Supreme Court acquits LTCB trio

Law change at time of alleged window-dressing deemed still in 'transitional period'

by Jun Hongo

The Supreme Court on Friday reversed a lower court ruling and acquitted three former executives of the now-defunct Long-Term Credit Bank of Japan who were charged with window-dressing the bank’s earnings reports for fiscal 1997.

In a verdict that vindicated the executives of the failed bank that symbolized the bursting of Japan’s bubble economy in the 1990s, the top court unanimously agreed the three defendants did not violate the Securities and Exchange Law.

Although their conduct may have deviated from accounting standards that were introduced in 1997, “it cannot be said (their) acts were unlawful” at the time, presiding Justice Ryoji Nakagawa said at the Supreme Court’s Second Petty Bench.

Former LTCB President Katsunobu Onogi, 72, and ex-Vice Presidents Yoshiharu Suzuki, 71, and Masami Suda, 68, had been charged with hiding ¥310 billion in nonperforming loans and illegally paying dividends to LTCB shareholders.

The rare reversal by the top court redeemed the former heads of LTCB, which was put under government control in 1998 and had about ¥7 trillion in tax money injected as an emergency revitalization measure. The bank has re-emerged as Shinsei Bank.

The focus of the trial was whether the executives in 1997 were justified in appraising LTCB’s assets by employing older accounting standards even though new rules with increased transparency were put in place in March that year.

The trio were arrested and charged in 1999 with authorizing the annual securities report to the Kanto Local Finance Bureau that stated the bank had ¥271 billion in bad loans instead of ¥584 billion in reality.

They also approved a ¥7.18 billion dividend payment in June 1998 to LTCB shareholders after declaring a false profit of ¥46 billion, which prosecutors argued was a violation of the Commercial Code.

Prosecutors alleged that the three disregarded the Finance Ministry’s new guidelines and stuck with the old standards in evaluating the bank’s bad loans. The trio were afraid LTCB’s credibility would have been damaged if the real figures had been disclosed, they said.

The defendants acknowledged they turned in the financial report and paid the dividends to shareholders but denied any wrongdoing. They argued that the new guidelines by the Finance Ministry were not yet legally binding or recognized as the common standard at the time.

The Tokyo District Court in 2002 handed a suspended three-year prison term to Onogi and suspended two-year prison terms to Suzuki and Suda for violating the Securities and Exchange Law and the Commercial Code. The Tokyo High Court upheld the ruling in 2005.

But in overturning the verdict, the Supreme Court said Friday the new guidelines “lacked clarity” on whether they were to be applied immediately. It acknowledged LTCB’s financial statements for fiscal 1997 were turned in while accounting standards were in a “transitional period.”

The lower court rulings “misinterpreted and misapplied” the law in finding the defendants guilty, Friday’s ruling said.

Lawyers for the defendants said Friday’s outcome was based on “objective evidence.”

The top court “did not confuse the accounting guidelines that are standard today with the ones that were used when the financial report was filed,” they said in a statement.

Civil court rulings have also backed the former LTCB executives. The Tokyo District and High courts both turned down a request by the government-run Resolution and Collection Corporation to have the three pay damages to LTCB — a decision also supported by the Supreme Court on Friday.

RCC took over the bank’s nonperforming loans, but the civil court rulings found the financial report was filed when the new guidelines had yet to become legally binding and the executives could not be held liable for compensation.

LTCB, founded in 1952, in October 1998 became the first bank in Japan’s postwar history to be placed under government control. It was sold to an international group of investors led by Ripplewood Holdings LLC in 2000 and re-emerged as Shinsei Bank.