A Case Study|
Background and History
Daiwa Bank, or Osaka Nomura Bank as it was first called, was founded in 1918 in Osaka, Japan by Tokushichi Nomura. It was created mainly to take advantage of the new capital Japan had amassed from foreign commercial ventures and domestic industrialization. Its securities division experienced huge growth in volume and profits that it almost functioned as different entity. Japanese industry spectacularly grew in the 1930s, but after the war the Allied occupation forces enacted a variety of laws aimed at decentralizing the industry. Part of this was that the bank was forced to change its name to Daiwa Bank, Limited. In 1948, Daiwa Bank established a foreign department and the following year it was authorized as a foreign exchange bank. Daiwa opened representative offices in New York and London in 1956 and 1958, respectively as it was also gaining stronger presence in Tokyo. The bank opened more overseas offices, in Los Angeles in 1970, Frankfurt in 1971, Hong Kong in 1976, and Singapore in 1979. It established a new trust headquarters in 1985 to reinforce its position in trust banking, promote fee income, and demonstrate its ability to accommodate the increasingly diverse needs of Japanese society. Daiwa, like most Japanese banks, made its profits through lending, but failed to implement appropriate oversight procedures when it turned to high-volume securities trading. It was not until 1980s that Daiwa’s entry to trading securities would lead to a scandal with longtime repercussions. In September 1995, the news reported that one of its New York bond traders, Toshihide Iguchi, had embezzled funds and altered bank records in order to conceal 11 years of losses than amounted to $1.1 billion. Five years later, Daiwa was still enduring the impact of the New York scandal when a Japanese court ruled on the shareholder suit when a number of former and current management officials were ordered to pay $775 million in damages to shareholders for failing to properly oversee Iguchi's trading. Occurrences of Fraud
Toshihide Iguchi is a Kobe, Japan-born US citizen who majored in psychology at Southwest Missouri State University, Springfield. He joined Daiwa’s New York branch in 1977. There he learned how to run the small back office of the branch’s securities business. Traders say that he had traded as much as $1billion in a day, striving to affect the prices through big positions, yet his reported profits averaged $4 million a year over the past decade, never exceeding $10 million in a single year. When Iguchi lost a few hundred thousand dollars early on in his trading activities, he was tempted into selling off bonds in the Bankers Trust sub-custody account to pay off his losses. As money was lost in trading mostly short-term Treasury bills, he covered the losses by selling US government securities owned by Daiwa, allegedly forging documents to hide their sale. He concealed his unauthorized sales from the custody account by falsifying account statements so that the statements would not indicate that the securities had been sold. He was able to forge some 30,000 trading slips, among other documents. When customers sold off securities that Iguchi had already sold off on his own behalf, or when customers needed to be paid interest on long-gone securities, Iguchi settled their accounts by selling off yet more securities and changing yet more records. Eventually about $377 million of Daiwa’s customers’ securities and about $733 million of Daiwa’s own investment securities had been sold off by Iguchi to cover his trading losses. By the early 1990s, it was difficult for Iguchi to continue to hide them particularly after 1993 when Daiwa made limited efforts to split up its trading and back-office functions. Yet he managed to survive for another two years before engineering his own day of reckoning. Why Violations Occurred
When Iguchi was promoted to become a trader in...