Charges Urged Against Giant Nomura

The Securities and Exchange Surveillance Commission asked prosecutors to charge Nomura Securities Co., Japan's largest brokerage, and three executives with illegally compensating a racketeer for trading losses.

The request was expected. Nomura said in March it was under investigation by the commission and prosecutors. It admitted two executives had passed money through an illegal account but said it was done without the company's knowledge.

The commission-by taking the unusual step of asking charges be filed against Nomura as well as the executives-indicated it doesn't believe the executives acted on their own.

That will further damage Nomura's reputation at a critical time. It needs all its prestige to make a good deal for itself and other brokers when Japan deregulates its financial markets over the next few years.

Nomura is likely to face criminal charges. Japanese prosecutors routinely bring charges when requested by the securities commission.

Even more serious to Nomura's pocketbook, the company still faces punishment by the powerful Ministry of Finance, probably within a few months. The ministry is contemplating shutting down Nomura's trading on its own account and the selling of investments to big institutional investors for as long as three months. That could cost Nomura as much as $50 million in profits, analysts said.

"The impact would be severe," said James Fiorillo, an analyst at ING Baring Securities Japan Ltd.

That would come on top of about $320 million in earnings Mr. Fiorillo estimated Nomura would lose this year as customers desert the brokerage. The company had current profits of $1.04 billion last year.

Also today the ministry said it was banning Nomura from bidding on new sales of government bonds until the ministry decides how to punish the brokerage. Nomura has the largest share of that business, with 6%.

Nomura neither admitted nor denied guilt in its only statement. "We take the filing of the complaint very seriously, and we will make a creative start toward not doing the same thing again," Nomura said in a statement. "We are very sorry that we caused problems for our customers. We deeply apologize."

The securities commission's complaint alleges that Nomura and the executives made five payments totaling $418,000 between January and June 1995 through an illegal account to a company linked to Ryuichi Koike, a sokaiya, or gangster, who blackmails companies.

The commission asked that managing directors Shinpei Matsuki and Nobutaka Fujikura be charged. Managing directors are just a few steps away from the president's office in a Japanese company. Also included in the complaint was Osamu Fujita, a lower-ranking executive.

It is the second mob-related scandal involving Nomura in six years. In the first, Nomura admitted in 1991 lending a gangster $125 million two years earlier to buy stock in Tokyu Corp., a railroad and department store concern.

Nomura then pushed the stock through its army of brokers, causing the price to jump.

Nomura also admitted illegally compensating big clients in 1991 for a quarter of a million dollars in losses, then a widespread practice used to sign up customers. In neither case was it charged with a crime.

After the Tokyu scandal, the Finance Ministry ordered Nomura to close eight branches for six weeks and another 79 for four weeks.

This time, though, the authorities are more serious. That includes the securities commission, which admits investors haven't trusted it to clean up Japan's scandal-ridden markets in the past. It's important that authorities seem serious because they need to lure back small investors, who've fled the market since it crashed in 1991. It has yet to recover fully.

The stock market will need them, especially with tough times for brokers ahead as deregulation occurs over the next few years. Banks, for instance, will be allowed to compete with brokers for customers, and some brokerages are expected to go under.

Typical of authorities' recent comments in solemn, formal Japanese is Tokyo Stock Exchange President Mitsuhide Yamaguchi statement today: "It is deplorable that the Securities and Exchange Surveillance had to file charges against Nomura Securities for violating the securities and exchange law."

While there are tough times ahead for Nomura, it is still by far Japan's biggest brokerage and-in terms of equity-the world's. Even hurt, it will remain a formidable presence in the Japanese markets, and analysts say eventually most of the clients who've dumped it will return.

The stock has jumped 20% since April 22, when most of Nomura's top managers resigned, although some will remain as advisers.

"It is a problem from which they can recover and recover relatively quickly," said David Threadgold, an analyst at BZW Securities (Japan) Ltd. "They certainly have still by far the strongest position of the domestic securities companies. I don't think that's been substantially eroded.

"It's a cost to their reputation, I think, more than direct financial costs that are likely to flow out of this."

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