Japan needs more than apologies on insider trades
By Wayne Arnold
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Handing responsibility for the sale of a $6 billion stake in Japan Tobacco to Nomura Holdingsâ rivals after the bank apologized for leaking earlier share sales seemed like a rebuke from Japanâs government. But Nomura probably lost fair and square. Either way, though, Tokyo needs to make such leaks illegal and attempts to profit on them much more painful.
Privatizing a third of the governmentâs 50 percent stake in the tobacco giant is the kind of deal bankers love. So losing the deal to smaller rivals reinforces the image of Nomura as a teetering colossus. Though it still dominates Japanâs investment banking scene, its leading market share in stock sales slipped last year to 30 percent from 37 percent. The companyâs shares have lost a quarter of their value since March and some shareholders are restless as Wednesdayâs annual meeting approaches – with one irate owner proposing votes on things as wide-ranging as executive pay and underarm odor.
The firmâs admission that its employees leaked information to clients ahead of three public share offerings in 2010 doesnât help. But despite appearances, thatâs unlikely to have contributed to the Japan Tobacco win by rivals Daiwa and Mizuho. The governmentâs beauty contest relied on a 160-point scoring system, with only 20 points for regulatory compliance.
Nomuraâs transgressions should matter much more. Leaking inside information isnât illegal in Japan. Only trading on it is. Overzealous underwriters can clue favored investors into upcoming secondary issues, which gives them a head start to profit from the typical discount for such sales, sometimes by selling the issuerâs stock short before the public announcement of the sale. That can help underwriters too. Because shorting tends to drive a stock price lower, it can make it easier for them to sell the stock theyâre on the hook for.
Japanâs rules donât provide much disincentive. Regulators imposed a mere 10 million yen ($125,000) fine on First New York Securities for trading on information about a share offering in 2010. And even thatâs a fortune next to the 130,000 yen they fined Chuo Mitsui for profiting on leaks from Nomura.
In contrast to former McKinsey supremo and Goldman Sachs diretor Rajat Gupta in the United States, Japanâs insider traders also face no jail time. Tip-offs help the favored few investors and the underwriters, while companies, ordinary shareholders and the efficiency of Japanâs capital market lose out. To stamp out unfair insider trading, Tokyo needs to extract more than paltry fines and apologies.