The nationalized Long-Term Credit Bank of Japan filed a criminal complaint Friday against its former top executives, accusing them of falsifying the bank’s balance sheets and illegally paying dividends to shareholders without earning enough profit.
The move sets the stage for law enforcement authorities to launch raids on several ex-LTCB executives for suspected breach of trust. The investigators are believed to have already questioned Katsunobu Onogi, 63, who served as LTCB president from 1995 to last September.
Since the LTCB was declared insolvent and placed under state control last October, Tokyo prosecutors and the Metropolitan Police Department have been looking into whether the bank’s former executives should be held liable for actions that led to the bank’s collapse.
LTCB’s internal committee, headed by lawyer Kazuharu Kawabata, submitted a report claiming the executives in question most likely violated the Commercial Code and the Securities and Exchange Law.
After receiving the report and obtaining unanimous support at a special board meeting, current LTCB President Takashi Anzai filed the complaint with the Tokyo District Public Prosecutor’s Office and the MPD against the former management. The bank also reported its action to the Securities and Exchange Surveillance Commission.
The LTCB is the first bank placed under state control whose former management face criminal liability. Anzai, a former Bank of Japan official, was appointed head of LTCB after the bank was nationalized.
It is also the second such case this year involving a failed major bank. In March, two former presidents of Hokkaido Takushoku Bank (Takugin), which collapsed in November 1997, were arrested for allegedly causing massive losses to the bank through illegal loans.
The LTCB committee was formed last December by seven attorneys recommended by the Japan Federation of Bar Associations upon a request from the current LTCB management. It looked into the collapsed bank’s lending and other business practices.
The lawyers focused on irresponsible lending by LTCB during the asset-inflated boom of the late 1980s, and on management efforts after the bubble collapsed to hide nonperforming loans by transferring them to dummy firms.
Specifically, the panel concluded that the bank, in compiling its earnings report for fiscal 1997, falsely described as “recoverable” some 200 billion yen in outstanding loans that had in fact soured, and failed to set aside necessary loan loss reserves to cover them.
At that time, the LTCB reported that it no longer had any irrecoverable loans because it had written off 616.5 billion yen in such loans during the fiscal year. However, it had merely transferred the 200 billion yen worth of bad loans held by its affiliates to dummy firms.
If the bank had correctly appraised the status of its loans, it would not have been able to secure profits needed to pay 7.1 billion yen in dividends to shareholders, according to the panel’s findings.
Under the Financial Reconstruction Law, directors on the board or auditors of banks placed under special public supervision are obliged to file either a criminal complaint or civil lawsuit for compensation if they believe a crime has been committed.
The LTCB is expected to file a civil suit soon demanding that former top executives, including Onogi, compensate the bank for the illegally paid dividends.
At a news conference announcing the bank’s action, Anzai refused to disclose the names and number of those deemed responsible and the amount of the falsified earnings, saying that it might interfere with the probe by investigation authorities. But lawyer Kawabata said he is sure the actions of the former management constitute a crime.
The Commercial Code bans a company’s management from paying dividends to shareholders by padding its profits. A violator faces a jail term of up to five years and a maximum fine of 5 million yen. Falsification of earnings reports is punishable by the same degree under the Securities and Exchange Law.
The LTCB, established in 1952 as one of the nation’s three long-term credit banks, was mired in a mess of bad loans in the 1990s after its aggressive loans to nonbank moneylenders during the bubble years went sour.
The LTCB attempted to survive by tying up with Swiss Bank Corp. (now UBS AG) and seeking to merge with Sumitomo Trust & Banking Co. In March last year, it also obtained 177 billion yen in public funds in a government scheme to boost banks’ capital.
But the bank eventually gave up and was placed under state control last October. The Financial Reconstruction Commission later said the bank suffered a capital deficit of 2.653 trillion yen.