FINANCIAL SCANDALS IN JAPAN: TAKAFUMI HORIE, YAKUZA AND BILLION DOLLAR SCANDALS INVOLVING DAIWA AND SUMITOMO COPPER

HIGH-FLYING BANKERS AND GANGSTERS IN JAPAN

20100501-bank japan-photo.deD-BANK06-08.jpg
Inside Japanese bank
In December 2004. it was revealed that Citibank Japan helped launder money from criminals and engaged in fraudulent activities such as failing to fully inform investors of the risks of their investments. The American head of the group. Charles Prince, made a deep bow of apology at a press conference.

In the 1995, four major credit unions collapsed and the Japanese government had to fork out billions of dollars to pay off people with guaranteed deposits. One of the major figures in the collapse was Harunori Takahashi, a self proclaimed resort king who bought up Hyatt and Regent hotels around the Pacific with $6 billion borrowed from the credit unions and parent banks that were run by his friends. He once boasted that his debt was a "figure for the “Guinness Book of Records”." He and a friend were also the presidents of two of the troubled credit unions, which lent his own businesses over $1.26 billion.

Takahashi reportedly flew his banker friends to Hong Kong in his private jet, wined and dined them and set them up top-of-the-line call girls.

Yakuza, Banks, Bad Loans and the Bubble Economy

The yakuza made billions of dollars during the bubble economy years and vastly increased its power. They borrowed heavily and invested heavily in speculative real estate deals. The godfather Susumu Ishii received $2.3 billion in loans and loan guarantees from banks. brokerage houses, construction firms and delivery houses.

When the bubble economy collapsed the yakuza was saddled with huge debts. In many cases the yakuza refused to repay its loans or turn collateral and made threats against banks that tried to seize their assets. Typically when the yakuza threatens a bank, the bank backs off on its loan collecting. This was especially the case after two bank executives were murdered in the mid 1990s.

The yakuza is believed to be directly linked to about 10 percent of Japanese bank's bad loads and suspected to be involved in 30 percent more. The debt from these loans has been estimated as high as $1 trillion. Some people even called Japan's economic problems in the 1990s the "yakuza recession."

During the economic slump many yakuza members began doing more business overseas and exploiting weakness to in the economic to move into legitimate real estate, bank-lending and debt collecting businesses. Some yakuza members made a lot of money from bankruptcies. They targeted struggling businesses and milked them dry by convincing them they could make a lot of money by going onto bankruptcy.

Japan second largest bank, Dai-ichi Kangyo, was accused of loaning $260 million to a gangsters who used the money to buy stakes in brokerage firms. In an investigation by Kroll and Associates of one bank, 40 percent of the borrowers had ties with organized crime and 25 percent had criminal records for things like rape, extortion and assault.

Many Japanese are angry that tax money is used to pay off banks that lost money because of their shading deals with gangsters. Much of the loan money has disappeared and most think that the money lost by the yakuza will never be recovered.

In response to allegations that Japan's bad loan problem is the fault of the yakuza, gangster boss Tokutaro Takayama told Time: "It's easy to blame it all on us. But it's tactic to shift responsibility away from bureaucrats and politicians and heap it on the yakuza."

Daiwa Bank Scandal

In 1995, Daiwa Bank, one of Japan's largest financial institutions, lost $1.1 billion due the trades made by a 44-year-old rouge trader named Toshihide Iguchi, who had lost the money making 30,000 unauthorized trades in bonds market over an 11 year period.

Iguchi was unlikely figure to be at the center of such a massive financial scandal. A native of Kobe, he attended an American university (Southwest Missouri State University) because he his scores on his college entrance exam were too low to get into a good Japanese university. In college he was a less than exemplary student. He had a high B average and was a member of the university cheerleading squad. He graduated with a psychology degree after five years and worked briefly as a car salesman before joining Daiwa.

Iguchi married and divorced an American women, had two children and lived in a town house in Kinnelon, New Jersey. He began working for Daiwa as a clerk in 1976 and was promoted to a bond trader in 1984. Iguchi was reportedly given a lot of freedom and responsibility because his superiors knew little about the bond market and they trusted Igichi more than American working for the bank because he was Japanese.

