided to press ahead with the still-unannounced plan to raise $500 million, even though the cost of doing so was shooting higher as investors, worried about the dilution to existing share value, dumped the stock.

The kind of leak that battered Nippon Sheet Glass shares was widespread by 2010, earning Japan a reputation as a haven for insider trading with a regulator willing to look the other way.

But Japan's third-largest glassmaker did something unusual: it complained.

The company summoned its underwriters, JP Morgan (JPM.N: Quote) and Daiwa Securities (8601.T: Quote) and pressed for an investigation. Over the following months, Nippon Sheet Glass emerged as a crucial test case in a crackdown by Japan's Securities Exchange and Surveillance Commission (SESC) that has reset the rules of the game for insider trading in the world's third-largest stock market, according to interviews with more than a dozen participants in the probe, from lawyers and investigators to traders and brokers, and a review of related documents.

As the SESC closes out the first phase of an unprecedented insider trading investigation, its ability and resolve to tackle the problem is no longer in doubt.

Since March, the agency has announced five cases, two involving Nippon Sheet Glass. It has taken down an influential hedge fund, and, along with its parent, the Financial Services Agency (FSA), pushed for a management shake-up at Nomura Holdings (8604.T: Quote), Japan's largest investment bank.

In the process, the SESC has surprised Tokyo banks and fund managers by enforcing a zero-tolerance policy in an area where many believed standards of conduct remained vague, people involved say.   Continued...

A transcript of a conversation between a former Daiwa salesman and Japan's Advisory's head Edward Brogan, provided to Reuters by the salesman, is pictured in this photo illustration in Tokyo August 8, 2012. The transcript is of a conversation between the salesman and Japan Advisory's head Edward Brogan on the morning of August 20, 2010, according to the salesman, who spoke to Reuters on condition of anonymity and said he has been wrongly implicated in an insider trading probe. Japan's securities regulator has fined and revoked the license of Japan Advisory for trading on inside information about the public share offering of Nippon Sheet Glass, which it says was passed to Brogan in this conversation. The salesman says the transcript, which was provided to him by an investigative committee set up by Daiwa, contains several mistakes including a mistranslation of a key part of their exchange. Picture taken August 8, 2012. REUTERS/Yuriko Nakao