Shares in Nikko Cordial were untraded on Tuesday morning amid a flood of sell orders after Japan’s third-largest broker was hit with the largest fine – Y500m ($4.2m) – ever imposed by the country’s financial regulator.
The broker faces delisting from the Tokyo Stock Exchange for inflating profit and issuing Y50bn in corporate bonds based on false information.
Shares in the broker remained untraded by early afternoon with sell orders at Y1,219, down by the daily limit of Y200. Brokers said that by the lunchtime close there were combined orders to sell 40m shares matched by buy offers for just 1.8m shares, making it unlikely for the shares to trade for the rest of Tuesday and Wednesday.
On Monday, the Securities and Exchange Surveillance Commission said it had advised the Financial Services Agency to fine Nikko Cordial, which is 4.8 per cent-owned by Citigroup, Y500m for accounting irregularities that inflated the broker’s net profit for the year ending March 2005 by 33 per cent.
Depending on what information emerges from further investigations, “criminal penalties cannot be ruled out”, the SESC said.
The record fine is a blow to the reputation of the Nikko group, which has struggled to keep pace with rival brokers Nomura and Daiwa.
The penalty highlights the regulator’s increasingly tough stance on accounting irregularities and comes as the FSA has sought to improve transparency and governance in an attempt to revitalise Japan’s capital markets.
Nikko Cordial’s punishment is the latest in a string of penalties imposed by the regulator on companies including high-profile groups such as Livedoor, established banks such as Sumitomo Mitsui Bank and Merrill Lynch, consumer finance groups including Aiful and GE Consumer Finance and auditors Chuo Aoyama, the then-Japanese affiliate of PwC.
According to the SESC, Nikko Cordial failed to consolidate NPIH, a special-purpose company set up to invest in private equity deals, even though NPIH is a 100 per cent subsidiary of Nikko Principal Investments, the group’s private equity arm.
Furthermore, NPI also falsified information on the timing of a derivatives deal that it had with NPIH.
The failure to consolidate NPIH and the falsification of the date on the derivatives deal allowed Nikko Cordial to book profit of Y14.5bn that it should not have booked, the SESC said.
Nikko Cordial’s accounts were audited by Chuo Aoyama.
The SESC also took exception to Nikko Cordial’s move to issue bonds last November based on the inflated results filed for the previous year.
Nikko Cordial said the penalty would be paid personally by its directors, who will also take a pay cut of between 30 and 50 per cent for six months to bear responsibility for the situation.
Nikko Cordial said it would revise its financial statements for 2005 and 2006 but said the revisions stemmed from the falsification of documents related to the derivatives trade between NPI and NPIH by one employee.
Nikko Cordial officials on Monday denied that the misinformation was intentional or known to top management.
Osamu Morita, Nikko Cordial’s chief financial officer, said: “It was a big oversight. We recognise and regret that our internal controls were not functioning properly.”