Daiwa’s Historic Losses

Iguchi historic loss began when he made a trade that resulted in an unexpected lost $70,000 in early 1983 in the floating-rate note market. Instead of admitting the loss he tried to recoup his loss making other trades — which he was not authorized to make — in the U.S. Treasury market. His first trade on the treasury market netted him a $100,000 loss.

Iguchi was able to hide his losses because he was also in charge of recording bond transaction, which made it record fabricated profits and postpone the time in which the debts had to be settled. Like an addicted gambler hopelessly trying to recoup his losses, Iguchi lost $30 million by the fall of 1984, $200 million by January 1988, and $900 million in 1993. By 1995, the books doctored by Iguchi showed that Daiwa's portfolio contained $4.6 billion in bonds when it actually held only $3.5 billion.

In July 1995, Iguchi finally sent officials at Daiwa a 40-page confession in which he said "For the last 10 years, I have been alone in darkness, shivering with fear." Ten days later, one July 27, he had a secret meeting with one of his superiors. On August 8, the president of Daiwa told an official from the Ministry of Finance, "I have received a shocking letter from our man in New York. We seem to have lost a billion dollars. It's hard to believe."

In September 1995, Iguchi was arrested and Dawia was slapped with a $340 million fine and forced to close its New York office. Iguchi was sentenced to four years in jail for fraud and falsifying documents and forced to pay $2.6 million in fines and restitution. Fearful of the other inmates, he requested to be placed in solitary confinement in a 6½-x-7-foot cell in Manhattan's Metropolitan Correction Center.

Sumitomo Copper Scandal

null
In June 1996, it was revealed that Sumitomo, one of Japan's largest financial institutions, lost $2.6 billion due to transactions made of its traders, Yasuo Hamanaka, on the world copper market. Hamanaka had accrued the loses over a 10 year period and admitted he falsified company documents. It was the largest loss ever blamed on the activities of a single trader and twice what the famous rouge trader Nick Leeson lost.

Sumitomo is one of the world's largest distributors of basic commodities such as metal and grains, and a wide range of industrial goods and consumer products. One of Japan's five great “sogo shoshas” (trading houses), its annual revenues in 1995 were $152 billion.

The chairman of Sumitomo, Tomiichi Akiyama, resigned after accepting responsibility for $2.6 billion in losses incurred by Hamanaka.

Yasuo Hamanaka and the Sumitomo Copper Scandal

Known as Mr. Five Percent and Mr. Copper because he reportedly controlled 5 percent of the world copper market, Hamanaka was regarded as the most powerful man in the world copper market. "Everyone was familiar with him," one tradeR on the New York Mercantile exchange told AP. The mention of his name "would make me quiver." Another trader told AP, "He was the most feared man in the copper market. In copper, as in any physical commodity, whoever controls the chips in the game controlled the way things proceeded."

Hamanaka worked for Sumitomo for 23 years, the last 15 as a copper trader. A resident of the Tokyo suburb of Kawasaki, he graduated from unprestigious Seikei University and was married with two children. He often stayed in his Tokyo office until 3:00am, which is when the market closed in New York. He dominated the market by controlling copper stockpiles at the London Metals Exchange in Long Beach California. His coworkers described him as quiet, unassuming man who smoked Marlboros.

Hamanaka was jailed for seven years for hiding more than $2.6 billion in losses. The president of Sumitomo said that "these transactions were made solely by Yasuo Hamanaka himself” but many analyst believe that his superiors knew because other people executed his trades.

Takafumi Horie and Livedoor

null
Takafumi Horie for a while was a media darling and a scourge of the business world. He dropped out of Tokyo University — Japan’s a top university — became rich when he was young, and took on what he called the “club of old men” that dominated Japanese business before he was brought down in a financial scandal involving his Internet company Livedoor.

Tomohiro Ohsumi wrote in Bloomberg News: “When he burst onto the national scene early in the last decade, he was the most un-Japanese of business figures: an impish young man in his early 30s who wore T-shirts into boardrooms, brazenly flouted the rules by starting hostile takeovers and captured an era when a rejuvenated Japanese economy seemed to finally be rebounding. He was arrested five years ago and accused of securities fraud in what seemed a classic case of comeuppance, with the news media demonizing him as a symbol of an unsavory, freewheeling American-style capitalism.

