Of all Takafumi Horie’s impressive achievements, there is at least one thing Japan’s most controversial entrepreneur is unlikely to have planned – the edification of the Japanese public about the ways of market capitalism.
Last year, the Livedoor president, who stole the limelight with his bid to take control of a leading TV broadcaster, was the man who made words such as “out-of-hours trading”, “takeover bid” and “corporate governance” popular on TV talk shows.
In the latest chapter of his extraordinary public life, Mr Horie has brought “market manipulation” and “stock splits” and similar sophisticated financial terms into Japanese living rooms.
The relentless media coverage of Monday’s raid by prosecutors on Livedoor’s headquarters and the homes of Mr Horie and his closest deputies highlights the impact he and his group of internet businesses have had on the public psyche.
As such, the outcome of the probe is expected to help shape future attitudes towards everything from the trustworthiness of venture businesses to the merits of share trading and the spread of white-collar crime.
According to the Japanese media, prosecutors believe Livedoor and its top executives deliberately provided false information that Livedoor Marketing, an advertising subsidiary listed on the Mothers market for start-ups, would acquire Money Life, a publisher, in a stock swap.
The announcement was made in October 2004, even though Money Life was by that time controlled by Livedoor. According to Japanese media, an investment fund, financed by Livedoor, had already acquired a 100 per cent stake in the publisher, paid for in cash.
Livedoor Marketing is also suspected of having provided inflated earnings figures in a statement issued in November of that year, the Japanese media say.
The share price of Value Click, as Livedoor Marketing was still known at the time, was Y179,000 on October 25, 2004. After the announcement of its acquisition of Money Life and the release of its financial statement, the shares soared to Y445,000 on November 24.
Misleading the market with false information violates Japan’s Securities and Exchange Law and is a serious offence in other countries as well.
However, under Japanese law it carries a relatively lenient penalty of either a fine of less than Y50,000 or a prison term of less than five years, which is usually suspended, says Hiroshi Kamano, a Tokyo lawyer. This is because the penalties for white-collar crime in Japan are generally low and it is difficult for the authorities to raise the penalty for one particular white-collar offence without doing so for all the others, he says.
Another point that critics have raised is Value Click’s announcement on November 8 2004 that it would conduct a 100-for-one share split.
Although share splits in themselves are a common way to reduce the price of one stock to make it easier for individuals to invest, prosecutors reportedly suspect that this particular stock split was announced in order to boost Value Click’s share price.
Until this year, when the rules were amended, stock splits tended to result in higher share prices because of the time lag between the announcement and the delivery of the new shares to shareholders.
In the past, it usually took about two months for shareholders to receive their new shares, during which time it was not possible to sell those new shares. The subsequent low liquidity made it easy to boost the share price of the stock.
When Livedoor conducted a 100-for-one stock split in 2004, eyebrows were raised. Tokyo Stock Exchange (TSE) has also asked member companies not to conduct such large stock splits.
If the allegations about Livedoor wrongdoing prove true, there is also a possibility that the group or its subsidiary will be delisted.
Under TSE rules, spreading false information in itself does not automatically lead to a delisting. But “if false information is published in the company’s financial reports and the impact is judged to be large”, the TSE could decide to delist the company, says an official at the exchange.
Another clause in TSE rules allows the exchange to delist a company if it decides that such a move is called for “in order to protect investors”, he says.
Mr Horie on Tuesday emphasised that the investigation would not have an impact on Livedoor’s businesses.
However, given the publicity it has generated, the resultant sharp drop in Livedoor’s share price on Tuesday and the impact on the shares of other start-up companies – as well as Fuji TV, a big Livedoor shareholder – that seems optimistic.