In late 2020, the dealing room of Japan’s third-largest brokerage SMBC Nikko was cautiously returning to normality after months of pandemic upheaval. Makoto Yamada, the head of equities trading known for his blue Berluti shoes and sharp suits, was back on the floor. Alexandre Avakiants, the deputy global head of equity and owner of a Brazilian jiu-jitsu gym, was reviving animal spirits after lockdown.
Overseeing all this while simultaneously schmoozing the biggest global equity funds, was Trevor Hill, the former UBS banker parachuted in seven years earlier to transform the domestic Japanese house into a global heavy hitter.
But the recovery was shortlived. Months later, the Securities and Exchange Surveillance Commission under Japan’s Financial Services Agency launched a probe into Nikko. That culminated in the arrest this month of the three executives along with equity products head Shinichiro Okazaki on suspicion of market manipulation in connection with block trades, large securities transactions that take place outside of trading hours.
What started as a routine inspection has evolved into a sprawling investigation that threatens to sink Nikko’s equities division as institutional clients sever their relationships. Japanese TV crews, tipped off by prosecutors, captured footage of a late-night raid on the company headquarters.
The four executives have been plunged into the same criminal justice system that interrogated former Nissan chief Carlos Ghosn for more than 100 days and are destined for indefinite stays in the Kosuge detention centre on the outskirts of Tokyo.
“We will refrain from answering the questions which are under investigation,” said SMBC Nikko in response to questions on the arrests and investigation. The SESC declined to comment.
At stake is Tokyo’s effort to present itself as a global financial centre with transparent and fair markets. If regulators and prosecutors have indeed uncovered systemic wrongdoing by a major brokerage, Tokyo’s image will be tarnished. But if the months of investigation turn out to have been unnecessarily drawn out, the regulator emerges looking vindictive.
“Execution of block trades is always a challenge, anywhere in the world. There is supposed to be a strict Chinese Wall in place between the primary origination desk, the secondary sales desk, and the trading desk,” said Nick Benes, chief executive of the Board Director Training Institute of Japan. “Against the backdrop of Tokyo’s desire to remain a major financial centre, regulators appear to be cracking down.”
Since the FSA introduced Japan’s first corporate governance code in 2015 as a flagship of the “Abenomics” reforms under former prime minister Shinzo Abe, Japanese companies have been under increasing pressure to offload their substantial cross-shareholdings.
The shareholdings are protective, mutually held stakes that listed companies hold in one another and which fund managers see as a recipe for management complacency.
Nikko is unusual in that it has both significant flows of block share sales coming via its megabank parent, but also a large network of branches broking to domestic retail investors. People familiar with the disputed trades said Nikko had become a significant vehicle for unwinding of corporate cross-shareholdings with block trades.
Investigators suspect SMBC Nikko used its proprietary trading desk to put in large buy orders towards the end of the trading day to artificially boost the price of stocks that were in many cases being sold throughout Nikko’s retail sales network.
The regulators believe Nikko’s practice of encouraging traders to buy stock at anything other than the lowest price disturbs the function of the market.
One employee not directly involved in the trades said they were surprised that the prop desk was involved in the trades. “I would’ve thought that this whole thing is just passing the thing from left to right and earning a commission on the trade. It’s not what a block trade is supposed to look like.”
Sources at the company say compliance warnings often flashed suspicious trades but the trading control department was unable to prevent the transactions from occurring.
By late June 2021, Nikko’s clash with the FSA was eviscerating. It heightened tensions between Japanese staff and its two most prominent foreign managers, and also deepened resentments between brokerage veterans and the regular SMBC bankers cycled in to watch over their subsidiary.
Bankers were regularly being pulled from the trading floor or their homes to answer long barrages of questions from inspectors. A Nikko trader in his 50s died of a brain aneurysm after days of interrogation.
“A lot of the guys had been through an FSA inspection before, either at Nikko or another bank, and they are always nasty. But this was different. Much nastier. Like they came in with something to prove,” said one banker.
“The shock is hard to describe. Trevor, Mak, Alex . . . by mid-February they thought this was basically over and that Nikko’s lawyers had shown that nothing illegal had happened,” said one former colleague.
“The feeling was that the regulator hadn’t got what it wanted, but there would be a deal for everyone to save face . . . nobody knows what happens next. For everyone, not just Nikko,” he said.
Nikko bankers say it may be too late to salvage relationships because many large clients, fearing reputational damage, have already severed their ties with the brokerage.
In a desperate attempt to bolster morale, chief executive Yuichiro Kondo on Monday tried to convince staff that the matter was more complex than portrayed by the Japanese media.
But according to people at the brokerage, he admitted that efforts by Nikko to explain their actions to both the regulator and prosecutors “have not been accepted and as a company we suffered a huge social sanction through the arrests”.
At least six junior traders have left the group in the past few months. Traders are disoriented without Hill and Avakiants, who commanded tremendous respect and loyalty on the floor and were the brains behind the broker’s expansion to New York, London and Hong Kong.
One employee said people overseas “have completely lost direction. Who’s going to drive the hedge fund business? Who’s going to drive the commissions? It was those two.”
