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Thursday, Feb. 16, 2006
Answers to the questions swirling around Livedoor
Prosecutors on Monday charged Livedoor Co., its former president, Takafumi Horie, and three other Livedoor executives, along with subsidiary Livedoor Marketing Co., with violating the securities law.
But what exactly are the charges? Are there more to come? Here are some of the basic facts in the case.
What charges are the defendants facing?
Prosecutors accuse Livedoor, its executives and Livedoor Marketing of fraud. They say the executives deceived investors by announcing Livedoor Marketing intended to buy publisher Money Life Co., which Livedoor already owned, to inflate its stock price. They also accuse Livedoor Marketing of lying about its profits in the fiscal third quarter that ended in December 2004.
Why would Livedoor feel compelled to artificially boost its stock price?
A high stock price makes it easier for an acquiring company to purchase a target firm by allowing it to finance the purchase with its own shares instead of cash. The higher the stock price, the fewer shares it needs to buy the target, leaving it with more stock to acquire other firms.
Why are prosecutors holding Horie?
Investigators are looking into other possible violations, including six acquisitions by Livedoor and Livedoor Marketing between 2003 and 2005. They say that by setting up three dummy investment funds (translated directly as "unions"), Livedoor was able to pretend it bought the firms through stock swaps, and instead pocket an extra 8 billion yen.
How did this scheme work?
Livedoor set up "shell" investment funds with Livedoor capital. These funds, or unions, bought controlling stakes in target firms with cash. Livedoor or Livedoor Marketing then announced it was about to buy the target companies, which allegedly were already under Livedoor control.
On the day of the "acquisition," Livedoor or Livedoor Marketing would issue new stock, ostensibly so that Livedoor could trade them for the targets' stocks, which were held by the investment funds. On paper, control of the target firms would then pass to Livedoor, while the investment funds would receive Livedoor stock in exchange.
But in reality, when the funds sold the Livedoor or Livedoor Marketing stocks on the open market after the "acquisition," the proceeds were sent secretly back to Livedoor. Because Livedoor stock prices would rise after the announcement of the acquisition and stock splits, Livedoor would get a larger profit from the shell investment funds.
How would Livedoor have kept its control of these funds hidden from investors?
Investment funds -- whether large, high-profile funds like Yoshiaki Murakami's MAC Asset Management Inc., or a small investment club set up among friends and neighbors -- don't have to disclose who their investors are. Only if those funds possess more than 5 percent of a listed company's stocks do the names of the funds have to appear in a securities filing.
In Livedoor's case, the three dummy funds were not registered firms and didn't invest in listed companies. These funds thus did not have to file a report with the local finance bureau of the Finance Ministry or register their seals with the Legal Affairs Bureau, as registered companies are required to do.
Since the Livedoor case has highlighted the shortcomings of the nation's vague securities regulations, ruling bloc politicians are studying plans to increase oversight over investment funds. But some market participants worry that too much regulation will hurt investor sentiment.
Typical investors in the funds include big companies, pension funds, hedge funds and government affiliates. They do not want to be listed as investors in a particular company because they don't have a say in where the investment funds put their money. Market experts warn tighter disclosure rules will drive large investors out of Japan and hurt the economy.
What other charges could Horie and the other Livedoor executives face?
Investigators are also examining possible violations ranging from money-laundering to insider trading to using subsidiary profits to jack up profits at the parent company. According to media reports, investigators have found money flowing out of Livedoor, through bank accounts, foreign brokerages, and into Swiss bank accounts registered to Horie and the other suspects under pseudonyms.
If he is found guilty, what punishment would Horie face?
That isn't clear yet, since prosecutors keep hinting at additional charges against Livedoor. Usually, however, violations of the securities law are punishable by a maximum 5 million yen fine, or up to five years' imprisonment.