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Teruko Noda, a commissioner of the Securities and Exchange Surveillance Commission, has a cabinet full of letters, mostly telling the same story: brokers who allegedly lied and individual investors who lost their life savings.

In all but a few cases, the brokers went unpunished and are still doing business.

“Many times, the evildoers just walk away,” Noda said. “We act very slowly, months after the damage has been done. We’re understaffed and have limited power.”

Confidence in the economy may be improving, but the man on the street is still wary of investing, Noda said. Critics say one reason is that the SESC, which is supposed to act as watchdog over markets and ensure fair play, lacks muscle to protect investors.

A 74-year-old investor, who declined to be named, is among those who feel cheated. A broker from Mizuho Investors Securities Co. called her in January 2001, promising a chance to earn 2 percent on bonds issued by retailer Mycal Corp. at no risk to her principal.

She put up 6 million yen of her retirement money. It vanished eight months later, when Mycal went under.

“The broker showed me Mycal bond ratings at Japan Research Institute, where they were rated ‘A,’ ” a rating for minimal risk of default, the woman said. “The broker told me Mycal bonds were a safe place to keep my money, and still get a better rate than what I was getting at the bank.”

Mycal defaulted on 70 percent of its obligations, leaving some 35,000 individual investors with losses amounting to 63 billion yen.

It was not until later that the woman learned the following: Mycal had been repeatedly bailed out by its main creditor, the former Dai-Ichi Kangyo Bank, now merged into the Mizuho Financial Group; Mycal was insolvent without DKB funds; Mizuho Investors was a DKB subsidiary; and Kawasaki’s broker most likely knew Mycal wouldn’t last long.

Mizuho Investors declined comment on these allegations.

For its part, the SESC launched an unprecedented yearlong inspection in 2002, visiting victims and seizing papers and databases at securities firms, including Mizuho Investors and power house Nomura Securities Co.

But the investigation turned up no evidence proving Mizuho Investors or Nomura had profited from the doomed Mycal bonds, or that brokers had deliberately tried to pass on losses to individual investors.

The SESC was unable even to have the Financial Services Agency slap an official warning on any of the suspect companies. It had to settle with a “strong recommendation” that the firms would, in the future, provide written warnings that similar investments could result in large losses to investors.

“The SESC’s inability to crack down on the securities firms was a huge disappointment,” said Tomoo Takei, a lawyer representing 20 of the victims in a planned suit against Nomura, Mizuho Investors and Shinko Securities Co. “If the SESC can’t act, investors will have to stand up and protect themselves.”

More victims are calling Takei asking to join the suit, which he plans to file before the end of the year.

The SESC was set up in 1992 to ensure fair play in the marketplace. Every month, brokers and company heads suspected of deliberately cheating investors or rigging stock prices are ushered quietly into small windowless rooms in the basement for questioning.

But unlike the Securities and Exchange Commission of the United States, the SESC cannot punish violators on its own.

The SESC reports its findings to prosecutors, the Financial Services Agency or the Cabinet Office, along with “recommendations.”

At the prompting of the SESC, prosecutors in fiscal 2003 fined or arrested 28 brokers and the FSA has either suspended operations or revoked licenses at 16 companies and 28 brokers.

Understaffed, the SESC lacks the manpower to move quickly to seize concrete evidence of stock manipulation or deceiving investors. The SESC has a staff of 444, compared with some 3,100 at the SEC in the U.S.

Until the securities watchdog can prove it can protect investors from unfair practices, playing the market will continue to be associated with gambling, said Tatsuo Uemura, a law professor at Waseda University.

“Securities regulations are still designed on the assumption that companies are coddled by the state and never fail,” Uemura said. “Without the necessary legal framework to make sure everyone plays by the rules, it’s plain wrong to argue investors should be more responsible for their decisions.”

For now, policymakers can only daydream about a healthy investment appetite among Japanese, said the SESC’s Noda.

“I can’t recommend investing in Japan’s markets. Things are rigged so that the little guy loses out.”

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