Horie was the son of salaryman and grew up in Fukuoka in Kyushu. His father never gave him an allowance and instead gave him useful things like a set of encyclopedias, which he tore through, and a bicycle which he rode 20 kilometers to and from school everyday. Horie attended exclusive schools and had been labeled as a genius since grade school. He classmates said he didn’t socialize much and preferred to keep to himself. To earn money he woke up at 4:00am to do a paper route. At Tokyo University he joined the cycling team but didn’t cycle much.

Horie founded the Internet company Livedoor — first known as Livin’ on the Edge Inc.”in 1997and expanded it great velocity through takeovers and 100-1 stock splits that made the stocks affordable to ordinary people until the value of the company reached $6.3 billion in the mid 2000s. Known for his T-shirts, silver-blue Ferrari, and ubiquitous look of complacency, he was idolized by university-age people and people in their 30s and despised by the old guard in Japanese business.

Horie built Livedoor by combing a portal site with online brokerage and banking and a host of other Internet services. The company offered everything from news to travel information, One of the most popular stops was Horie’s blog.

Horie once boasted that "we can do anything unless it's banned by law." He first made headlines in a big way in 2004 when he tried to buy the Kintensu Buffaloes, a struggling Osaka-based, Japan League baseball team, and criticized the teams owners as being a bunch of old fogies when they turned him down. Horie statements like “Geezers who live in the past aren’t able to seize business opportunities” did not endear Horie to Japan’s business establishment. He even ran for parliament, but lost to a prominent old-guard politician.

Horie made even bigger headlines in 2005 when he tried to make a hostile takeover of one of Japan’s largest media conglomerates, Fuji TV. Hostile takeovers are rare in Japan. Livedoor surreptitiously bought up much of the equity of Nippon Broadcasting Systems — an affiliate of Fuji TV and Fuji TV top shareholder — through off-hours trading. Livedoor acquired 30 percent of Nippon Broadcasting Systems and battled with Fuji TV for control for of the company. In the end Horie failed to buy Fuji TV but was able to get Fuji TV to buy 15 percent stake in Livedoor. The move sent shudders through the business establishment and raised worries about hostile takeovers.

Horie said his dream was create the world’s largest company in terms of market value. In 2002, the company had only 150 employees and annual revenues of ¥1 billion. By early 2006 it was valued at $6.3 billion, embraced 44 subsidiaries, including some overseas, had five related companies and employed 2,500 people. Horie’s wealth was said to be around $1 billion. He often appeared on talk shows and even some game shows. Some of his books like “How to Make ¥10 Billion” were bestsellers.

Horie and Livedoor in Trouble

null
Horie
In January 2006, Japanese authorities raided Livedoor and arrested Horie. When news that Livedoor was being investigated got out not only did Livedoor stocks take a dive, the entire Tokyo Stock Market shuddered. On the day that Livedoor was raided, there were so many sell orders Tokyo Stock Exchange was forced to close early and stop trading of all listed issues for the first time in its history.

In two days Livedoor lost $1.8 billion of its value. A 38-year-old executive at a securities linked to Livedoor committed suicide. Within a week the company lost $2.8 billion. Within a few months the company was delisted from the Tokyo Stock Exchange when the its value of its stock fell below ¥100, down from about ¥700 before the January raid.

Horie was charged with falsifying Livedoor’s annual financial report and window dressing the books of Livedoor, making loses of $8.7 million in 2004 look like profits of $12.2 million and spreading false rumors about stock sales by a company owned by Livedoor in connection with the takeover of another company. He was accused of inflating Livedoor’s earnings through shady stock splits and swaps and buying shares using dummy companies and cheating shareholders and investors “without any hesitation to raise profits for the company and himself.” Horie has took the Enron defense, insisted that his underlings did unscrupulous things without his knowledge. For many the crimes that Horie was charged with were not that serious. The media coverage of his arrest and imprisonment and trial was just as intense as rise to fame. Long lines formed to get tickets to the trial hearings.

