Risk Latte - The Last Straw that Never Breaks the Camel’s Bank

The Last Straw that Never Breaks the Camel’s Bank

Rahul Bhattacharya
July 19, 2013

It is one year since the insider trading scandal broke out at Nomura Securities. Last July observers thought that Nomura’s story is over; but then the story is never about any stock or a company, it’s always about the men behind the company or the stock. This is a story of one man who courageously built a corporate empire and a bunch of nincompoops who came very close to destroying it.

As the sun rises on the eastern horizon and a great empire awakes from a long slumber, one of its biggest securities companies looks for a fresh lease of life.

Tokushichi Nomura II, the founder of the Nomura group, was anything but an ordinary man; quite far from it, actually. He was great leader, someone who saw far into the future and had the vision to create Japan’s greatest securities company. He was a great investor and an astute trader, and in the early twentieth century he created a great company in a nation what was then forging its destiny to become a global economic powerhouse some six decades later. As a child he was known as Shinnosuke, a name that implies spiritual intensity and charm, though some Japanese believe that even though the letter "S" brings love and new beginnings into life as well as attracts wealth, it may not always a happy letter. For sure, if he had lived now, he would decidedly be a very unhappy man.

For more than two decades since the early 1990s, certain senior Nomura executives have been committing foolish acts – even the fraud they committed were the handiwork of fools – and dragging the firm’s name deeper into disrepute. In 1997, Junichi Ujiie, the then President and CEO of Nomura securities said, "Nomura wouldn't survive a third scandal.” He was referring to the incidents of 1991 and 1997.

In 1989, Nomura Securities advanced hundreds of millions of dollars in loans to a gangster named, Susumu Ishii, and it bought worthless memberships in a public country club from the gangster at around $14 million apiece. Ishii then used the money to invest in shares of a company called. Later on, Nomura heavily promoted Tokyu shares, and prices of the stock soared. The scandal came to light and under public scrutiny in Japan 1991. Then in 1997, once again, following an internal investigation, the company disclosed that it had transferred illegal trading profits to the accounts of a real estate client which had ties with the Yakuza, or the gangsters. Nomura Securities Co. solicited clients by offering them privileged information on companies, and failed to prevent unfair trading. This was when CEO of Nomura made the dire prediction that Nomura will not be able to survive a third scandal.

Yet, fifteen years in July 2012, Nomura Securities once again got caught in the powerful maelstrom of an insider trading scandal due to which its Chief Executive, Kenichi Watanabe and the Chief Operating Officer Takumi Shibata had to resign. The allegations were again quite serious and it pertained to leaked information on share offerings to customers by Nomura staff before such information was made public. The company was fined around $3.8 million by the Japan Securities Dealers Association. What seemed utterly incredulous to any outside observer was that it was as though all this happened inside the company as if there had been no history; as if, such behavior is the norm and will always be condoned.

Well, Nomura has lived on. One may be tempted to ask as to how long before it finally collapses. Ironically, an equity analyst named Jim Sinegal had to say this after the scandal broke out last year, "When you look at their history, the number of scandals, this was the last straw." Mr Sinegal may be forgiven if he has made an error in judgment here, for “the last straw” may never ever break the camel’s back.

Los Angeles Times, August 30, 1991.
BBC News, July 26 & July 31, 2012.
Bloomberg, Oct 16, 2012.

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