Japan: Another 'Hills tribesman' brought down
TOKYO - For many observers of the Japanese business scene, last week was like deja vu: the second star entrepreneur in less than five months was arrested on suspicion of violating the securities exchange laws.
This time, the hammer fell on outspoken investment tycoon Yoshiaki Murakami, who was arrested by the Tokyo District Public Prosecutors Office on Monday last week for alleged insider trading in connection with purchases of shares in the radio station Nippon Broadcasting System Inc (NBS). The arrest of the owner of the so-called Murakami fund followed the woes of information-technology (IT) mogul Takafumi Horie, then president of Internet firm Livedoor Co, and three other Livedoor executives in January, also on charges of violating the securities-exchange law by window-dressing the company's financial statements and thereby misleading investors.
The January raid on Livedoor and arrests of its top executives rattled the Japanese stock market. Murakami's arrest dealt a fresh blow to public confidence in the fairness of securities transactions. To heighten the similarities even further, Murakami's arrest is apparently linked to investigations into the Livedoor case.
Japanese stock prices have been slumping recently, largely because of a massive selloff by foreign investors. The Nikkei average fell below 15,000 for the first time this year on Thursday last week, as shares of export-oriented firms such Honda Motor Co declined on continued concern about a slowdown in the United States, Japan's largest export market. Some analysts say that Murakami's arrest, which has further hurt foreign investors' faith in the Japanese market after a recent spate of scandals including Livedoor and a leading Japanese accounting firm, is one factor in the nation's slumping stock prices. Among the declining shares are the majority of the 20 so-called Murakami issues of firms in which the Murakami fund owns a stake of more than 5%.
In the eyes of many ordinary Japanese, Murakami and Horie seemed to have a lot in common. They are both graduates of the nation's most prestigious university, Tokyo University, and relatively young in a society still dominated by gray-haired business leaders - Murakami is 46, and Horie 33. They both rose to fame - and wealth - in non-traditional business areas. They both shook up the somewhat conservative Japanese business environment. They had both frequently appeared on television to express their views. Their iconoclastic rhetoric and style, while fascinating many young Japanese, made many elder business leaders frown.
Their similarities did not end there: both are widely known as members of what is dubbed the "Hills Tribe". Livedoor is headquartered at Roppongi Hills, a huge and posh skyscraper built in 2003 in downtown Tokyo where Murakami's fund also has its offices. Successful venture firms, many in the IT industry, have moved into the Roppongi Hills complex, making it a symbol of success.
But aside from their contrasting attire in public places - Murakami dresses in orthodox business suits but Horie in casual T-shirts - there is at least one stark difference between the two "Hills Tribe" leaders. In an unusual move, Murakami held a press conference, only hours before being arrested, and acknowledged his insider trading. He also said he had signed a statement for prosecutors acknowledging what he had done.
"I consider myself a pro among pros, but I had to consider the outside possibility that I had made a mistake," he told reporters at the Tokyo Stock Exchange. "I have decided that I have to meekly admit my wrongdoing."
Murakami's munching of humble pie contrasted noticeably with the behavior of Horie. Although several other Livedoor executives have confessed, Horie continues to deny any wrongdoing, even after spending three months in jail and being interrogated daily. He is now out on bail.
It is anybody's guess what strategy Murakami is pursuing. Some say he frankly admitted to his violation of the law in the hope of being handed a more lenient sentence than otherwise in his future trial. Under the current law, if convicted of insider trading, he could face a penalty of up to three years in prison or a fine of up to 3 million yen (US$27,000).
But others believe he came clean because of his strong desire to keep his fund afloat. He may well know the fate of the IT empire built by his fellow Hills Tribe member Horie. Livedoor Group is now in the jaws of death. What will happen to the Murakami fund remains to be seen.
Since it was established in 1999, when Murakami retired from the then Ministry of International Trade and Industry, the Murakami fund has grown rapidly and now manages about 400 billion yen in investments; it is a major shareholder in more than 30 listed firms. While at the ministry, he pressed for reform of Japan's commercial code and successfully promoted a law to allow mergers through share swaps.
On Monday last week, Murakami resigned from the top management post of the Murakami fund, simultaneously giving up his posts as the representative of MAC Asset Management Pte Ltd, a Singapore-based investment company, and his status as a board member of M&A Consulting Inc, which is in charge of the fund's operations in Japan. Murakami moved the headquarters of MAC Asset Management to Singapore in March. Tsuyoshi Maruki, the representative director of M&A Consulting, is expected to succeed Murakami as the new representative of the entire Murakami fund group.
"It would not be appropriate for me, someone who violated the securities and exchange law - the constitution of the securities world - to remain in this position," Murakami said on Monday last week. "As of today, I will withdraw from this world."