Bloomberg reported: “Horie sharply increased Livedoor's stock price in a short period by conducting large-scale share splitting. By abusing investment partnerships, Livedoor reported profits from the selling of its shares as "sales" instead of "capital" in accounting books to give the impression that the company was growing. Disclosure of correct information by listed companies is indispensable for protecting investors and ensuring stock is traded fairly. The crime Horie was involved in was extremely malicious because it undermined the very foundation of these market norms.” [Source: Tomohiro Ohsumi, Bloomberg News]

Horie was sentenced to 2½ years in prison based on a ruling that Livedoor’s accounting methods were illegal and could not have occurred “without instructions and approval from” Horie. In handing down the unusually harsh sentence the judge said hat Horie “played a central role” in all the charges and “deserves strong approbation for his crime deceiving individual investors and sacrificing their well-being in the pursuit of corporate gain.”

Horie had maintained his innocence throughout the trial. In July 2008, Horie’s 2½year prison sentence was upheld by a higher court. In June, Livedoor was told to pay ¥9.5 billion in compensation to shareholders of the Internet service for losses the suffered because of the company collapse.

Many think that Horie is being treated much too harshly. The crimes he had been accused of doing had been common practices in Japanese business and companies that were charged with such crimes were investigated by financial regulators not criminal prosecutors. Many think Horie was made a scapegoat by the business and government establishment bent on getting revenge.

In April 2011, Horie’s appeal was rejected by the Supreme Court. He began serving his 30 month sentence in June 2011. Before he was licked up Horie said he would return and apologized to Livedoor shareholders.

Admiration for Takafumi Horie.

Tomohiro Ohsumi wrote in Bloomberg News: “In dozens of interviews, young Japanese brought him up again and again as a way of explaining their generation’s malaise. To them, he symbolized something very different: a youthful challenger who was crushed by a reactionary status quo. His arrest, they said, was a warning to all of them not to rock the boat. “It was a message that it is better to quietly and obediently follow the established conservative order,” Mr. Horie, now 37, wrote in an e-mail. [Source: Tomohiro Ohsumi, Bloomberg News]

“He remains for many a popular, if almost subversive figure in Japan, where he is once again making waves by unrepentantly battling the charges in court, instead of meekly accepting the judgment, as do most of those arrested. He now has more than a half-million followers on Twitter, more than the prime minister, and publicly urges people to challenge the system.”

“Horie has been the closest thing we had to a role model,” said Noritoshi Furuichi, a 25-year-old graduate student at the University of Tokyo who wrote a book about how young Japanese were able to remain happy while losing hope. “He represents a struggle between old Japan and new Japan.”

Yoshiaki Murakami

In 2006 a big deal was made about the arrest of Yoshiaki Murakami — the head of the powerful and influential Murakami Fund — for insider trading. According to his indictment, in 2004 he learned from Livedoor officials that the company planned to buy a 5 percent stake in Nippon Broadcasting through a public tender offer and Murakami bought up 1.93 million shares for about ¥9.95 billion before the public tender offer, and made a ¥3 billion profit when he sold the stocks as the battle between Livedoor and Fuji televison drove Nippon Broadcasting shares upwards.

Murakami is a trade ministry bureaucrat turned fund manager who liked to say he was a genius in business. He was regarded as brilliant student in high school and attended Tokyo University. He made a name for himself speaking out for shareholders rights and attacking Japanese corporate culture. He made headlines in 2005 for efforts to takeover Hanshin Electric Railway and list the popular Hanshin baseball team on the stock market and sell share to public. Murakami Fund was a large shareholder un Nippon Broadcasting, Tokyo Broadcasting System (TBS) and Hanshin Electric Railway. It reportedly made a ¥20 billion profit by selling stocks in TBS.

Murakami, like Horie, appears to have been made a scapegoat by a business establishment bent on getting revenge on those that rock the boat and threaten the status quo. He initially said that he was guilty of inside trading but later he said he made those statements to protect his company and investors and was “certain he was not guilty.” He said that he had “overheard” Livedoor’s plans but didn’t take them seriously and said he did not make his investment decisions base on what he heard.

In July 2007, Murukami was sentenced to a two-year jail term, the longest ever given for insider trading. He was also ordered to pay a ¥1.15 billion financial penalty, the largest ever penalty for insider trading, and criminal fines of ¥3 million. Prosecutors had shown Murkami attended a meeting attended bu Livedoor executives. The judge said “Murukami’s profits first attitude is horrifying.” Murukami appealed and was released in ¥700 million bail.

