June 8, 2012 / 11:39 AM / 6 years ago

UPDATE 3-First New York faces fine in Japan insider probe

* SESC says to impose $184,500 fine against First New York

* Marks first penalty against overseas fund in insider probe

* Japan watchdog coordinated with U.S. SEC in the case

* Case is third in which Nomura employee leaked information

By Nathan Layne and Noriyuki Hirata

TOKYO, June 8 (Reuters) - Japan’s securities regulator on Friday recommended a fine of more than $180,000 against First New York Securities for insider trading in a 2010 share offering by Tokyo Electric Power Co, the first foreign firm to face such a penalty in a widening probe.

The case is also the third linked to Nomura Holdings , which was the sole underwriter on Tokyo Electric’s $6 billion stock offering. As in two other cases, an employee at Japan’s largest broker was the source of the leak.

The penalty proposed against First New York is the largest since the Securities and Exchange Surveillance Commission (SESC) launched an industry-wide probe in 2010 aimed at stamping out insider trading ahead of share offerings, a widespread practice that has tainted the reputation of Japan’s financial markets.

The Japanese securities watchdog said it had worked with the U.S. Securities and Exchange Commission (SEC) to gather evidence against First New York, a broker-dealer based in New York with more than 200 traders on staff, according to its web site. The company did not return a call seeking comment.

While overseas funds have been a key target of the two-year-long investigation, they had until now eluded the SESC. In three other cases the investors implicated for insider trading were domestic asset management firms.

“Overseas investors count for a large portion of the Japanese market, they are an important component of the market. But when there is unfair trading in the market as the regulator we can and will work to punish that behaviour,” an SESC official, who asked not be identified, told a news conference.

The SESC sought a 14.68 million yen ($184,500) fine against First New York, roughly twice the profit it gained from taking a short position on Tokyo Electric one day before the offering was announced, and then buying the stock back at a lower price.

The fine was much higher than in the three other cases brought since March, in which token penalties ranging from 50,000 yen to 130,000 yen were meted out because, unlike First New York, those funds were not trading on their own account.

The SESC said a sales staff member at the underwriter passed on word of the Tokyo Electric share offering to a trader at First New York via a director of a consulting firm which it did not identify. The director also took out a short position, the SESC said, and was therefore fined 60,000 yen.


The Tokyo Electric case will add to doubts about the effectiveness of the “Chinese Wall” at Nomura that is supposed to keep confidential information from the underwriting department from ever reaching sales.

It will also raise the chances that Nomura will face sanctions - ranging from an order to improve compliance to a suspension of some operations - as the SESC concludes an on-site investigation of the broker launched in April.

Nomura for the first time on Friday acknowledged publicly that its employees were the sources of leaked information in three cases. In addition to Tokyo Electric, the other two were offerings by energy firm Inpex and lender Mizuho Financial Group, both of which were already made public by the regulator without naming the broker involved.

“Nomura expresses its regret concerning the findings that non-public information was received from Nomura employees in such cases and we sincerely apologise for the trouble this has caused,” the broker said in a statement.

Nomura added that it expected the results of an investigation it launched to run in parallel with the SESC’s probe to be finished this month. The broker’s investigation is being carried out by a team of external lawyers.

Last week, Nomura replaced the head of institutional sales at its core securities unit. A source with knowledge of the matter said Kenichi Ishitomi had been asked to relinquish his post to focus on cooperating with the SESC probe.

Separately, Sumitomo Mitsui Trust Holdings, whose asset management arm has been fined twice for insider trading, said on Friday that it had fired the two fund managers implicated in the probe.

A third-party panel set up by Sumitomo to investigate the issue said in its report on Friday that the insider trading occurred in part due to the cosy relationship formed with officials at a securities company. The report did not name the securities company, but sources with direct knowledge of the matter have previously identified it as Nomura.

The fund manger who was tipped off about Mizuho’s share issue was found to have been wined and dined on at least 39 occasions in a period of less than a year to the tune of about 890,000 yen from the securities firm officials, the report said. The manager also received gifts worth 320,000 yen.

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