Tuesday, June 16, 2009

Have US Banks Learned A Thing Or Two From 2003 Japan?

A blast from the manipulated past (via Bloomberg). When will domestic regulators demonstrate they are at least on par with their Japanese colleagues.
Nikko Salomon Banned From Japan Trading for 20 Days

Tokyo, March 18, 2003 (Bloomberg) -- Nikko Salomon Smith Barney Ltd., the investment bank owned by Citigroup Inc. and Nikko Cordial Corp., received a 20-day trading ban for conducting artificial stock trades, the longest such penalty in Japan.The ban, which affects stock trading for the firm's own account, will be in effect between March 19 and April 16, Japan's Financial Services Agency said. Shares of Nikko Cordial, Japan's third-largest brokerage, tumbled 22 percent since March 7, when the Securities and Exchange Surveillance Commission said it would ask the agency to penalize Nikko Salomon. The ban may also hamper Nikko Salomon's chances of winning new business in the next month.

``This is a message from regulators that they are keeping a close eye on brokerages as well as banks,'' said Muneyuki Tsuji, who helps manage 15 billion yen ($126 million) at Japan Investment Trust Management Co. ``Recent inspections are making securities firms nervous about being too aggressive in their trading.'' The Ministry of Finance also said the brokerage will be excluded from government bond auctions for the duration of the ban.

The violation occurred last July when a Nikko Salomon managing director placed buy orders to drive up the price of five different stocks. In trades on the Tokyo Stock exchange, the volume was as much as three times more than the daily average and drove the stocks between 15 percent and 26 percent higher.

The trades earned Nikko Salomon at least 200 million yen in brokerage fees, the commission said. It earned an additional 5.8 billion yen through trading in about 1,400 stocks it purchased to create an exchange-traded fund for a client, it said.

`Take It Seriously'

``We take it seriously that Nikko Salomon received such penalties and apologize to our shareholders and investors,'' Nikko Cordial said in a statement. Nikko Salomon said in a statement it will improve its compliance, ``accepting the penalties as important issues on its management.'' Previous trading bans for securities firms also affected their ability to win new business. Morgan Stanley was barred from bidding to manage Japan's biggest share sale last year -- a 266 billion yen offer of government shares in East Japan Railway Co. -- after it received a five-week trading ban for two rules breaches. Nippon Telegraph & Telephone Corp., Japan's largest phone company, said March 7 that Nikko Salomon withdrew from managing a 70 billion yen bond sale in a move that was related to the commission's penalty recommendation. Citigroup owns 49 percent of Nikko Salomon while the Japanese brokerage owns the rest.

`Significant Case'

``This is a very significant case,'' said Tatsuya Kanai, a senior Financial Services Agency official. ``I want market participants to learn a lesson and ensure they keep the stock market fair.'' The agency also ordered Nikko Salomon to report to regulators by April 18 on measures it will take to avoid any repeat of the offense. ``Nikko Salomon explained to us that it conducted the trades to meet real demand,'' Kanai said. The agency said it asked the Japan Securities Dealers Association to have member brokerages set guidelines for transactions that are based on the closing price of a stock to prevent artificial trading just before the close.

J.P. Morgan

J.P. Morgan Chase & Co., the second-largest U.S. bank, was last month told to halt trading in Tokyo for 10 days as a penalty for making ``artificial'' stock trades. Before today's ban, Japan had penalized 20 overseas securities firms and seven domestic brokerages in the past two years for violating securities rules. Most firms received trading bans of two weeks or less. The Nikko Salomon infraction involved exchange-traded funds. Such funds contributed 15 billion yen of Nikko Salomon's trading profit in the three months ended Sept. 30, when Nikko Cordial had net income of 3.8 billion yen. Nikko Salomon bought 200 billion yen of shares at a discount from Tokio Marine & Fire Insurance Co. to set up an exchange-traded fund on behalf of the Japanese insurer. It then bought additional shares for Tokio Marine to match the components of the Topix Index, pocketing commissions and trading profits.

Nikko Salomon was the third-biggest arranger of share sales in Japan last year, working on 49 transactions worth $2.4 billion, Bloomberg data shows. The four-year old investment bank was the No. 2 adviser on Japanese mergers, managing 35 transactions worth $7.4 billion. Nikko Cordial shares rose 5.4 percent before the ban was announced, matching gains for its rivals, on optimism the Japanese stock market will rebound, boosting commissions.
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