Sumitomo Mitsui punished for rigging the brokerage firm’s market


Sumitomo Mitsui Financial Group and its securities unit were penalized after Japan’s financial regulator found the unit had engaged in stock market manipulation.

The Financial Services Agency has asked the nation’s second-largest banking group to improve its oversight of SMBC Nikko Securities Inc., noting the seriousness of market manipulation allegedly committed by the brokerage, according to a statement on Friday. Companies must submit corrective measures to the regulator by November 7.

The financial watchdog also ordered SMBC Nikko to suspend operations related to block offerings for three months, another blow to the company’s reputation. In addition to this, he asked the brokerage to put a plan in place to prevent the recurrence of violations of customer information sharing rules, as well as clarification of management responsibilities.

“We want them to take this matter seriously,” Finance Minister Shunichi Suzuki told reporters, referring to sanctions against SMBC Nikko.

The move follows the indictment earlier in the year of SMBC Nikko and six of its employees over allegations that they artificially supported share prices for transactions known as block offerings, in violation of financial law. The scandal eroded SMBC Nikko’s profits, forcing it to undertake emergency cost-cutting, while hampering parent Sumitomo Mitsui’s efforts to bolster the investment bank.

In its statement, the FSA also asked Sumitomo Mitsui and its commercial banking arm Sumitomo Mitsui Banking to report why the lender was improperly sharing customer information with the brokerage subsidiary. The loan unit is required to check for other similar violations.

Sumitomo Mitsui and SMBC Nikko said in a joint statement that they “seriously accept the matter and will make company-wide efforts to improve and prevent recurrence and regain the trust of customers and other stakeholders.” .

The sanctions are negative for SMBC Nikko because they highlight deficiencies in control and governance that can harm the company’s reputation and operations, according to Tetsuya Yamamoto, chief credit officer at Moody’s Investors Service.

Block trades have been used in Japan in recent years as companies increasingly unwind what are known as cross-shareholdings. A panel commissioned by SMBC Nikko found in June that the company had made “inappropriate and unfair” stock purchases related to such transactions, in an attempt to prevent a sharp drop in prices.

Japanese prosecutors allege SMBC Nikko used its proprietary trading desk to place large buy orders for certain stocks before the Tokyo close. The objective was to support prices before selling a large part of these shares outside the open market for institutional clients.

A handful of SMBC Nikko executives, including former equity manager Trevor Hill, have been arrested and face criminal trial over the allegations. Hill told the Wall Street Journal in April that the transactions were correct and approved.

For SMBC Nikko, however, the block trading saga should end once it submits measures for improvement, said Kengo Sakaguchi, financial analyst at the Japan Credit Rating Agency. “Customers will likely gradually return their dealings with the company to normal.”

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