News photo
Former Livedoor Co. Chief Financial Officer Ryoji Miyauchi enters the Tokyo District Court on Friday.

Claiming, as accused, that he acted on Horie’s instructions, Miyauchi said, “The – are for the most part correct,” contradicting Horie’s assertions that he did not knowingly falsify the company’s financial statements.

“I deeply regret having committed these crimes, and apologize for having caused so many people trouble, he said.

The admission by Miyauchi, once Horie’s most trusted ally, is likely to make Horie’s legal position more difficult, and lawyers for Miyauchi said he is willing to testify against Horie at the latter’s trial.

Horie has said he intends to plead not guilty to all the charges against him.

Discarding the T-shirt and jeans of his days as a high-flying Internet mogul, Miyauchi wore a dark suit and tie, as did three other former Livedoor executives who are also on trial.

Prosecutors alleged in their opening statement that the four executives acted on Horie’s orders to fabricate a 5 billion yen consolidated pretax profit for the first half of fiscal 2004, instead of reporting the firm’s actual 300 million yen loss.

Horie and his former executives conspired to make up the difference by claiming 1.5 billion yen in nonexistent sales, on top of 3.7 billion yen worth of illegal proceeds from sales of Livedoor stock, prosecutors alleged.

In February 2004, when the firm initially forecast a profit of 3 billion yen for the first half of fiscal 2004, Horie ordered Miyauchi to revise the estimate upward to 5 billion yen, according to the indictment.

When Miyauchi reportedly claimed that might be difficult, Horie allegedly said: “It’s OK. Be aggressive, be aggressive. A pretax profit of 5 billion yen looks better, doesn’t it?”

When Miyauchi further claimed he told Horie that the company had fallen short of the 5 billion yen goal at the end of August 2004 by 1.4 billion yen to 1.5 billion yen, and that false sales would have to be recorded to hit the target, Horie allegedly said: “Well, we’ll just have to do it. We’ll just have to do it and push forward.”

During Friday’s court session, Miyauchi said: “The stock sale in question was not done to falsely inflate profits, nor did I, at first, believe the 3.7 billion yen profit from selling the shares was problematic.”

“However, although I later suspected this was not right, I still submitted the financial statements, and I mean to face up to my responsibility.”

The fate of Livedoor’s executives — who until late last year were heralded for shaking up Japan’s staid business community — is widely seen as a measure of how much new blood the old guard can stomach.

While charges of accounting fraud are often made against companies that have effectively collapsed, it is rare for prosecutors to pounce on successful companies in search of Securities and Exchange Law violations, wrote Takeshi Kimura, president of consulting firm Financial Japan Co., in his blog.

“This is the first time that a going concern was forced to open its books and had its executives arrested for accounting fraud,” Kimura wrote.

He noted that in March, NEC Corp.’s wholly owned subsidiary, NEC Engineering Ltd., admitted it had falsely reported earnings based on an employee’s fake transactions between March 2002 to December 2005, inflating the parent firm’s sales by 36.3 billion yen and its profits by 9.3 billion yen.

In a world where the line between “creative” accounting and fraud can be blurry, the arrest and trial of so many executives and accountants will have a huge impact on Japanese business practices, Kimura wrote.

The three other former Livedoor executives owned up to some of the charges, but denied they deliberately cooked Livedoor’s books through paper transactions.

“I had no means of knowing that the transactions in question were not allowed,” former Representative Director Fumito Kumagai told the court.

His lawyer argued that the transactions in question, including the injection of 3.7 billion yen in capital by a fund that prosecutors said had indirect ties with Livedoor, would have been approved by many accountants.

“We are not convinced that the transaction is, in itself, illegal, and (we) ask prosecutors on what grounds they say it is,” defense attorney Hitoshi Shinho said.

Also on trial are accountants Motoshi Kobayashi and Taishin Hisano, who approved Livedoor’s earnings reports. They pleaded not guilty to colluding with executives to manipulate Livedoor’s earnings.

The CPAs’ lawyers demanded in court that the accountants’ trial be held separately, leading to an interruption in proceedings. The defense request was accepted.

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