High court zero-tolerance signal for stock scams said no surprise

by Minoru Matsutani and Takahiro Fukada

Friday’s high court ruling to uphold Livedoor Co. founder Takafumi Horie’s prison term is significant because the judiciary has restated its zero tolerance of activities that undermine fair stock market trading, experts said.

“The ruling was no surprise, considering the scale of losses by investors and the viciousness of the defendant’s acts,” said Shin Ushijima of law firm Ushijima & Partners. “The high court sent a warning to authorities watching securities laws to get a grip.”

The Tokyo High Court upheld the March 2007 district court-imposed 2 1/2-year prison term for the dot-com mogul for falsifying financial statements and violating the Securities and Exchange Law.

The court said Horie, 35, manipulated the market by spreading false information on the takeover of a publisher by an affiliate, Livedoor Marketing, to raise Livedoor’s stock price. It also found him guilty of conspiring with four senior Livedoor executives to report a pretax profit of ¥5 billion for the business year through September 2004 instead of an actual loss of ¥300 million.

The punishment seems severe because white-collar crimes normally result in suspended sentences. However, some experts say the verdict was necessary to send a message that those who violate stock market rules will be punished to protect individual investors from being victimized and keep foreign investors from taking their money out of Japan.

Yo Ota, a lawyer at Nishimura & Asahi, pointed out that Horie’s sentence was lighter than it would have been for a similar crime in the United States and many other countries.

Horie’s lawyers immediately appealed to the Supreme Court, but legal experts, including Hiroshi Itakura, a criminal law professor at Nihon University Law School in Tokyo, said the top court is unlikely to show leniency because the high court’s finding appeared flawless.

There is no reason to reduce the sentence because Horie has steadfastly maintained his innocence, Itakura said.

Horie’s failed appeal probably means the high court will rule similarly in September to uphold the 20-month sentence of Ryoji Miyauchi, his former deputy at the Internet company, Itakura said.

Horie “received the same verdict as in the first court. That will not be beneficial to Miyauchi,” Itakura said.

Takaaki Hoda, representative of the think tank Waku Waku Economy Research Institute LLP, said the ruling would have little impact on other venture businesses because the number of startup firms has significantly decreased since Horie was arrested in January 2006. Horie was once viewed as an IT prodigy for turning a small Internet startup into an influential conglomerate.

“Before Horie’s arrest, people and money were actively circulating among venture businesses. But now it seems like nobody wants to take a risk,” Hoda said. “Livedoor is beginning to become a forgotten name.”

One of the lines of argument in the high court was whether Horie was involved in the illegal acts in question. The high court ruled such acts could not have taken place without Horie’s approval. Legal experts agree.

“It’s common sense that such complicated activities couldn’t be carried out without a CEO’s knowledge, and if they had been, what kind of CEO would that make him?” Ota asked.

In a separate case on July 19, the Supreme Court acquitted three former executives of the defunct Long-Term Credit Bank over falsification of the bank’s financial statements, overturning the high court ruling that had found them guilty.

The focus of that case was whether the accounting standard in March 1998 had to be in compliance with new regulations that took effect in 1997.