New Japanese Stock Scandal Probe Starts

TOKYO —  Major brokerage Daiwa Securities is under investigation by Japan’s Finance Ministry for allegedly violating securities law in what appears to be another Japanese stock scandal.

When stock recommendations went sour, Daiwa allegedly offered its favored corporate clients special stock deals that guaranteed illegal profits to make up for losses.

The Finance Ministry has opened an investigation of Daiwa’s alleged loss-free transactions, which violate Japan’s Securities and Exchange Law.

Daiwa officials said today that the company did cover losses of 20 to 30 customers totaling about 10 billion yen ($69.4 million), but these were not guaranteed loss-free deals.

The officials said Daiwa had not promised any compensation for loss to the customers but decided to cover some to maintain good relations.

The Daiwa scandal is the latest load of the stock market’s dirty laundry the media have hung out for the public to see.

Last month, police arrested a Nomura Securities employee and a Kawasaki city employee. The Nomura employee is suspected of selling pre-listed stock to the Kawasaki official in return for managing a larger share of the city’s pension fund.

But at the top of the list was the Recruit affair, the worst postwar political scandal. A number of politicians reaped large profits by buying stock in a real estate unit of Recruit Co. before the shares were listed and then selling the stock after it started trading on the over-the-counter market.

General elections are expected in February and--if not hushed up--the Daiwa affair may be taken as yet another symbol of Japan’s elite doing favors for one another, with the ruling party looking on benignly, if not actually part of the process.

“The last thing the Finance Ministry wants in pre-election times, when people are still goosey about Recruit and minor scandals, is to create more of a stink than they have to,” a veteran analyst said.

Brokers say loss-free trades abound because they are difficult to prove and because stock regulations in Japan are often loosely enforced.