Japanese market watchdog files complaint against SMBC Nikko

(Bloomberg) – Japan’s securities watchdog has filed criminal charges with prosecutors against SMBC Nikko Securities Inc. and seven of its employees, accusing it and the individuals of manipulating stock prices, in a move ported to one of the largest brokerages and megabanks in the country.

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The Securities Exchange and Surveillance Commission has asked prosecutors to charge SMBC Nikko with allegedly manipulating company stock prices ahead of so-called block offerings, selling large amounts of their shares outside of normal trading hours. , she said in a statement on Wednesday. The SESC also requested similar measures against the seven employees, he said.

The request follows months of investigation by the Japan Financial Services Agency’s law enforcement arm into the practice of the brokerage, a unit of the second-largest lender, Sumitomo Mitsui Financial. Group Inc. Tokyo prosecutors are likely to indict SMBC Nikko, the Nikkei newspaper reported. Tuesday.

An indictment could prompt the brokerage firm’s corporate clients to invest more in other areas, ranging from bond and stock underwriting to merger advisory services, said Kengo Sakaguchi, financial analyst at Japan Credit Rating. Agency Ltd. “The impact would be unavoidable,” he said. said, adding that the companies could otherwise raise questions from their own shareholders to continue doing business with the brokerage.

Public apologies

The saga has already rocked the Japanese financial sector and damaged SMBC Nikko’s reputation and bottom line as major institutional and other investors stopped doing business with the company. SMBC Nikko staff reportedly used the company’s proprietary trading desk to place large buy orders on certain stocks before the market closed in Tokyo. Their alleged goal was to support prices before the brokerage sold a large portion of these companies’ shares outside the open market for clients.

Such actions constitute market manipulation, prosecutors say. Tokyo prosecutors have determined that SMBC Nikko employees were insufficiently supervised despite repeatedly conducting allegedly illegal transactions, the Nikkei reported.

An indictment could also mean Japan’s financial regulator takes a fresh look at alleged market manipulation. The regulator’s investigation would cover a broader set of topics, such as how SMBC Nikko’s internal controls work and how the firm has allocated resources to risk management, according to an official with the Financial Services Agency.

After its own investigation, the agency would decide whether to impose an administrative penalty, which could be a business improvement order or another penalty, the person said.

Separately, the regulator would also look into the liability of SMFG, SMBC Nikko’s parent company, for the alleged breaches, another FSA official said. The two people asked not to be identified while discussing individual cases.

The seven employees are now former head of equities Trevor Hill, his deputies Alexandre Avakiants and Teruya Sugino, former managing director of equity trading Makoto Yamada, former managing director of structured products Shinichiro Okazaki, his deputy Hitoshi Tamura and trader Yuji Karino shares.

Speaking at a press conference, an SESC official, who could not be identified due to organization policy, declined to say whether employees denied or acknowledged the allegations.

“Regain Confidence”

In a separate statement on Wednesday, SMBC Nikko said it takes the SESC accusations “seriously” and apologized “for causing trouble and anxiety among our customers and other stakeholders.” We will sincerely cooperate with the authorities’ investigations and do our utmost to regain trust. »

The incident is likely to have a limited impact on parent company SMFG’s earnings, said Toyoki Sameshima, an analyst at SBI Securities Co. But the allegations could slow SMFG’s efforts to expand its investment banking business in at home and abroad, a key growth strategy, he said. .

Some large institutional investors, including insurers, have suspended transactions with the brokerage firm, according to people familiar with the matter.

Meanwhile, SMBC Nikko is also missing bond underwriting deals worth billions of dollars. Earlier this month, he was relieved of his duties as an underwriter for a first ticket sale by Osaka University.

It’s hard to predict how long companies will stay away from SMBC Nikko, but it’s also “difficult to think they would resume operations before the company puts in place an appropriate structure” to avoid problems. , said Sakaguchi, of the Japan Credit Rating Agency.

(Updates with employee details in the ninth and tenth paragraphs)

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