The Murakami fund held meetings with domestic and overseas client investors on Tuesday last week, asking them to continue asset management contracts with it. The fund is expected to decide on its management policy after confirming client reactions.
But an exodus of money from the Murakami fund may be in the pipeline. Orix Corp, a major leasing company, and Norinchukin Bank, the central bank for Japanese agricultural cooperatives, appear likely to withdraw huge amounts of investment money from the Murakami fund. Adding returns on investment, the fund now manages much more than 10 billion yen on behalf of Orix and billions of yen for Norinchukin. Among other firms, Ushio Inc is considering pulling out its investment of about 1.7 billion yen and Japan Petroleum Exploration Co (JAPEX) is mulling whether to withdraw its investment of some 1.8 billion yen.
The Murakami fund also gets much of its capital from overseas investors, including some US college endowment funds. Although asset-management contracts between investors and the investment fund are due to expire in December, Murakami said in his June 5 press conference that the fund will allow advance cancellations if clients wish.
Murakami has been accused of raking in some 3 billion yen from the dubious sales of NBS shares. But it now appears that the profit was far greater than initially believed and could be 10 billion yen or more. The Murakami fund bought a large number of NBS shares between the autumn of 2004 and January 2005 after obtaining insider information that Livedoor would buy shares of NBS, then Fuji Television Network Inc's biggest shareholder. In February 2005, Livedoor launched a takeover attempt for NBS, ultimately buying more than half of it, before selling the stake to Fuji Television.
During the two-month takeover battle between Livedoor and Fuji Television, NBS shares surged at least 33%. The Murakami fund sold about 80% of its NBS shareholdings by the end of February 2005. When a public tender offer is made, the price of the target company's shares will usually go up. Someone who buys a block of shares in the company based on inside information prior to the public announcement of the takeover bid and then sells them when the price has soared after the takeover bid was made public would be able to reap a hefty profit.
To be sure, Murakami was quick to admit to the charges of insider trading. But only a few days later, it emerged that he actually did not tell the whole truth. Murakami said on Monday last week, "I didn't try to commit a crime," adding, "but I heard about" Livedoor's NBS stock-purchase plan. In effect, he maintained that the offense was an unintended error, and likened it to running a stop sign.
But suspicions have grown since that Murakami intentionally cashed in on the NBS stock-purchase by Livedoor. In fact, Murakami is suspected to have recommended the NBS share purchase to Horie and other former top Livedoor executives.
News reports said, quoting sources, that Murakami approached Horie and other Livedoor executives about purchasing large amounts of shares in NBS in September 2004. Prosecutors suspect that the Murakami fund stepped up purchases of NBS shares from November 2004 with advance knowledge of Livedoor's bid to take control of the radio station, in violation of the Securities and Exchange Law.
On February 8, 2005, Livedoor announced that it had acquired some 35% of NBS shares through off-hours trading and other transactions. After the disclosure, the NBS share price surged from 6,030 yen on the day to 8,800 yen on February 10. As of February 8, the Murakami fund owned some 6 million shares in the radio broadcaster. It is believed to have sold 1.25 million of the shares to Livedoor through off-hours deals and much of the rest on the open market during the stock price surge over the next few days.
By 2000, Murakami was launching Japan's first hostile takeover attempt, trying to buy Shoei Co, a company with real estate and share holdings worth several times its market capitalization. Although he failed in the Shoei takeover bid, Murakami made his name in the Japanese market and progressively began to target larger companies. Last year, he acquired large stakes in the Osaka Securities Exchange Co, Japan's second-largest stock exchange, and the Tokyo Broadcasting System Inc, one of the country's biggest television networks.
Last September, the Murakami fund disclosed that it had acquired a sizable stake in Hanshin Electric Railway Co, an Osaka-based railway operator with valuable land holdings he thought weren't reflected in the share price. Japanese public sentiment that Murakami's ambitions were becoming excessive grew after the purchase, however, since the railway firm owns the popular professional baseball team the Hanshin Tigers. Fearing a takeover by Murakami, Hanshin engineered a takeover offer from local rival railway firm, Hankyu Holdings Inc.
Hankyu's takeover of Hanshin is expected to go through, as Murakami said on Monday last week that his fund would accept the terms of Hankyu's buyout. That could result in a nearly 60 billion yen, or about $538 million, profit for the Murakami fund.
The primary objective of an investment fund is to return the largest possible profit to investors. Some critics suspect the fund struggled to maintain 20-30% yields and eventually crossed the line into illegitimate dealings.
