Nomura Holdings, Japan’s securities industry leader, on June 29 announced it would halve CEO Kenichi Watanabe’s pay for six months and COO Takumi Shibata’s pay for five months to take responsibility for a series of confidential information leaks by Nomura Securities employees to clients on upcoming share offerings, which surfaced in and after March. The latest series of inside information leaks on upcoming share offerings to investors, including banks, have ruined the reputation not only of the Nomura group but also of Japan’s securities markets. Daiwa and SMBC Nikko were also found to be involved in similar scandals.

The Securities Exchange and Surveillance Commission should carry out a thorough investigation to get the whole picture of the Nomura scandal. The Nomura group should find out what organizational problems and corporate culture-related problems it has and ensure that its employees will never repeat the act of leaking inside information.

The scandal involved information leaks on the planned public offering of a large number of shares by Inpex Corp., Mizuho Financial Group and Tokyo Electric Power Co.

When companies announce plans to issue additional shares, share prices are likely to go down because the total number of shares will increase. If investors can get information in advance on such share issues, they can sell shares before the additional shares are issued and make profits. In contrast, investors who do not have such information suffer losses. Because of this, the leaking of inside information should never be allowed.

A panel of lawyers brought in by Nomura Holdings who probed the scandal said that employees improperly handled information related to planned share issues and that the Nomura group had failed to instill into employees a high level of professional ethics and consciousness about legal compliance. The panel pointed out that “the work environment appeared to be one in which employees would do anything to meet sales targets.”

In a securities company, a wall is supposed to be erected to prevent the flow of information between the section handling corporate capital increases and the sales section, which recommends selling or buying shares to clients. It has been pointed out that this principle has not been strictly followed by Japanese securities companies including Nomura.

Under the Financial Instruments and Exchange Act, investors who profit from the use of inside information are punished while workers or organizations that leaked such information are not. The government should consider revising the law so that those who leak inside information in advance to investors also are subject to punishment.

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