By Chris Wright
Japan is becoming familiar with some unexplored concepts recently. There’s been the audacious leveraged buyout (Softbank/Vodafone); the blue-chip hostile takeover bid (Oji Paper/Hokuetsu); the Japanese company making transformational acquisitions overseas (Toshiba/ Westinghouse). And now the Tokyo Stock Exchange is about to discover something equally uncharted: being sued.
In December 2005, a trader at Mizuho Securities made a big mistake. Wishing to sell one share in cable TV and telecoms business J-Com for ¥610,000, he accidentally entered a sale of 610,000 shares at ¥1 – more than the outstanding stock of the entire company. Realizing his mistake within minutes, the trader tried to cancel the order, only to find himself unable to do so, thanks to a glitch in the Tokyo Stock Exchange’s software.
Demand for recompense
Mizuho, which ended up having to pay ¥912,000 ($7,800) per share to unwind its unintended short position, found itself out of pocket to the tune of more than ¥40 billion. Now it wants the money back.
After months of apparently fruitless discussions between the two sides, in August Mizuho sent a note to the Tokyo bourse demanding damages in full. The TSE – which would lose two years of net profit were it to pay up – appears unlikely to agree. Calls from Euromoney to the TSE press office were not returned but the exchange’s stance was made clear when exchange president Taizo Nishimuro addressed the issue at a monthly press conference that the exchange routinely holds in Tokyo.
“As we are not ready to pay the demanded compensation, it looks highly likely that the issue will be brought to a stage where a third party like the court will be involved to solve it,” Nishimuro said.
This is unusual: the exchange has been threatened before but nothing has ever landed in court, and commercial disputes in general rarely do in Japan.
Several points will be at issue. The TSE has apparently said it will not pay unless it is shown to be guilty of gross negligence. Mizuho’s lawyers would have to prove that the TSE’s system’s inability to cancel the order amounts to that. The exchange’s lawyers, on the other hand, will contend that the fault lies with Mizuho for putting the wrong order through in the first place.
Resignation implies liability?
The story is complicated by a typical Japanese trait: the willingness of senior executives in the country to resign sorrowfully and publicly shoulder the blame when something goes wrong. Takuo Tsurushima, Nishimuro’s predecessor as president, apologized to Mizuho and resigned to take responsibility for the software error; Mizuho’s lawyers will surely argue that this constitutes an admission of liability.
This all comes at a sensitive time for the exchange, which is trying to reorient itself in a changing world in which exchange mergers and alliances are rife. The same Tokyo press conference included an announcement, almost universally ignored, that the TSE would enter into an alliance with the Shanghai Stock Exchange to go with the one already in place in Korea; Nishimuro has publicly stated that the exchange also needs an alliance or merger with a US or other major overseas exchange.
That proposition was already going to be challenging even before the present problem. “We view cross-border exchange consolidation in Asia Pacific as a more difficult prospect than in Europe or North America,” says Mike Younger, an analyst at Citigroup. “Generally, exchanges are still considered entities of national or strategic importance, plus there are significant differences in culture, political frameworks, legal structures, currencies and languages across the region.”
Fixing the system
The TSE has also launched a competitive tender process for a new trading system, following on from a highly embarrassing incident in January when the exchange had to close down because it could not handle the weight of the trading volume, around the time that internet company Livedoor! was being investigated for fraudulent accounting. The tender process should be wrapped up by the end of the year, and will presumably be decided upon by a new chief information officer, Yoshinori Suzuki, who was brought in in February to overhaul the exchange’s IT systems (his predecessor had also resigned over Mizuho).
Mizuho spokesman Hideki Sakuma told Euromoney: “We confirm that we sent a letter to Tokyo Stock Exchange, but we decline to comment on the details of the letter. Talks with TSE are continuing. We do not make any comment about talks with TSE.”
Not sufficiently sorry
There’s one other issue in this case that suggests changing behaviour in Japan. At the time of Mizuho’s mistake, it was widely suggested that firms that had benefited from the error would return the proceeds in order to minimize Mizuho’s accidental losses – the honourable thing to do. With a ¥40 billion claim – and that’s just for the losses that came after Mizuho noticed the error and tried to cancel it, not the few minutes after the trade was made – it would appear that not many institutions have felt sufficiently sorry for it to return their loot.
Hostile bid subverts Japanese politeness
Trading blunders: This month, the Tokyo Stock Exchange