TOKYO, July 16 (Reuters) - First New York Securities has challenged the findings of Japanese regulators in their case against the broker-dealer for allegedly trading on inside information ahead of a share offering by Tokyo Electric Power in 2010, a source with knowledge of the matter said.
The move marks the first time a financial institution has opted to challenge the Securities and Exchange Surveillance Commission (SESC), and the outcome could be seen as a test of whether the regulatory agency can make a case stick.
In early June, the SESC recommended a fine of 14.68 million yen ($185,300) against First New York, equivalent to twice the profit it allegedly made taking a short position on Tokyo Electric one day before the $6 billion offering was announced.
The SESC found that First New York was tipped off by a consulting firm employee who was acting as a conduit in passing on information from an executive at Nomura Holdings, the Japanese broker that underwrote the Tokyo Electric deal.
First New York, an independent proprietary trading firm, has submitted its objections to the SESC’s case with the aim of being exonerated, according to the source, who spoke on condition of anonymity because the process is not public.
In a statement to Reuters, First New York said it was “working with the regulator and cooperating fully with the process.”
One of First New York’s key assertions is whether it should be considered a “primary recipient” of inside information, making it therefore subject to sanctions, given that the tip allegedly came from an intermediary source.
More broadly, First New York has also pointed to the abundance of rumours and speculation about Japanese companies raising funds and whether inside information was truly the basis for its investment decisions in this case, the source said.
First New York will now await a hearing from the Financial Services Agency (FSA), the financial regulator which oversees the SESC and has the final say on meting out punishments.
The penalty proposed against First New York was the largest since the 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 SESC worked U.S. Securities and Exchange Commission (SEC) to gather evidence against First New York, which is based in New York with more than 200 traders on staff, according to its web site.