As the trial of Japan’s most famous dot-com entrepreneur opened Monday, a much wider issue was also before the court: the nation’s tenuous shift toward a more freewheeling market economy.
Takafumi Horie, 33, founder and former president of Internet startup Livedoor Co., faces charges of securities laws violations in falsifying earnings data to inflate stock prices. He said before the Tokyo District Court on Monday that he was innocent.
But in many ways the Livedoor scandal is more than the story of a cocky technophile. It has far deeper repercussions for the Japanese financial world.
Donning T-shirts instead of dark suits, Horie, a dropout from the prestigious University of Tokyo, defied old guard Japan Inc., which protected itself through the practice of cross-shareholding, in which companies held stocks in each other to ward off interested outsiders.
Starting about two years ago, Horie tried — unsuccessfully — to buy a professional baseball team and take over a small radio broadcaster that was a key part of the powerful Fuji Sankei media conglomerate led by Fuji Television Network Inc.
Horie was praised by some as a courageous innovator but scoffed at by others as a brash novice. He appeared on TV talk shows and used his visibility to draw individual investors to Livedoor, raking in millions as the Net portal it operated grew increasingly popular.
At one point, Horie seemed destined for celebrity status.
He dated actresses. The Roppongi Hills complex where he lived and worked became synonymous with the beautiful life. He ran for the Diet as an independent last year and had the support of the ruling party, although he lost the election. He appeared in TV commercials. He announced he was investing in space travel as a business.
But that’s as good as the ride got.
In January, rows of prosecutors marched into Roppongi Hills in a raid shown live on nationwide TV. Horie was arrested a week later.
The selloff in Livedoor shares triggered a plunge in the Tokyo Stock Exchange that was later dubbed the “Livedoor shock” and even shut down the bourse’s trading system, which didn’t have the capacity to handle the flood of transactions.
Individual Livedoor investors, estimated to number some 220,000 people at one point, were both dismayed and outraged.
Prosecutors say Horie and other Livedoor executives used dubious methods to buy other companies and set up dummy companies to hide losses and jack up the capital value of their group companies.
Livedoor is suspected of pretending to have an affiliate acquire a company that was already under its control and selling stock in that company to fudge its books, prosecutors say.
Key to the trial is how much Horie knew about the alleged antics, whether he was aware of wrongdoing and whether he conspired with other executives to fabricate the results as prosecutors contend.
The whole affair set off loud criticism that the government had failed to adequately monitor the securities transactions and other financial practices, such as stock splits and aggressive takeovers, that Livedoor was famous for using in its aggressive expansion.
As calls grew for stricter and clearer rules for governing the securities market, the Diet responded weakly to the Livedoor scandal in June by passing a bill to tighten oversight of investment funds. It also sent securities reform reeling backward by hurriedly aborting the approval of “triangular mergers,” which would have helped globalize the mergers and acquisitions market.
But there has so far been no move to create an independent watchdog as thorough or powerful as the U.S. Securities and Exchange Commission. Japan’s financial system uses a small team of bureaucrats with weaker punitive authority to regulate its vague securities laws and mostly relies on prosecutors to catch wrongdoing.
Robin Greenwood, an assistant professor of finance at Harvard Business School, said Horie used a regulatory loophole on stock splits to bolster Livedoor shares.
In the U.S., stock splits don’t change the value of a company. But in Japan, stock splits make shares temporarily unavailable for trade, which can jack up the price as supply fails to keep up with demand, he said.
This is because settlements in Japan are still done with paper shares, which have to be printed and delivered. In the U.S., however, the paper system was replaced long ago by electronic trading.
This allowed Horie to engage in completely legal stock manipulation, Greenwood said.
“It is somewhat surprising how long it took them to figure out what was going on,” he noted in an e-mail message.
Greenwood and others worry the fuss over Livedoor will push individual investors away from the market. Although some of Horie’s actions were positive, such as the way he openly bid for companies and appealed to investors, the stodgy old-style management of Japan Inc. could exploit his fall from grace to block sorely needed change.
“It is convenient for Japan’s old guard,” Greenwood said. “They can claim that Horie was bad news for shareholders, and therefore that this justifies any steps that management might take to entrench themselves.”
Timeline of Livedoor’s rise, fall
Following are key events related to Livedoor Co. and its former president, Takafumi Horie:
1996 — Horie sets up Livedoor’s predecessor, Livin’ on the Edge Inc.
April 2000 — Livin’ on the Edge lists its shares on the Tokyo Stock Exchange’s Mothers market for startups.
February 2005 — Livedoor becomes Nippon Broadcasting System Inc.’s biggest shareholder, setting off a battle with Fuji Television Network Inc. for control of the radio station.
September 2005 — Horie runs unsuccessfully in general elections.
Jan. 16-17, 2006 — Prosecutors search Livedoor headquarters in Tokyo, Horie’s home and other locations on suspicion of securities law violations.
Jan. 23 — Prosecutors arrest Horie and three Livedoor executives, including Chief Financial Officer Ryoji Miyauchi.
Jan. 24 — Horie steps down as Livedoor president and is replaced by Kozo Hiramatsu.
Feb. 13 — Prosecutors indict Horie and the three others as well as Livedoor and one of its subsidiaries.
Feb. 22 — The suspects are served fresh arrest warrants for allegedly falsifying Livedoor’s financial figures for the year to September 2004. Prosecutors also arrest Livedoor Representative Director Fumito Kumagai.
Feb. 24 — Hiramatsu suggests Livedoor might file a lawsuit for damages against its former management.
March 14 — Prosecutors file additional charges against Horie and the four others as well as Livedoor.
April 14 — Livedoor is delisted from the Mothers market.
May 26 — First trial session is held for the defendants other than Horie, with Miyauchi pleading guilty and Kumagai denying part of the charges against him.
Sept. 4 — Horie pleads not guilty at the opening of his trial.
In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.