A decade ago, when Japan and the outside world fell under the spell of Prime Minister Shinzo Abe and his sweeping “Abenomics” reforms, the country’s top brokerages Nomura, Daiwa and SMBC Nikko started rolling out a new product.
The block trades, involving companies selling chunks of stock off-market to the brokerages that then parcelled it out to individual investors, were profitable, politically welcome and not especially complicated.
But for SMBC Nikko, a century-old business whose owner Sumitomo Mitsui Financial Group is one of Japan’s biggest financial industry brands, they have proved spectacularly damaging.
After an 18-month regulatory probe into alleged market manipulation during which one trader died after intense questioning, large clients have fled the tarnished brokerage. Six senior bankers now face criminal trial over accusations the group artificially boosted share prices before the sale of the blocks.
Business, morale and prospects at SMBC Nikko are “apocalyptically bad”, according to one veteran of the brokerage.
“Nobody says anything openly but after bonuses in June, there is an exodus coming,” said another employee.
The products are also the centrepiece of a new, high-profile reputational test for Tokyo prosecutors, who are widely seen as having secured only a marginal victory in their flagship case against Greg Kelly, lieutenant to the fugitive former Nissan boss Carlos Ghosn.
Many bankers within SMBC Nikko believe the prosecutors are in large part motivated by the perceived need to score a big win. Legal experts and numerous current and former staff say the brokerage’s fall from grace smacks of needless heavy-handedness by authorities.
Indictments for market manipulation, served both on individuals and the bank, suggest at least a two-year criminal trial and threaten to permanently damage a once-proud financial brand over actions critics say could easily have been dealt with through regulatory sanction.
Four people closely involved in the investigation believe its escalation into a major criminal trial is the direct result of the death of a charismatic trading floor figure who suffered a brain aneurysm days after enduring extended interrogation.
“There is a kind of reverse logic that comes into the calculation, whether the investigators feel they had no responsibility or privately know that they went too far,” said one person targeted in the probe. “If someone has died, they feel that they have to show that it was collateral damage in an investigation that was of huge national importance to the health of the financial system.”
However, he warned, “they also must know they are pursuing a supposed crime where nobody got hurt and maybe nothing illegal happened”.
The prosecutors and regulators, now supported to some extent by the admission of corporate guilt by the brokerage itself, now face a potentially year-long trial where they must convince judges that a practice that appeared to pass SMBC Nikko’s compliance standards made criminals of both traders and managers.
Though marketed under different names, the fundamental idea behind the block trades offered by the three brokerages was the same.
Under the pro-governance push of Abenomics, Japanese corporations were under mounting pressure to unload the colossal portfolios of cross-shareholdings — mutually held stakes that critics say had long granted underperforming and complacent managements a sense of security.
Another pillar of the programme was to prepare Japan’s rapidly ageing public for the normalised, mildly inflationary economy the government hoped to create, ideally tempting households to move more of their huge savings into riskier assets such as stocks.
The block offer appeared to be a good solution. The spread produced by the deal supplied a lucrative revenue stream both for the bankers who dealt with the corporate seller and the sales network dealing with retail clients.
For SMBC Nikko in particular, these deals were juicy. The relationships between the SMBC banking parent and hundreds of Japanese companies ensured it had a larger supply of sellers than its bigger rivals Nomura and Daiwa. Meanwhile, SMBC’s huge retail sales network gave it an advantage over other megabank-owned brokerages under Mizuho and Mitsubishi UFJ.
The efforts to protect this golden goose, say people close to the Securities and Exchange Surveillance Commission (SESC) that began investigating SMBC Nikko in late 2020, was what drove the brokerage to cross the legal line.
Current and former staff confirmed to the Financial Times that the block offer — in common with certain other operations of the bank — involved the trading division undertaking certain transactions not for its own profits but with an unspoken understanding they were supportive to the brokerage’s broader bottom line.
SMBC Nikko trades were different from those offered by other brokerages in two important ways.
First, it was the only brokerage that informed its retail clients of the exact date the transaction would be finalised, creating an environment in which clients, knowing there would be downward pressure on the stock, could go to another brokerage and short it.
People formerly involved in the trades have told the FT that SMBC Nikko required customers to promise in recorded conversations not to short the stock. However, the bank had no practical way of enforcing that policy.
Other brokerages told retail clients the block trade would take place at an unspecified point over subsequent days, making shorting more difficult. People involved in the investigation say this also made it harder for these brokerages to sell the product.
The problem created by the short selling was that it drove down the stock of the company whose shares were being sold. That, said people familiar with the process, could create friction between the corporate client and the brokerage, threatening future relationships, the flow of new deals and, if the drop was especially sharp, the transaction itself.
To remedy this, prosecutors allege, the proprietary trading desk would juice particular stocks.
SMBC Nikko, in contrast with other brokerages, allowed these trades to go through despite alerts from the compliance department. Its rivals would automatically place stocks involved in block offers on their restricted list, preventing them from trading the shares while the market was open.
This, allege prosecutors, was the motive behind the trades now at the centre of the indictments against the American former head of SMBC Nikko’s equities division, Trevor Hill, his British deputy Alexandre Avakiants, senior trader Makoto Yamada, former vice-president Toshihiro Sato and two others.
Prosecutors claim the bank’s proprietary trading desk supported the price of shares being sold as part of block offers towards the end of the trading day. This was the market manipulation SMBC Nikko has admitted to. But all the individuals intend to plead not guilty.
The indictment of Yamada, say people close to the situation, targets an individual who appeared directly involved in the late-day trades, and whose alleged language in emails included triumphant self-congratulation for “support” of particular shares.
Hill and Avakiants are expected to argue that, as senior executives of a trading operation handling thousands of transactions a day, they would not have paid much attention to prop desk trading in what were often relatively small-cap names.
In their pursuit of scalps, both the SESC and Tokyo Prosecutors’ Office have guaranteed a long trial that will hinge on highly nuanced debate over the precise nature of whether the act of buying shares at the end of the day constitutes stock manipulation under its legal definition of “price fixing”, and the provability of intent.
Both of these, say legal experts who have been involved in other cases, would normally be enough to deter prosecutors.
Instead, they have doubled down in a way that has put the future of one of Japan’s biggest financial brands in doubt.