At Nomura, Tips on Offerings Were Routine

By PHRED DVORAK, KANA INAGAKI and ATSUKO FUKASE

TOKYO—In September of 2010, at the request of a client, an equity salesman at Nomura Holdings Inc. pulled out all the stops to get some valuable inside information: tips on whether his company would be underwriting a share offering of a big Japanese blue-chip company.

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The Tokyo headquarters of Nomura, which is under investigation.

He called the Nomura analyst who covered the company, Tokyo Electric Power Co., in order to get his views. He tried to get a sense of timing of the offering by asking a colleague who handled public offerings whether it would be OK to take a holiday during the week he suspected the share sale would be announced. He asked whether Tepco had been removed from Nomura's research coverage list, a good sign that a share offering was coming up.

Those efforts are described in a report that Nomura, Japan's largest brokerage, released Friday. The report details results of a probe into alleged insider trading in shares of Tepco and two other companies whose equity sales Nomura underwrote and whose shares plummeted in the weeks before the offerings were announced.

Tepco, which hasn't been charged with wrongdoing, said in a statement earlier in June that the incident was "extremely regrettable."

The report on the probe, which was conducted by a group of outside lawyers, described the sales culture, where information passed casually over corporate firewalls and employees from the most senior managers to junior employees scrabbled for tips on upcoming deals.

It comes as a crackdown by Japanese regulators on insider trading, continued to expand Friday, encompassing what regulators said was an associate of a major U.S. hedge fund and another brokerage firm. The crackdown has already resulted in fines against three financial firms from Japan and one from the U.S.

"It's a crisis'' that multiple brokerages are suspected of being involved in information leaks, an official of Japan's Financial Services Agency said.

Investors have complained for years that shares in many Japanese companies mysteriously decline in the weeks leading up to the announcement of an equity offering. Financial regulators have been investigating since 2010 after seeing suspicious trading dips in a series of high-profile cases, but have been hamstrung by an inability to go after people who don't directly profit from the trades. In Japan, insider-trading charges can be leveled only against those who bought or sold securities, not those alleged to have supplied information ahead of trades.

In one of the harshest penalties to come from those investigations yet, the Securities and Exchange Surveillance Commission on Friday pulled the business license of Japan Advisory. The advisement firm, which was also fined 370,000 yen ($4,634.38), allegedly traded on inside information ahead of a share offering by Nippon Sheet Glass Co. in 2010, the SESC said. The underwriters for that deal were J.P. Morgan Chase and Daiwa Securities Group Inc., the SESC said.

Repeated phone calls to the Tokyo office of Japan Advisory weren't answered.

In a statement, Daiwa Securities said it would begin an internal inquiry on the matter. "We will work to prevent a recurrence and further enhance our compliance with the law and internal control,'' it said, without commenting on whether it was the source of the leak. J.P. Morgan declined to comment.

Meanwhile, Nomura Chief Executive Kenichi Watanabe officially acknowledged that lax controls had led to a series of leaks of insider information in high-profile share offerings by Japanese blue-chip companies dating to 2010. The firm will voluntarily suspend part of its business operations for three to five days to take responsibility for the failure in compliance. Nomura also said its executive officer in charge of the institutional equity sales department and another executive officer in charge of compliance will step down, while the pay of senior executives would be cut. Mr. Watanabe will take a salary cut of 50% for six months.

Financial regulators are continuing their investigation of Nomura, he said.

The report on the probe describes a company with "serious systemic defects'' that led employees to pass around information without much awareness that it wasn't supposed to be shared. Parts of the institutional sales department that handled domestic clients were "willing to do anything to meet sales targets,'' the report said, while the department that sold to foreign customers routinely forecast which companies would likely conduct equity financings and often strove to "increase the accuracy of forecasts'' by fishing for inside information.

Some employees scoured research lists to see which companies Nomura had withdrawn coverage on, which the broker routinely did ahead of deals— ironically, to prevent insider trading. Other junior staff who had been asked to be on standby on the day a share offering was to be announced would spread the word through email and chats to colleagues, the report said.

In many cases, employees and managers alike thought it was appropriate to tell colleagues and clients information about forthcoming deals, as long as they didn't give the name of the issuers, the report said.

In at least one instance, the report said, there is reason to believe that a salesman persuaded his client to sell some stock in a company that was going to be announcing a share offering so that the client would buy it back during the public offering.

Write to Phred Dvorak at phred.dvorak@wsj.com, Kana Inagaki at kana.inagaki@dowjones.com and Atsuko Fukase at atsuko.fukase@dowjones.com

A version of this article appeared July 2, 2012, on page C3 in the U.S. edition of The Wall Street Journal, with the headline: At Nomura, Getting Tips On Offerings Was Routine.