Bogus share swap allegedly concocted to pad group’s financial statements

Livedoor Co. gained 5.6 billion yen from the sale of new shares it issued in March 2004 under the pretext of swapping them for shares in two firms it was targeting for takeover, prosecution sources investigating alleged securities law violations at the Internet services firm said Thursday.

Of the proceeds, Livedoor used 3.7 billion yen to pad its group financial statements for the business year to Sept. 30, 2004, according to the sources close to a special investigative squad of the Tokyo District Public Prosecutor’s Office.

The two takeover targets were online financial service firm Webcashing.Com Co. and cell phone sales firm Kurasawa Communications Co., the sources said. Kurasawa later changed its name to Livedoor Mobile Co.

The figures for the allegedly fraudulently obtained proceeds came to light a day after former Livedoor President Takafumi Horie and three other ex-executives were served fresh arrest warrants on suspicion of cooking the books for fiscal 2004 in breach of the Securities and Exchange Law.

Livedoor Representative Director Fumito Kumagai was also arrested Wednesday on the same charges.

Prosecutors allege that Horie and the four others added 5.35 billion yen to the group’s earnings results for the year by posting bogus sales to two Livedoor arms and issuing new Livedoor shares under the pretext of swapping them for shares in target firms, including Kurasawa Communications and Webcashing.Com.

The 3.7 billion yen in proceeds were part of the 5.35 billion yen, the sources alleged.

The investigative squad is pressing the five to explain the allegedly illicit transactions.

The sources said Horie and the other Livedoor figures had devised a plan to enter a large consolidated pretax profit on its accounts for the business year.

Under the plan, Livedoor announced in late 2003 it was acquiring Kurasawa Communications and Webcashing.Com via share swaps on March 15, 2004.

But Livedoor had actually arranged for investment groups it controlled to buy the target firms with cash beforehand, with an eye to making the investment groups recipients of a total of 1.39 million Livedoor shares, including the shares it issued under the pretext of exchanging them with the targets, the sources said.

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