AIJ Lost $93 Million Over Nine Years While the Company Produced False Reports to Attract Clients

AIJ Investment Advisors Co. posted 109.2 billion yen ($93.2 million) in investment losses from fiscal 2002 through fiscal 2010, accounting for 75 percent of the assets entrusted to it by clients, the Securities and Exchange Surveillance Commission has found. AIJ invested mainly in Nikkei 225 options and other domestic derivatives through funds based in the tax haven of the British Cayman Islands. [Source: Yomiuri Shimbun March 24, 2012]

While it was losing money, AIJ reported to its clients that it had 209 billion yen in assets, including yields, during fiscal 2010, even though the company's actual assets were only 25.1 billion yen, the SESC found. The 25.1 billion yen consisted of 4.9 billion yen in deposits, 2.1 billion yen in equity to overseas funds and 18.1 billion yen in contributions to an investment partnership.

“The SESC searched AIJ for allegedly falsifying the results of its management of pension assets to attract new customers. AIJ is also suspected of not having invested assets entrusted to it by its clients but instead using them to refund those that canceled their contracts with the company. AIJ started investing in financial derivatives and similar instruments through funds based in the British Cayman Islands, a tax haven, in 2002, only to experience consistent losses stemming from these investments. Despite this fact, AIJ allegedly attracted new customers by reporting phony investment results--for example, the firm claimed that it "achieved cumulative yields of about 250 percent over the past decade," the sources said.

“In June 2012, Kazuhiko Asakawa, president of AIJ Investment Advisors Co., and three others were arrested on suspicion of having defrauded customers of about 7 billion yen. According to investigative sources, Asakawa, 60, and the other suspects allegedly swindled a Nagano Prefecture construction industry pension fund of about 6.5 billion yen between June and August last year by convincing it to invest in a foreign investment trust at inflated prices.They showed the fund officials false reports inflating the investment's performance. AIJ is also suspected of having defrauded semiconductor manufacturing equipment maker Advantest Corp., based in Nerima Ward, Tokyo, of about 500 million yen in a similar scheme. The MPD is investigating the case further as it suspects 92 other funds that had signed contracts with AIJ since April 2009 were defrauded. [Source: Yomiuri Shimbun, June 20, 2012]

“AIJ made deals with clients under which the company was fully entrusted to manage their assets through funds such as one in the British Cayman Islands, which was effectively controlled by AIJ. However, the company failed to manage the investments, incurring massive losses. To prevent the fraud from coming to light when clients canceled their contracts with AIJ, the company sold investment trust products to other clients at inflated prices and used the money to refund clients canceling their contracts. The 7 billion yen, over which the four were arrested, is also believed to have been used to provide such refunds.

Nomura Group Accused of Insider Trading

In July 2012, according to JijI Press, Nomura Holdings’s Group Chief Executive Officer Kenichi Watanabe resigned to take responsibility for leaks involving insider information on new share offerings.The resignation come as fallout from the scandal widens, threatening to affect the management of Japan's top brokerage group. [Source: Jiji Press, July 27, 2012]

“In a report released June 29, Nomura Holdings admitted that Nomura Securities employees in the sales division for institutional investors leaked yet-to-be-announced information on new share issuance by resources giant Inpex Corp., Mizuho Financial Group Inc. and Tokyo Electric Power Co. The information is believed to have been used for insider trading by employees of other financial institutions.

“Nomura Securities has been barred from securities underwriting jobs by an increasing number of government agencies and companies. In one such case, it was removed from a core position in a syndicate of lead underwriters for Japan Airlines' stock listing, which is expected in the autumn.

“The Yomiuri Shimbun reported: “A report on an in-house investigation by Nomura Holdings Inc. shows that Nomura Securities Co. leaked important information to clients in an organized manner on a regular basis until its recent insider trading scandal came to light. The Securities and Exchange Surveillance Commission (SESC) also found similar leaks had occurred at Daiwa Securities Group Inc. Similar scandals involving SMBC Nikko Securities Inc. had come to light earlier this year. This means all of the nation's big three securities firms were allegedly involved in insider trading. [Source: Yomiuri Shimbun, July 1, 2012]

