The Meaning of Murakami and Horie

by Stephen Givens

The Supreme Court’s rejection of Horie’s appeal and the confirmation that he will serve two and a half years in prison for “accounting fraud”, five years after Horie and Murakami were initially arrested, concludes a chapter that should make us worry about the integrity of Japan’s judicial system.

The saga began in 2006 when the National Prosecutor’s Office decided that the style of “money game” capitalism practiced by Murakami and Horie was bad for Japan and that the two upstarts needed to be put out of business. It needs to be stressed that this was an unusual prosecution, driven by the prosecutors’ own vision of “national economic policy”, rather than concrete evidence of criminal wrongdoing by either Murakami or Horie at the time the investigations began. The prosecutors initiated open-ended investigations with the mission of finding evidence they could turn into criminal charges. This is a dangerous way for criminal investigations to begin, and a judicial system should be especially wary when prosecutors and police with a political or policy agenda target specific individuals with the objective of digging up something that will fit the definition of a crime.

The obvious first fishing hole the prosecutors dipped their nets into was Murakami and Horie’s involvement in the 2005-6 control contest for Nippon Broadcasting System (NBS). The prosecutors’ initial decision to target Murakami and Horie was driven by their gut sense that there was something illegitimate and un-Japanese about the way the two had exploited NBS’s strange ownership structure and resulting undervaluation in the stock market, and sought control to drive up the price without any intention of actually managing the company—by the way, a routine practice outside Japan.

The prosecutors did succeed in finding something against Murakami in the Nippon Broadcasting deal—an “insider trading” charge based on the fact that Murakami had continued to trade in NBS stock after Horie had privately indicated that he (Horie) intended to launch a tender offer against NBS. There is no question that it is illegal under Article 167 of the Financial Instruments and Exchange Law to trade securities with the private knowledge that a third party intends to launch a tender offer—and therefore likely trigger a jump in the stock price.

However, when one looks at the facts of Murakami’s “insider trading” violation more carefully, it becomes clear that this was a highly technical violation that did not harm any NBS shareholders other than perhaps Horie himself. The reason is that the NBS stock price had already jumped considerably thanks to Murakami’s highly publicized acquisition of shares and his open invitation to NBS’s largest shareholder, Fuji Television, to launch its own tender offer. The market already knew that NBS was the target of a control contest and had already adjusted the price accordingly. It is not surprising that Murakami did not think it wrong to continue trading after he learned Horie might launch his own tender offer. It was the equivalent of a pedestrian crossing the street against a red light when no cars are in sight.

Nonetheless, Murakami was arrested and subjected to a lengthy trial, ending in a two year prison sentence. The Tokyo District Court’s disorganized and confusing decision (the statute that Murakami allegedly violated is not identified until half-way through the long decision) ends with the court’s justification for imposing a harsh three year sentence: “It is clear that Murakami’s only motive was to wring as much profit from the situation as possible… He must be punished for his extreme greed.”[1] Murakami’s crime, it turned out, was trying to make a profit.

[1] 強い利欲性が認められるのであり、やはり厳しい非難に値するといわざるを得ない。

Fortunately, two long years later in 2009, the Tokyo High Court, in a decision that received scant attention, effectively overturned the Tokyo District Court’s decision and gave Murakami a suspended sentence. The High Court saw correctly that is was improper to make “facts that are not even the subject of the indictment”[2]– i.e. Murakami’s “greed”—a punishable crime.

[2] 起訴されてもいない事実を犯罪として認定しこれを実質的に処罰したことになってし まう

As for Horie, the prosecutors could find nothing in NBS case to pin on him, and therefore were driven back to earlier history—Livedoor’s “creative” techniques for driving up its stock price during the 2002 – 2004 period. There is no question that Livedoor and Horie aggressively exploited loopholes in the law, for example Livedoor’s use of stock splits to drive up its stock price or Horie’s use of the after-hours market to avoid reporting his acquisition of NBS shares. Horie was, legally speaking, “Livin’ on the Edge” (the name of his company before it became Livedoor). One suspects it was precisely Horie’s practice of pushing the law to its limit that drove the prosecutors crazy. One has to ask, however, in a society and economy governed by law, whether the blame should be on the person who exploited the loopholes, or the officials responsible for the design defects in the law.

The transaction that resulted in Horie’s conviction for “accounting fraud” was highly complex in its details, but relatively simple in its substance. Livedoor, through controlled entities, bought and sold shares of Livedoor itself and reported the resulting gains (driven up by stock splits) as income on its income statement rather than as a capital transaction on its balance sheet. This made Livedoor’s income look better than it would have otherwise. On the other hand the gain did not appear on the balance sheet, therefore lowering the company’s amount of reported capital by the same amount. The entire question was a technical one of where the transaction should have been reported.

Accounting experts themselves are of different opinions as to how the transactions should have been reported. It is quite clear that Horie, acting alone, could not have caused the transaction to be reported as it was. As a public company, Livedoor was audited by an independent accounting firm and its financial statements were prepared and approved by independent professionals who, apparently, believed that the transaction was properly reported on the income statement. As Horie himself has persuasively argued, even assuming the accounting treatment of the transaction was incorrect, this type of technical accounting issue is one that should be handled at the administrative level by the securities regulators, not by the national prosecutors as a criminal matter. It is completely unprecedented in Japan for a questionable accounting entry by a public company to result in a full criminal trial of company officials and punishment of this severity.

Reading the decisions of the Japanese courts in these cases I am struck by how poorly they explain what exactly the defendant did, or how the facts recited add up to a criminal violation that is not merely technical but actually harmed others. Pages and pages of facts, conversations and transactions are woodenly recited in the decisions, but the question “So what?” is never answered. Clearly explaining the basis of judicial decisions is essential to the legitimacy and integrity of the judicial system. One gets the sense that the judges themselves do not completely understand the facts or their relevance, but are too timid to resist committed prosecutors. These cases give one insight into the reasons 99.7% of criminal cases brought to court in Japan result in conviction,as opposed to 88% the US.

The press and other leaders of public opinion who should act as an independent voice against the public authorities also bear responsibility. The Japanese public to this day does not have a precise understanding of what Murakami and Horie did, or why exactly what they did was wrong. The press failed its responsibility critically to analyze the cases, perhaps out of fear of offending the authorities and the business establishment, perhaps out of laziness and the difficulty of summarizing the complex facts in short newspaper articles, perhaps because Murakami and Horie had targeted a leading media conglomerate in the NBS case.

Five years later, Murakami and Horie are old news and capture little public interest. Murakami and Horie may not be entirely sympathetic characters, but the manner they were driven out of business does not speak well for Japan.

(Uploaded at the request of Stephen Givens)

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.