The stark news that hit the financial headlines last week concerned Malta’s sovereign debt, which has exceeded the Maastricht criteria and reached 75 per cent of GDP in the first quarter (this was quickly rebutted by the Finance Minister who said it was only a temporary glitch and promised it will fall to 69 per cent by the end of the year). By sheer contrast, this news was dwarfed by the sudden revelation in the banking world of the downfall of Nomura, a major bank and brokerage house in Japan. It came as no surprise that its chief executive has resigned following a damaging insider-trading scandal that shocked the investment bank. Chief executive Kenichi Watanabe, who is 59, stepped down last month and chief operating officer Mr Takumi Shibata has also resigned.
Shares in Nomura have fallen in value by more than a third since the insider-trading case came to light. It was such a serious breech that asset managers stopped trading with the firm to meet their own compliance rules and Nomura has lost underwriting business. The resignation of Watanabe had been expected by many inside Nomura since they felt the bank’s leadership was crossing swords with Japan’s financial regulators.
Compare this to the La Valette Fund investigation led by the Malta Financial Services Authority and a sustained denial of any fault by the bank’s directors/officers. Bank of Valetta never admitted widespread failures in its internal controls and during a two-year investigation by the MFSA, one of the Fund’s directors was found to be using sensitive information and voluntarily resigned. In contrast with the Nomura insider-dealing probe, the local bank did not cut the pay of its top executives – it was business as usual. It came as no surprise that the financial regulator, jolted by various collective legal claims instigated by aggrieved unit holders, started to investigate.
After two years the MFSA concluded that the manager of the Fund had wrongly applied and wrongly monitored the application of investment restrictions laid down in the Fund’s prospectus. In 2011 and 2012, it found BOV in breach of financial regulations in connection with La Valette’s multi-manager property fund in the course of three investigations. When BOV’s chairman resigned, quoting personal reasons, the government, as BOV’s major shareholder, promptly nominated a new chairman (a political acolyte) whose audit firm was, for a number of years, appointed by the majority shareholder to act as the senior auditor responsible for the statutory audit on the La Valette Fund. With hindsight, readers will know that this resulted in a €50 million loss to unit holders.
The previous auditor of the Fund had the onerous responsibility, under the Investment Services Act (see article 18, sub-articles 1, 3 and 4), to report to the MFSA anything that he suspected required further investigation. Allegedly, no reservations in the auditors report were disclosed in the Fund’s accounts and no inquiry was instigated by the Ministry of Finance’s Accountancy Board. Again, in contrast with the Nomura case, no BOV director or top official offered to resign but then this comes as no surprise, given that the culture of resignations in public sector-controlled entities is not in vogue. In Japan, regulators accused Nomura of being slow to respond to an investigation into the insider-trading practices that had become rampant in the Tokyo market.
The scandal challenged the credibility of the bank’s leadership – and it should not be forgotten that Mr Watanabe is the second global bank boss to resign this month – Barclays CEO Bob Diamond and chairman Marcus Agius also resigned over the Libor rate-rigging scandal as the banking industry finds itself under huge political and regulatory pressure.
Certainly, the resignation of both the chairman and the CEO of Barclays racket allegedly run by the bank, which for over five years was involved in LIBOR rate-rigging, shocked the international media. Diamond blamed a “series of unfortunate events” for his shock departure from Barclays, while all the while strongly denying he was personally responsible for what had been happening. In another instance, Barclays was also in the news for allegedly resorting to tax evasion in the UK when its auditor PricewaterhouseCoopers (PWC) raised concerns over two tax avoidance schemes created by the bank that were later rejected by the tax authorities as being “highly abusive”. PWC is understood to have raised concerns with the bank over the structure of the schemes that would have saved it from paying hundreds of millions of pounds in tax.
Nomura has confirmed it was the source of leaks on planned share offerings by energy firm Inpex, the Mizuho Financial Group and Tokyo Electric Power. Simply put – in all three cases, employees in its institutional sales department provided the tip-offs (termed insider dealings). In particular one learns how a firm of lawyers commissioned by Nomura to investigate the insider trading cases said it found equity sales staff who would regularly question colleagues for inside information that was then sold to willing investors.
As part of sanctioning measures on the part of the regulator it ordered that Nomura be disqualified from participating in the government’s sale of $6bn worth of Japan Tobacco shares following allegations that its staff leaked information on share offerings to customers before it was made public.
The question is: how important is Nomura to the Japanese banking sector? The answer is that it is a top investment bank in Japan which has been obliged to replace its top brains and CEO and appoint as a replacement its securities unit head, Koji Nagai. Financial commentators with knowledge of the situation had earlier said the resignations of Watanabe and his top lieutenant Shibata were swiftly approved at a board meeting.
Kenichi Watanabe was one of the architects of Nomura’s takeover of the Asian and European assets of failed US giant Lehman Brothers. Many are questioning how, considering all the rules and regulatory filters that are in place, a top investment bank could be caught red-handed? It will be interesting to see what happens, once the shake-up is over? The tell-tale sign was given last March by Moody’s Investors Service which cut its debt rating on Nomura to one notch above the speculative or “junk” grade, reflecting the way the rating agency ensured the weakness of Nomura’s long-term profitability, particularly in its overseas operations.
It never rains but it pours for this bank, as it registered a pre-tax loss of ¥12.1bn (€145 m) in the latest quarter – partly due to the global recession, since banks have been plagued by both falling trading and advisory income as clients pull back from markets because of the eurozone debt crisis. The banking scandals of financing terrorists and allegedly dealing in drug money on the part of HSBC, and Barclays’ over the fixing of Libor, has also continued to weaken investor confidence.
To conclude, this episode raises questions about the future of the global expansion strategy that Nomura had planned and how it has faltered after suffering the indignity of three major insider-dealing scandals. As is customary in international scandals, those responsible fall on their swords, while their replacements apologise for the insider-trading scandal and promise to increase internal controls.
Let us hope that this sad episode will serve as a lesson to us all that greed is not supreme and also that probity will return to the markets after the fracas is over.
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The writer is a partner in audit and business advisory firm PKF