Former Chairman of Daio Paper Takes Over $140 Million to Pay Off Gambling Debts

In November 2011, Japanese prosecutors arrested Mototaka Ikawa, the former chairman of tissue maker Daio Paper Corp, on charges connected with causing billions of yen in damage to subsidiaries by borrowing money from them for personal use, Jiji news agency reported. Daio Paper said it filed a criminal complaint against Ikawa, who stepped down as chairman in September, saying that it suspects he caused 8.6 billion yen ($111.7 million) in damage to seven subsidiaries. [Source: Reuters, November 21, 2011]

“The Asahi Shimbun reported: “Before his arrest, prosecutors from the special investigation division questioned Ikawa on a voluntary basis. During questioning, Ikawa said he borrowed billions of yen from seven Daio subsidiaries for personal use, including gambling in casinos. According to an in-house special investigation committee set up by Daio Paper, Ikawa took control of 10.68 billion yen ($140 million) from May 2010 to September 2011 in 26 installments without offering collateral or gaining approval from the boards of directors of those subsidiaries. [Source: Asahi Shimbun November 22, 2011]

“Ikawa, a member of Daio Paper's founding family, served as representative director of the seven companies when he borrowed the money. He later returned some of the funds, but Daio Paper did not allow him to repay his debts in the form of shares. Daio Paper, based in Shikokuchuo city, Ehime Prefecture, and listed on the First Section of the Tokyo Stock Exchange, is the country's third largest paper manufacturer and Japan largest maker of tissue paper. It is known for its tissue paper marketed under the best-selling brand name of Elleair.

“Of the 10.68 billion yen he borrowed, Ikawa said 850 million yen went to pay gambling debts. He said the remaining 9.83 billion yen was for his personal use. However, it emerged that almost the entire amount was used to pay gambling debts chalked up at casinos overseas. Prosecutors suspect that Ikawa was in such dire straits he felt he had no choice but to borrow funds to wipe the slate clean on his gambling debts, sources said. Ikawa has no prospect of repaying the money.

“Ikawa is a grandson of the late Isekichi Ikawa, founder of Daio Paper. At age 42, he assumed the post of company president in June 2007. However, he resigned from the post in June this year to take responsibility for the company's poor business performance. After that, he assumed the post of chairman. But he also resigned from that post in September after the borrowing scandal came to light.

“Hiroko Tabuchi wrote in the New York Times: “Ikawa routinely ordered subsidiaries to deposit money into his personal bank account and to an account held by a Japanese subsidiary of the casino operator Las Vegas Sands.”I apologize from the bottom of my heart for the discovery of 10.7 billion yen in loans to our former chairman, which has brought great inconvenience to our shareholders,” the president of Daio Paper,Masayoshi Sako, told a packed news conference. Mr. Sako said the company had also fired Mr. Ikawa’s brother, Takahiro Ikawa, who is a board member, and their father, Takao Ikawa, who is an adviser to Daio Paper and a former chairman. His father, Isekichi Ikawa, founded the company in 1943. [Source: Hiroko Tabuchi, New York Times, October 28, 2011]

“The Yomiuri Shimbun reported: “The Tokyo District Public Prosecutors Office's special investigation unit had been secretly looking into Ikawa since the spring 2011. However, Daio Paper only started its own internal investigation after being tipped off by an e-mail sent from a whistleblower in a group subsidiary in September. [Source: Yomiuri Shimbun, November 24, 2011]

“After the scandal Tokyo Stock Exchange designated shares of Daio Paper as "Kanri-Meigara," or stock under supervision. The designation is intended to warn investors that the company's stock could be delisted. Daio Paper’s share price has dropped about 15 percent between the times since reports about the loans started surfacing in the local media in September 2011 and the time charges were brought against Ikawa in November.

Ex-Daio Boss Blew Over $100 Million in Macao

The Yomiuri Shimbun reported: “Mototaka Ikawa, 47, the former chairman of Daio Paper Corp. who has been charged with aggravated breach of trust, literally gambled away about 9 billion yen ($114 million) of the money he borrowed from group companies at a casino in Macao, according to sources. He is also believed to have lost additional billions of yen in a Singapore casino. The total amount of Ikawa's borrowing from Daio Paper's consolidated subsidiaries and other group firms far exceeded 10 billion yen. [Source: Yomiuri Shimbun, November 28, 2011]

“According to the sources, about 9 billion yen of the money Ikawa borrowed from Daio Paper subsidiaries was transferred via Ikawa's own accounts to an account opened in Japan by a company operating casinos in Macao. The company's account was exclusively for settlements of casino payments. Almost no money remained in the account, most of it having been spent on gambling. It was also newly learned that billions of yen was transferred via Ikawa's personal bank account to an account of a Japanese unit of a U.S. firm operating casinos in Singapore.

