Mr. Yoshiaki Murakami, who has drawn intense public attention as Japan’s most controversial investment fund manager, was arrested Monday by the Tokyo Public Prosecutor’s Office on suspicion of violating the Securities and Exchange Law. He is suspected of having engaged in insider stock trading when his firm purchased Nippon Broadcasting System Inc. shares between late 2004 and early 2005. Mr. Murakami, a former official of the former Ministry of International Trade and Industry, set up an investment fund in 1999. It made headlines by making big profits through acquiring and selling a large stake in one company after another, including an apparel firm, an electronic parts maker and a food company. In the latest instance, it purchased a 47 percent stake in Osaka-based Hanshin Electric Railway Co.

Mr. Murakami, known as an advocate of shareholders’ rights, has long attacked Japanese corporate culture, calling on companies to carry out management reform and pay more dividends. His arrest, however, has deepened public suspicion over the operations of his investment fund, which started with some 4 billion yen and now manages around 400 billion yen.

At a news conference he hastily called on the day of his arrest, Mr. Murakami said, “I see myself as a professional among professionals (in the fund management business). But I realize I committed a crime.” He also said that when his fund acquired shares in NBS, he had no intention of making money through insider trading and that he will retire from the investment fund business and sell all his firms, including their shares, to younger operators of his fund. If he is found guilty of the unethical act he is accused of committing, his credit as an investor who stressed the importance of corporate governance will be forever tarnished. It is hoped that investigators will unravel hidden dimensions of the Murakami fund’s operations.

Under the Securities and Exchange Law, those who have knowledge of a company’s decision to purchase a stake of 5 percent or more in a listed firm are prohibited from buying the firm’s shares before the company’s decision is made public. Mr. Murakami is suspected of having violated this stipulation. As such, he faces imprisonment of up to three years or a fine of up to 3 million yen.

According to a statement placed on the Web site of M&A Consulting Inc., a key firm in the Murakami Fund group, the fund started buying NBS shares in early 2001. In November 2004 and January 2005, Mr. Takafumi Horie, then president of Livedoor Co., and other Livedoor officials visited Mr. Murakami and disclosed that the Internet firm intended to buy more than a 5 percent stake in NBS. But the Murakami Fund continued to buy NBS shares for some time. Mr. Murakami explained that he thought at that time that Livedoor would be financially unable to buy that amount of NBS shares. He also said that he never intended to make profits by using the information.

The Murakami Fund’s stake in NBS climbed to 18.57 percent as of Jan. 5, 2005, when it purchased 800,000 more shares. On Jan. 17, Fuji TV launched a public tender offer to buy NBS shares in a bid to acquire a 50 percent stake in NBS and turn the radio broadcast firm into a subsidiary. On Feb. 8, Livedoor announced that it had obtained a 35 percent stake in NBS, including a 29.63 percent stake it had acquired through off-hours trading. The Murakami fund sold 1.25 million NBS shares to Livedoor during off-hours trading. On Feb. 10, Fuji TV lowered its goal in the purchase of NBS shares to 25 percent. While Livedoor waged a high-profile takeover battle with Fuji TV, the Murakami Fund sold its remaining NBS shares at a high price and reaped a large profit. Its stake in NBS went down to 3.44 percent by Feb. 28.

The suspicion that Mr. Murakami was involved in insider stock trading is believed to have come to light in the process of the investigation into Livedoor Co.’s operations. Mr. Horie was indicted in February 2005 on charges of window-dressing his company’s financial performance and making false statements to mislead the stock market. Both Mr. Murakami and Mr. Horie shared a business philosophy that places importance on enhancement of corporate value. It may be said that this thinking led to Livedoor Co.’s frantic efforts to increase its share prices by any means. On the other hand, it appears that Mr. Murakami’s ultimate purpose may have been to earn profits from the margin as fast as possible by taking advantage of a rising stock price.

It is hoped that the criminal investigation into the Murakami fund’s operations will lead to a strengthening of relevant rules and legal provisions. Only after ensuring ethical and transparent behavior on the part of investment funds and other market players can trust be restored in Japan’s stock market.

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