The Tokyo Stock Exchange has decided not to delist Nikko Cordial Corp., the nation’s third-largest brokerage, from the Tokyo bourse despite its false reporting of earnings. The TSE’s explanation — that the brokerage’s misconduct was “not black enough” — makes the public wonder whether the exchange is strict enough in overseeing the behavior of listed companies. The decision may have left many uncomfortable in light of the fact that Nikko Cordial is in a position to give guidance to companies seeking a stock market listing. If the exchange’s power and rules are insufficient, changes should be made.

In December, Nikko Cordial admitted falsifying its financial report for the business year ended March 2005. Through illegal manipulation of transactions among affiliates, it had padded recurring profits by 18.7 billion yen. The Financial Services Agency fined the firm 500 million yen, the largest fine it has ever imposed.

After the admission, Nikko Cordial stock was placed on the monitoring post. But the TSE unanimously decided at an executive meeting to keep the brokerage on the bourse. TSE President Taizo Nishimuro told reporters that, although more than one Nikko Cordial official seemed to have been involved in inappropriate acts, the TSE could not reach the conclusion that the brokerage had manipulated its accounting systematically or intentionally. He also said the exchange, acting within its capacity, “should not punish a company that only seems to have done something suspicious.”

In January, an outside panel commissioned by Nikko Cordial concluded that former executives were involved in accounting irregularities that, it said, were carried out systematically. The brokerage has decided to sue three former executives, seeking 3.1 billion yen in damages.

One effect of the TSE decision is that Citigroup Inc. may have to revise its plan to make a public tender offer for the brokerage under an alliance accord with the latter. What is most important, though, is that both the TSE and Nikko Cordial must realize that they have much to do to win back the market’s trust.

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