“Daio Paper's in-house investigation committee has confirmed that Ikawa instructed two consolidated subsidiaries on July 19 and August 16 2011 to transfer a total of 850 million yen to the Singapore-related account. The money transferred into the account was then sent to another account exclusively for payment settlements for a casino that opened in April last year in a luxury resort in central Singapore. Balance sheet records of the account revealed that Ikawa frequently visited the casino in the June to September period this year, just before the scandal surfaced. In the Singapore casino, guests can gamble for higher stakes than in Macao.

“In a statement released by his lawyer, Ikawa said: "I won money at a casino I visited after suffering huge losses in stock transactions. I became deeply caught in the charm of gambling."The prosecutors quoted Ikawa as saying, "I intended to recover all the losses eventually.”

Ikawa Gambled In High Roller Lounges Until Just Before Net Closed

The Yomiuri Shimbun reported Ikawa visited a casino in Singapore until just before the case was exposed in September and wagered up to 150 million yen a day, according to sources. The same sources said Iikawa frequently visited a casino at a high-class resort that opened in central Singapore in April 2010. Ikawa pooled gambling money in a special bank account to play at the casino in Singapore. At least 500 million yen was transferred from Daio Paper's subsidiaries to the bank account over two or three months until August. [Source: Yomiuri Shimbun, November 24, 2011]

“Taro Nishijima wrote in the Yomiuri Shimbun: “The casinos in Las Vegas that former Daio Paper Corp. Chairman Mototaka Ikawa visited before his allegedly illegal borrowing was exposed, are the playgrounds of gamblers called "high rollers"--people who wager large amounts of money. They tend to be wealthy men or company managers from all over the world, and gamble large sums in exclusive rooms on the upper floors of high-ranking hotels that are off-limits to ordinary guests.

“To bring in and keep these customers, casinos provide lavish perks and services, including free stays and meals and arrangements for special seats at famous shows. For customers who come from faraway places such as Japan, casinos sometimes provide round-trip, first-class air tickets. According to David Schwartz, director of the Center for Gaming Research at University of Nevada, Las Vegas, most high rollers like card games such as baccarat and blackjack in which large sums of money can be moved in a short time. Bets of several million dollars are not unheard of, Schwartz said.

“Some big-spending customers who are allowed to have a special bank account for gambling at a casino can play at tables with money borrowed as short-term, interest-free loans. However, not everybody knows when to stop playing before their luck runs out. "There has been some trouble in cases when guests couldn't pay their debts," a senior member of the Nevada Gaming Commission and State Gaming Control Board said.

How the Daio Paper Boss Was Able to Take So Much Money and What It Says About Japan Inc.

“The Yomiuri Shimbun said that Ikawa was abel to get his hands on so much money because he and his father, who are members of the company's founding family, monopolized power in the management and personnel affairs of the entire Daio Paper group. A special inspection committee, consisting of an outside lawyer and others, set up by Daio Paper issued a report late last month that said "the corporate culture of absolute obedience to the father and son of the Ikawa family is to blame." [Source: Yomiuri Shimbun, Nov. 23, 2011]

“Executives of the consolidated subsidiaries agreed to provide loans without collateral upon receiving requests from the former chairman over the phone. An executive in charge of accounting failed to report the loans Ikawa borrowed to board of directors meetings, despite knowing about the loans. This prevented the board from being able to stop the damage from spreading. An auditing firm noticed the loans in summer last year but did not confirm how the money was used. It assumed "the former chairman will use it for business activities." The firm knew the loans continued to grow thereafter, but did not alert Daio's board of auditors about the matter.

