By Ben Hills
The world's oldest and largest financial conglomerate broke the law when it attempted to ambush the Australian Stock Exchange and wipe $15 billion off the value of Australia's public companies, the Federal Court ruled yesterday.
London-based Nomura (International) Plc was "not simply using accepted or standard market techniques to achieve legitimate commercial objectives".
Justice Ronald Sackville found, "Nomura engaged in deliberately misleading conduct designed to achieve illegitimate ends."
Nomura International is a division of the scandal-plagued, Tokyo-based Nomura securities group, founded in 1872, which has $151 billion in assets. Its Australian arm, Nomura Australia, was not involved in the attempt to rig the market but is registered here as a dealer.
The verdict is expected to trigger action against Nomura in the two cities from which the "sting" was organised - London, and in Hong Kong where legal action has been launched by the local securities regulators.
The chairman of the Australian Securities and Investments Commission (ASIC), Mr Alan Cameron, said the commission was unable to penalise Nomura International because it was not registered in Australia. But he expected that "our fellow regulators" in the UK and Hong Kong would consider suspending and/or heavily fining the company as a result of the Australian verdict.
The decision followed a trial that ran for 16 days in the Federal Court and involved millions of documents, electronic records, and taped telephone calls.
It represents a major victory for the ASIC. A jubilant official said after the verdict: "This is a 10-0 win."
Mr Cameron said it was a "landmark" decision that "... will help establish the boundaries of acceptable trading strategies not only in Australian markets but also for players in the international securities and futures markets."
The case focused on the drama of March 28, 1996, when Nomura tried to destroy billions of dollars of the value of the Australian Stock Exchange by dumping a portfolio of shares worth $600 million - more than the normal total daily turnover - in the closing minutes of trading.
The court was told that Nomura executives and traders in London and Hong Kong laughed and joked about what they were doing as they faxed instructions to 10 different brokers, hoping to drive the stock exchange's All Ordinaries index of 353 stocks down by as much as 10 per cent.
This would have destroyed $15 billion of the value of Australia's major public companies, with devastating consequences to pension funds and hundreds of thousands of individual shareholders.
The key players were Gary "Fatty" Channon, aged 28 at the time, who was in charge of equities derivatives at Nomura in London; his boss, Robert Mapstone, 35, head of Nomura's equities division; and Duncan Moss, 23, a Nomura trader based in Hong Kong.
The ASIC's barrister, Mr Dyson Heydon, QC, said phone tapes of the three "showed a cavalier, almost mocking attitude to Australian institutions and regulatory authorities. Mapstone thought it was 'good fun, quite a giggle actually'."
In the tapes, the brokers joke about Mr Nick Leeson, the young trader now dying of cancer in a Singapore jail, who lost $2.3 billion and bankrupted Britain's Barings bank.
They also laugh about Moss being "clapped in jail the next time you set foot in Australia".
Nomura's profit from the complex arbitrage play - it stood to make at least $50 million, and the three main operators were expecting to divide between $10 million and $20 million - would come from selling a matching portfolio of $600 million futures contracts which it had amassed over the previous year, the largest parcel put together by anyone in the history of the Sydney Futures' Exchange.
The futures contracts were due to expire that day and they represented a gamble that the "All Ords" would fall - Nomura's massive share-selling activity would make this a certainty. For every percentage point it fell, Nomura would make several million dollars on its futures contracts sales.
To ensure buyers for the shares, Nomura set up "bid baskets" with several brokers, offering to buy its own shares for up to 20 per cent below market price. In two cases, it did wind up buying its own shares, a practice outlawed by most stock exchanges and by Nomura's own rules.
But for several reasons, including Nomura's own "ineptitude" and its brokers refusing to dump the shares at bargain-basement prices, Nomura was left holding $150 million worth of its shares at the end of the day, and the index fell "only" 26 points, or about 1 per cent, in the last half-hour of trading.
Nomura's final profit is not clear from the evidence, although Channon, Moss and Mapstone did receive several million dollars' worth of bonuses, referred to in the tapes as "a piece of pie". Mapstone and Channon have left Nomura, and Moss still works for the company in London.
On the closing day of the case, Justice Sackville said: "On one view they went to rob a bank intending to take $20 million, but there was only $200 there."
This is the latest of a series of adverse findings against the world's largest stockbroker. In June last year, the Tokyo District Prosecutors' office filed charges against the company and two former managing directors accusing them of paying a sokaiya (racketeer) $625,000 to ensure that a shareholders' meeting was not disrupted. The company was also banned from trading on its own account on the Tokyo Stock Exchange for four months for compensating a gangster for trading losses.
In July last year, Nomura agreed to pay $84 million to Orange County, south of Los Angeles, in settlement of an action over the biggest bankruptcy in US municipal history. Nomura was one of the brokers the county used in gambling on high-risk securities which cost it nearly $3 billion.
Nomura said yesterday that it was making a "careful assessment" of the 155-page judgment, and "we are considering all of our options, including that of an appeal".
Justice Sackville adjourned the case until December 18 when he will hear submissions on what orders he should make against Nomura.
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