Less than 24 hours after four SMBC Nikko Securities Inc. employees were arrested on allegations of market manipulation, the Japanese brokerage’s chief executive officer took to the stage.
In a hastily convened press conference in central Tokyo earlier this month, Yuichiro Kondo expressed remorse about the matter, bowing deeply and apologizing more than a dozen times.
“I am taking very seriously and reflecting on the fact that multiple employees, including executives, from multiple departments have been arrested,” he said. “We have caused a situation that could undermine confidence in the fairness of the market. I am truly sorry.”
As Kondo spoke, the four — who include two foreign executives, the now former head of equity Trevor Hill and his deputy Alexandre Avakiants — were starting what could be a long spell in custody, even before any charges are filed. The men deny that they did anything wrong, according to local media reports, and Kondo used language that didn’t take a position on the allegations.
The arrests have rocked Japan’s financial industry and are hurting SMBC Nikko’s reputation and bottom line, with major institutional investors and others stopping doing business with one of the country’s largest brokerages.
They’re also reviving debate about Japan’s justice system, which faced strong criticism throughout the saga of another foreigner, former Nissan Motor Co. boss Carlos Ghosn, for being stacked in favor in prosecutors and inhumane in the way it treats suspects. While Ghosn famously escaped from the country before he could face trial, his deputy Greg Kelly was found guilty this month of helping him underreport compensation and given a suspended sentence.
An official at the Tokyo detention center in the city’s northeast suburbs said Hill and the others are barred from receiving visitors apart from their lawyers. A spokesman for SMBC Nikko said the brokerage sincerely apologizes for causing inconvenience and concern to customers and other stakeholders.
Kondo’s eagerness to apologize so quickly may surprise some people outside Japan, given that his employees haven’t even been indicted yet, much less found guilty of a crime. But it’s not unusual in a country where high-profile arrests often lead to charges and more than 99% of indictments end with convictions.
“In Japan, these kind of apologies show that the firm acknowledges the seriousness of the potential charges and don’t imply an admission of guilt,” said Michael Makdad, an analyst at Morningstar Inc. in Tokyo.
The four employees are alleged to have used SMBC Nikko’s proprietary trading desk to put in large buy orders for certain stocks before the market close in Tokyo. The alleged aim was to prop up prices before the brokerage sold large chunks of those companies’ shares outside the open market for institutional clients in what are known as block offers. According to prosecutors, such actions amount to market manipulation.
The four, who also include Makoto Yamada, the former general manager of equity trading, and Shinichiro Okazaki, his former counterpart in structured products, have told prosecutors their actions were normal business practice, according to local media reports.
“This case is very delicate,” said Nobuo Gohara, a former prosecutor who’s now a lawyer with Gohara Compliance and Law Office in Tokyo. Prosecutors will need to prove the stock purchases were market manipulation, he said. But if local media reports are right that the four continue to deny wrongdoing, “that’s probably because they’re very confident they haven’t done anything illegal.”
The arrests are a sudden escalation of a situation that’s been brewing since at least June, when the Financial Services Agency’s enforcement arm raided SMBC Nikko’s offices, according to the brokerage. Now, the matter is with prosecutors, who will weigh whether to file criminal charges not only against the individuals but also SMBC Nikko itself.
An FSA official said the agency will act as necessary based on the status of the investigations, while declining to comment on what steps it might take.
Some large domestic institutional investors, including insurers, have suspended all transactions with the brokerage, according to people familiar with the matter.
An official at one of the investors, who asked not to be identified because the information is private, said his company stopped doing business with SMBC Nikko following a media report of a raid by the market watchdog in November. He said institutions have become stricter about brokerages’ conduct as they themselves are under greater scrutiny about their decisions.
Meanwhile, SMBC Nikko is also missing out on underwriting bond deals worth billions of dollars. Last week, it was removed as an underwriter for a debut note sale by Osaka University.
The arrests may trigger administrative sanctions that could cut the brokerage’s revenue by as much as 10% for several months, Bloomberg Intelligence analysts Shin Tamura and Yasutake Homma wrote in a report this month. Internal checks may have been insufficient, they said.
The arrests have also put a spotlight on external hiring at SMBC Nikko. The company was born when Sumitomo Mitsui Financial Group Inc., SMBC Nikko’s parent, bought a mainly retail business from Citigroup Inc. It later merged it with another SMFG brokerage. SMBC Nikko needed to recruit outsiders to help build its wholesale operations.
Some of them came from foreign investment banks. Hill arrived from UBS Group AG in 2014 to lead the brokerage’s equity business. He hired the former Goldman Sachs Group Inc. trader Yamada the next year, who went on to become general manager of equity trading.
The scandal also deals a blow to parent SMFG’s efforts to reduce reliance on traditional lending business amid years of low interest rates.
SMFG declined to comment on its strategies, and said it would cooperate fully with the investigation. It said it will support SMBC Nikko in taking preventive measures based on the findings of the investigations and make efforts to regain trust.
Japan’s three megabanks, including the second-largest, SMFG, are financial conglomerates that have evolved from commercial lenders. Their ambition has been to use their vast customer bases to generate fee-based revenue by advising client companies and underwriting equities and bonds, areas that have long been dominated by Nomura Holdings Inc., the biggest brokerage, and others. Their brokerage arms have also sought to expand globally and make investments at home for Japanese households with more than 2 quadrillion yen ($17 trillion) in financial assets.
The brokerage units, while still small compared to core lending businesses, had been making progress, reporting big profit gains last financial year amid a global market boom. SMBC Nikko earned about $785 million in the year ended March 2021, slightly less than a fifth of the group’s net profit.
But with the market manipulation allegations, that progress is being called into question. In the first two trading days after the arrests and Kondo’s damage-control speech, parent SMFG’s shares plunged more than 8%. They have since recovered most of the losses.
“It will set back SMFG’s efforts to build out the institutional securities business, where it is relatively weak, in the near term as it overhauls management and compliance structures,” Morningstar’s Makdad said. “As for the broader securities business, other securities firms will certainly take another close look at their procedures around block trades and make sure they are robust.”