Murakami is a US-style corporate raider who takes big stakes in companies and demands changes aimed at boosting their stock prices. In a country where companies traditionally have held each others' shares to cement working relationships, he was a vocal champion of a more American style of business, one where maximizing return on capital was the fundamental principle. He vociferously advocated corporate reform and urged companies to generate value for shareholders.
Japanese firms have become highly sensitive to possible hostile takeover bids, especially from foreign investors. In an extreme defense measure, some have even opted to make themselves privately owned companies through a management buyout (MBO) since last year. Among those firms are major apparel maker World Co and beverage maker Pokka Corp. On Thursday last week, major restaurant-chain operator Skylark Co decided to make what is expected to be the nation's biggest-ever MBO, worth more than 260 billion yen (about $2.3 billion). Skylark, which operates some 4,400 restaurants, plans to reorganize its operations to defend against a shrinking domestic market without being influenced by stock prices.
Some people say that Murakami's aggressiveness as a "shareholder who speaks" has had the desirable effect of enhancing awareness among Japanese corporate executives of the need for better management and preventive measures against hostile takeover bids. But others point out that the American way of business does not necessarily suit the Japanese business environment, and the blind worship of US-style business practices, prevalent during Japan's post-bubble malaise years, seems to have receded. Many experts say that too much emphasis on short-term profit can impede an accumulation of capital and technology at companies, an essential prerequisite for their long-term growth and prosperity.
To be sure, the nation's traditional employment practices, such as lifetime employment and a seniority-based salary system are crumbling. But most Japanese firms still place greater importance than their US counterparts on stable labor-management relations in the long term. They view employees as stakeholders of an equal or perhaps even more important status than shareholders. Top leaders of Toyota Motor Corp and Canon Inc, two Japanese firms widely seen as "winners" in the increasingly tough global competition, are known as staunch advocates of maintaining good points of the Japanese-style corporate management. The leaders - Toyota chairman Hiroshi Okuda and Canon chairman Fujio Mitarai - are former and incumbent chairmen of the Japan Business Federation (Nippon Keidanren), the nation's biggest business lobby. Mitarai took the helm of the federation last month.
Meanwhile, the diet, Japan's parliament, enacted a bill on Wednesday last week to tighten oversight of investment funds amid growing criticism that the operations of many investment funds are shrouded in secrecy and calls for stricter and clearer rules governing the securities market.
The new law requires investment funds to register with the government watchdog Financial Services Agency, something that was not mandatory before. It requires professional investors, brokerage houses and banks to report to authorities within two weeks when they have a stake in a listed company that exceeds 5%. Currently, such investors are exceptionally given three months to file such disclosures if their stake in a listed company is 10% or less, though mutual and hedge funds already have to report within two weeks.
It also boosted the penalties for those convicted of insider trading to five years in prison or a fine of up to 5 million yen, up from three years or 3 million yen. If convicted of accounting fraud and market manipulation, the person faces up to 10 years in prison or a fine of up to 10 million yen, up from five years or 5 million yen. Many of the measures under the new legislation will take effect in a year and a half, but the stricter penalties on insider trading, accounting fraud, and market manipulation will take effect after 20 days of the promulgation of the new law, which requires cabinet approval.
Worries about checks on securities trading have been growing since the January arrest of then Livedoor president Horie. Leading politicians vowed quick passage of the bill after similar concerns resurfaced with the June 5 arrest of Murakami. It remains to be seen, however, how effective the new law will be in preventing a recurrence of the Livedoor or Murakami fund scandals. Analysts say that a big part of the problem is that Japanese regulations governing securities transactions aren't clearly spelled out, leaving many gray areas. Oversight also is lax, they say. Both Horie and Murakami shrewdly exploited loopholes in the laws and regulations to pursue their business ambitions.
The Murakami fund scandal has further fueled a heated debate in Japan over what is widely perceived as the widening gap between rich and poor, or more broadly, between winners and losers in Japanese society, which opposition parties and some critics blame as the negative byproduct of Prime Minister Junichiro Koizumi's reform programs. This criticism is moot, however.
Apart from the debate over the issue of social inequality, Murakami is now widely seen just as a money-monger, not a real reformer of Japan Inc. Murakami started investing as a child. His father, a wealthy Osaka real-estate investor, gave him 1 million yen when he was just 10 years old and instructed his son to invest it in stocks - and to pay his way through university with the proceeds. By the time Murakami entered the University of Tokyo, he had turned the initial capital into 100 million yen.
When asked by reporters about making money, a visibly offended Murakami replied, "Is making money wrong?" Most of the Japanese public would be quite willing to answer this question negatively - but only if the money-making is done according to the rules.
Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economics. His e-mail address is [email protected]