“The Daio Paper case, it may be said, has brought into sharp relief some deficiencies of corporate governance. Hiroko Tabuchi wrote in the New York Times, “The controversy provides yet another lens into the seemingly free-wheeling behavior — and disregard for corporate governance — still seen among top management at some of Japan’s leading companies. But the scandal at Daio Paper...is unique because the company has made public the accusations against the ex-chairman. [Source: Hiroko Tabuchi, New York Times, October 28, 2011]

“The Ikawa family is a major shareholder in the company. The dominance they wielded was excessive the company’s president, Masayoshi Sako, told the New York Times. According to the report filed with the stock exchange, which the company said had been prepared “In many cases, the former chairman would unilaterally demand: “You must deposit X million yen into my account by tomorrow,” the report said. Executives at the subsidiaries knew that Mr. Ikawa wanted the money for personal use but did not question him. Some of the subsidiaries were forced to take on more debt to cover for the loans to Mr. Ikawa, the report said. In the year to March, the company booked a net loss of 8 billion yen on sales of about 410 billion yen.

“In a harsh self-criticism, the report said that company executives, board members and even its auditors had turned a blind eye to the loans. “At the Daio Paper Group, speaking out against the Ikawa family has not been condoned,” the report said. “When the former chairman asked for a transfer of funds, his wishes were obeyed without question.”

“Takayuki Hayasaka wrote in the Yomiuri Shimbun: “The Daio Paper scandal has revealed that the company did not have effective checking systems in place to prevent former Chairman Mototaka Ikawa from abusing his power. Executives at Daio's consolidated subsidiaries apparently had no doubts in following Ikawa's orders to loan him large amounts of money without collateral, which also were overlooked by the parent company's executives. The Daio group had been unable to make personnel decisions unless Ikawa's father, Takao, 74, agreed with them. Even Daio's auditing firm cannot figure out exactly how many stocks of the subsidiaries the Ikawa family holds. [Source: Yomiuri Shimbun, November 24, 2011]

“The Daio scandal is comparable to the one that hit the Seibu group in the mid-2000s. Yoshiaki Tsutsumi, former chairman at Kokudo Corp., a now-defunct unlisted company at the center of the group, dominated listed Seibu Railway Co. and other affiliated companies as Kokudo's biggest shareholder. Exerting his influence, Tsutsumi made the group shoulder rental fees for the company housing that he used privately, resulting in authorities ordering the group to pay tax.

“Both the Daio and Seibu groups were family-owned companies. "Family businesses tend to be controlled by managing executives who hold stocks in the firms," Waseda University Prof. Hideaki Miyajima said. "As a result, they often find it difficult to ensure corporate governance, which allows executives to benefit themselves." It has been said that some Japanese companies have weaker oversight than their U.S. or European counterparts because their general shareholders have fewer opportunities to get involved in management. However, many family businesses have overcome such negative aspects, by strengthening the monitoring of management by executive boards and ensuring the transparency of decision-making processes.

Japanese Company Scandals Threaten to Spook Investors

Kojiro Sekine wrote in the Yomiuri Shimbun: “Investors at home and abroad are likely to question the soundness of Japanese corporate governance and legal compliance in the wake of huge unsecured loans made to the former chairman of Daio Paper Corp. and questionable payments made by Olympus Corp. for corporate acquisitions. Concern about Japan's murky corporate culture threatens to further scare away investments in Japanese shares. [Source: Kojiro Sekine, Yomiuri Shimbun, October 31, 2011]

Prof. Hideaki Miyajima of Waseda University School of Commerce criticized the situation, saying, "It [the lack of outside board members] resulted in a lack of proper external monitoring of corporate activities."But having outside board members does not automatically translate into healthy corporate governance. Many Japanese companies acquire their outside board members from their business partners, making collusion with company management more likely. Kubori, who is familiar with corporate governance, said, "It's necessary to make management strong enough to say no to the top leaders.”

Image Sources: 1) Bank of Japan Currency Museum 3) 8) Wikipedia 4) Jun at Goods from Japan 5) Danny Choo , Others japan-photo.de japan-photo.de ;

Text Sources: New York Times, Washington Post, Los Angeles Times, Daily Yomiuri, Times of London, Japan National Tourist Organization (JNTO), National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

Last updated August 2012


This site contains copyrighted material the use of which has not always been authorized by the copyright owner. Such material is made available in an effort to advance understanding of country or topic discussed in the article. This constitutes 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner. If you are the copyright owner and would like this content removed from factsanddetails.com, please contact me.