October 6, 2011 5:58 pm

SMBC Nikko faces insider trading probe

Japan’s financial watchdog is investigating SMBC Nikko Securities and one of its executive officers in connection with alleged insider trading in the shares of a company which the investment bank provided services to.

SMBC Nikko said it was co-operating fully with the investigation by the Securities and Exchange Surveillance Commission into suspicions that an executive played a part in an insider dealing case, but declined to comment on the details of the investigation.

The SESC is investigating the possible links between the Nikko executive and a company president, who is alleged to have profited from trading in the shares of Enoteca, a wine distributor, when it conducted a management buy-out in February this year, according to Japanese media.

The company president bought shares in Enoteca before the announcement and sold them at a profit, Japanese media reported. SMBC Nikko provided settlement services to Enoteca during its MBO.

The insider dealing scandal is a blow to SMBC Nikko, which is repositioning itself as Japan’s third-largest securities company by assets, after it was acquired by Sumitomo Mitsui Bank from Citigroup in 2009.

The company, which used to be called Nikko Cordial, lost its independence after it was given a record Y500m fine by the regulator following a high-profile accounting fraud.

An internal investigation at the time concluded that top executives, including its former president and chief financial officer, were closely involved in padding profits and that its internal control and governance problems were “systemic”.

Few insider trading cases come to light in Japan where the financial watchdog is handicapped by its lack of resources.

The SESC had been examining possible insider trading involving new share issues where short selling activity increased substantially in the run-up to the announcement that a company would be issuing new shares.

The SESC investigation was prompted by several market investors who complained about a year ago, that offshore hedge funds appeared to be involved in suspicious trading in shares weeks ahead of an equity issuance.

Investors said the suspicious activity undermined credibility in the Tokyo market. However, no charges have been brought yet in connection with those allegations.

In the six years since the regulator was given the ability to impose fines in insider trading cases, it has done so in 106 cases.

The SESC declined to comment.

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