Toshihide Iguchi and Daiwa Bank Securities Trading Scandal

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Toshihide Iguchi and Daiwa Bank Securities Trading Scandal
by balisunset, Sep 7, 2008
Prior to 1995, Daiwa Bank, Ltd., was one of the top twenty banks in the world in terms of asset size, and it was Japan’s twelfth largest institution.
Unfortunately, due to lax internal risk control management, Daiwa Bank and a handful of its employees engaged in illegal securities trading, culminating in extensive losses and a massive cover-up that led to sixteen counts of federal felony charges, a $340 million fine-the largest criminal fine ever imposed in the United States at that time-and political tensions between the United States and Japan. Although Daiwa's losses were some of the largest of its kind in history, the massive cover-up that ensued created the most damage.

On July 13, 1995, the executive vice president of Daiwa's New York branch, Toshihide Iguchi, wrote a thirty-page letter to the president of Daiwa Bank in Japan. In his letter, Iguchi confessed to losing $1.1 billion while dealing in U.S. Treasury bonds over the past eleven years. Daiwa filed an initial report with the Japanese Finance Ministry's Banking Bureau on August 8, 1995. The Bureau told Daiwa to investigate the accusations, and a final report was submitted one month later. On September 18, 1995, six days after receiving the findings from Daiwa, the finance minister reported the findings to the U.S. Federal Reserve. Following the conclusion of the U.S. Federal Reserve Board investigation, Daiwa was fined $340 million-a reduction from the original $1.3 billion fine-and pled guilty to sixteen federal felonies, including two counts of conspiracy to defraud the United States and the Federal Reserve Bank, one count of misprision of a felony, ten counts of falsifying bank books and records, two counts of wire fraud, and one count of obstructing a bank examination. Furthermore, the U.S. Federal Reserve Board forced Daiwa to end all U.S. operations within ninety days of the ruling. Toshihide Iguchi had been hired by Daiwa in 1977 to manage the back office of the branch's securities business.

The New York branch managed the custody of U.S. Treasury bonds, bought by customers and by the bank itself through a subcustody account held by Bankers Trust. In 1984, Iguchi was promoted to trader, but he did not relinquish his back-office duties, thus creating the first breach of internal controls. The scam began when Iguchi lost an initial $200,000 in 1984 and tried to regain his losses by selling off bonds in the Bankers Trust account. Because Iguchi was both a trader and securities manager, he was able to conceal his unauthorized transactions by falsifying the Bankers Trust account statements that he managed through the back office of Daiwa's New York branch. Unfortunately, Iguchi could not recoup the losses, and the debts began to grow even larger. When customers wanted to sell off securities or collect interest on bonds that Iguchi had already sold, he settled their accounts by selling even more securities and falsifying the records. In the course of the eleven-year scandal, Iguchi sold approximately $377 million of Daiwa's customer securities and $733 million of Daiwa's own investment securities; he purportedly forged 30,000 trading slips to cover his losses.

Interestingly enough, in the end not one Daiwa Bank customer lost money in this scandal. During the 1995 federal investigation, Iguchi revealed that two additional unnamed traders had also incurred serious losses totaling approximately $97 million between 1984 and 1987. These losses had been concealed from bank regulators by shifting the losses to Daiwa's overseas affiliates and a shelf company set up in the Cayman Islands. During the investigation, it was discovered that the bank had been operating an unauthorized trading area, which was disguised as a storage room during regulatory examinations. It was also revealed that U.S. regulatory agencies had warned Daiwa in 1993 and 1994 about their poor internal controls; one in particular was Iguchi's dual role as a trader and securities manager. Perhaps the most damning blow to Daiwa's reputation was the fact that the bank knowingly engaged in a cover-up of the situation. Upon receiving Iguchi's first letter in July 1995, Daiwa began selling off assets before reporting the fraud to authorities, and it seems as though they also attempted to transfer the losses to Japan in order to avoid U.S. scrutiny. Furthermore, U.S. officials were discontented with Japan's finance ministry for belatedly reporting the fraud to U.S. authorities despite regulations requiring immediate notification.

Iguchi pleaded guilty to misapplication of bank funds, false entries in bankbooks and records, money laundering, and conspiracy and was sentenced in New York to four years in prison and a $2.6 million fine, which he will probably never be able to pay. Iguchi requested to serve the first fifteen months in solitary confinement in Manhattan's Metropolitan Correction Center-for fear of what the other prisoners would do to him-before being transferred to a relatively plush minimum-security facility in Pennsylvania. Several of Daiwa's senior managers were forced to resign, and on September 20, 2000, five years after the initial charges, a Japanese court ruled that eleven current and former board members and top executives were to pay the bank $775 million in damages, a decision that was immediately challenged. Today, Daiwa has withdrawn from all overseas banking operations and has instead been focusing on becoming the strongest regional bank in Osaka, Japan.