OSAKA — The Osaka District Court on Wednesday ordered 11 former and current Daiwa Bank executives to pay the bank $775 million in compensation for losses it incurred from unauthorized bond deals by a rogue trader at its New York branch over an 11-year period beginning in 1984.
Of the total, former New York branch head Kenji Yasui was ordered to pay $530 million for failing to realize that then New York branch trader Toshihide Iguchi was making illegal loss-making trades and for failing to take proper action as his supervisor.
Presiding Judge Mitsuhiro Ikeda said, “The risk-management mechanism at the (New York) branch was effectively not functioning.”
The judge blamed the executives for “making extremely unreasonable, inappropriate management decisions” in failing to swiftly report the illegal trades to U.S. authorities, resulting in a heavy penalty.
The amount is the largest ever sought in a compensation case filed by shareholders against individual executives in Japan, according to lawyers representing the plaintiffs.
Lawyers representing the executives said they will appeal the decision.
Two individual shareholders and one corporate shareholder in the Osaka-based bank had demanded in the suit that former President Akira Fujita and about 50 other former and current executives who were on Daiwa’s executive board at the time jointly compensate the bank for $1.45 billion, including $1.1 billion in trading losses, a $340 million penalty and $10 million in legal fees paid to negotiate a deal with U.S. prosecutors over the scandal.
In Wednesday’s ruling, the court ordered 11 executives, including Yasui, to pay a total of $775 million. Of that amount, the ruling said Yasui should pay $530 million for the losses from the unauthorized trades, and that the 10 others should shoulder $245 million for the penalty and the legal fees.
Among the 10 executives was former President Fujita, Takashi Kaiho, the current president but a vice president at that time, former Chairman Sumio Abekawa and former New York branch Manager Masahiro Tsuda.
The plaintiffs filed two suits, in November 1995 and May 1996, which were later combined, accusing the bank’s management of failing to take proper action to prevent Iguchi from engaging in unauthorized U.S. Treasury bond trading over 11 years from 1984.
Iguchi, who was convicted in the United States in 1996 and imprisoned, was released in spring last year.
The bank, which was facing criminal charges by U.S. authorities, paid $340 million in an out-of-court settlement.
The plaintiffs alleged that if the former executives had conducted their operations appropriately, the losses could have been prevented.
In court, the former executives named in the lawsuit argued that they “delayed reporting the trades because (Japan’s) Finance Ministry instructed that the information disclosure be delayed” due to then growing concern over the stability of Japan’s banking system.
Presiding Judge Ikeda acknowledged that Fujita met with the chief of the ministry’s Banking Bureau at the time to inform him of Iguchi’s wrongdoing. However, although Fujita was told by the bureaucrat that disclosure of the case could not come at a worse time, the judge ruled out the possibility there was such an “instruction” because there is insufficient evidence. Even if there was such a suggestion, “it is inexcusable for management not to make decisions on its own and to instead rely on the judgment and instructions of the Finance Ministry.”
A Daiwa Bank spokesman withheld comment on the ruling, saying the suit targets the bank’s individual executives, rather than the bank as a corporate entity.
After the Osaka District Court handed down its ruling Wednesday, Ichiro Nishimura, a plaintiff and former employee of the bank, told reporters, “I wish that the amount of compensation was slightly higher, but perhaps the court did the best it could.”
Nishimura, 66, said he also regretted the court’s decision not to recognize the responsibility of all the executives named in the suit.
The losses made by Iguchi, who was once the trusted head of U.S. government bond trading at the now-closed New York branch, were a bid to cover up losses from previous transactions he made with U.S. government securities over a period exceeding 10 years.
The scandal broke when Daiwa Bank informed U.S. authorities of Iguchi’s illicit deals in September 1995, two months after the bank learned of the wrongdoing in a letter from Iguchi to then president Fujita.
The bank initially pleaded not guilty, but in February 1996 it negotiated a plea bargain with federal prosecutors, pleading guilty to 16 criminal charges in connection with the scandal and paying $340 million in fines for delaying the report to U.S. authorities. The bank was subsequently barred from operating in the United States. All its branches there were closed, ending four decades of business in the U.S.
Iguchi and then New York branch manager Tsuda were convicted in the U.S. in 1996. Iguchi was jailed and Tsuda was fined.
The number of lawsuits that have been filed by shareholders against individual executives over company mismanagement has been rising since 1993, when a revision of the Commercial Code reduced the fee required for filing such suits to a uniform 8,200 yen, regardless of amount of damages sought.
Before the revision, plaintiffs had to pay a fee that was based on the amount of compensation they were seeking.
Lawyers versed in shareholder suits say the previous record for compensation awarded was roughly 1.25 billion yen in 1996, when the Tokyo District Court ordered former executives of Japan Aviation Electronics Industry Ltd. to cover the penalties the company paid the U.S. government for illegally exporting missile components to Iran.
Asked about Wednesday’s ruling, Economist Fumiko Konya said the case resulted from Japanese banks’ poor risk management of derivatives. There is no visible attitude toward risk-management by Japanese banks because they have no will to play a risk-taking role in financing, she said.
Konya said the executives bear a heavy responsibility and Wednesday’s ruling was inevitable.
At the same time, she warned that similar lawsuits by shareholders may become excessive in the future because of shortcomings in Japan’s legal system to deal with such litigation.
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