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'Near Endemic' Insider Trading Drives Stronger Laws in Japan

Bruce Carton | December 27, 2012

A barrage of recent insider trading scandals revealing a "near endemic problem" has finally forced Japan to strengthen its insider trading laws.  The Financial Times reports that Japan's Financial Services Agency has promulgated new rules that are expected to become effective by the end of next year. An FSA representative stated that the new rules are intended to be "in line with those in the west,” and will include substantially increased fines, expanded criminal liability, and public proceedings against those who leak insider information.

Recently, an investigation by Japan's Securities and Exchange Surveillance Commission discovered five cases of insider trading in the past two years with a similar pattern. According to a Bloomberg report, "[u]nderwriters allegedly gave early warning of an upcoming share issue to traders, who then made short sales based on the information. Investment bankers who managed share sales allowed or encouraged their salespeople to pass on tips to short sellers because they created demand for shares during the public offerings...." 

Following this investigation, Financial Services minister Tadahiro Matsushita asked an advisory panel to urgently examine ways to change Japan's rules to punish people who leak confidential information. Under Japan's existing rules, the underwriters involved were not subject to any civil or criminal penalty because it is not currently illegal for a financial intermediary to leak non-public information. The FT reports that under the new rules, however, anyone who provides inside information, including staff at financial intermediaries, will become subject to criminal penalties and fines.