TOKYO (Reuters) - Japan’s widening probe of insider trading reached JP Morgan Chase & Co (JPM.N) on Tuesday as the embattled U.S. bank was identified as the source of leaked confidential information regarding a planned share offering by Nippon Sheet Glass Co Ltd (5202.T) in 2010.
Three people with knowledge of the probe said officials had determined that a JP Morgan salesman had been the source of the leak about the offering to a Tokyo-based fund, Asuka Asset Management.
The development marks the first time a foreign bank has been caught up in an investigation by Japanese officials that has put the spotlight on what insiders and regulators say had become a near-endemic practice in the Tokyo market.
There is no indication JP Morgan will face any penalty in Japan. Insider trading fines, even when imposed by Japanese regulators, tend to be token.
Even so, the revelation of JP Morgan’s involvement in the probe could raise new questions about the internal controls of a Wall Street bank already under scrutiny after reporting a trading loss of at least $2 billion in the “London Whale” case.
JP Morgan, one of two lead underwriters for the Nippon Sheet Glass stock sale, said it had not been accused of any “organizational” involvement in insider trading.
Japan’s securities watchdog, the Securities and Exchange Surveillance Commission (SESC), said it was seeking a fine against Asuka after finding the fund had profited by shorting the glassmaker’s shares ahead of a $505 million share offer in September 2010.
Regulators said a tip on the share offering came from one of the underwriters of the deal without naming the broker. The share offering was led by JP Morgan Securities and Daiwa Capital Markets.
Asuka, which manages money for Japanese pensions and other institutional investors, said one of its fund managers had been involved in the insider trading.
The company said the fund manager had been relieved of his duties at the Asuka Opportunities Master Trust but did not say if he had been fired. The fund had $288 million (23 billion yen) under management as of April.
Shares in Nippon Sheet Glass fell by 15 percent in the two weeks before its board of directors approved a new share offering in August 2010. Proceeds from the stock sale were used in part to fund capital investment and expansion in China.
Around the time of the offering, Nippon Sheet Glass became aware that news of the planned sale had leaked and asked both JP Morgan and Daiwa to conduct internal investigations, sources with knowledge of the matter have said.
Both brokerages reported back to say they had found no evidence that information had breached the “Chinese Wall” meant to protect confidential information kept by their securities underwriting teams from reaching the sales staff.
JP Morgan’s internal investigation was concluded in a matter of days, sources have said.
But in its own probe, the SESC determined Asuka had profited from a leak from a JP Morgan employee, essentially concluding that the bank’s own investigation had not gone far enough to find the leak.
“As of this point, we have not been told by regulators that there was any organizational involvement of the company as a whole, or any of its units, in this matter,” JP Morgan said.
Daiwa has said that its internal controls were sound and there was no evidence anyone at the brokerage had been involved in any wrong-doing.
Until now, the focus in the Japanese insider trading probe has been on Nomura Securities after the emergence of a second case in which sources say an employee at the broker told a fund manager about a share offering before it was made public.
Nomura apologized on Tuesday and said it was cooperating with investigators.
The schemes under investigation became a source of lucrative business, people involved have said, as other sources of revenue dried up for brokers here after the 2008 financial crisis.
Brokers involved in the transactions collected fees from managing stock offerings. At the same time, their sales departments earned fees by loaning funds stock to short in advance and then made commissions from those same funds when they bought back to close out the insider trade.
Japanese regulators have been criticized for a crackdown that lacks the tough sanctions in markets like the United States. For example, in one recent case a Sumitomo Mitsui unit was fined 50,000 yen ($630) for an insider trading infraction.
Asuka, which has a total of $812 million (65 billion yen) under management, said it was setting up a committee to reinforce compliance efforts and would invite outside advisors.
Writing by Kevin Krolicki; Editing by David Holmes and Erica Billingham