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22nd of October 2018

Economy



Nikko chief Takumi Shibata faces claim of fiddling share scheme

Seven former executives at Nikko Asset Management have accused the Japanese fund management group and its chief executive of fiddling an incentive plan and submitted a claim for more than $100m in damages.

The plaintiffs, all American citizens, were among hundreds of employees who were given so-called stock acquisition rights (SARs) under schemes rolled out after the 2009 acquisition of Nikko from Citigroup by Sumitomo Mitsui Trust Bank (SMTB).

Such instruments were issued to allow holders to benefit from an increase in the value of Nikko if the privately held company did not carry out an initial public offering over the next 10 years.

But in a lawsuit filed in the Southern District of New York, the executives allege that the company’s chief, Takumi Shibata, engineered a scheme to make the instruments practically worthless by valuing Nikko at less than the strike price. He then told the executives in 2015 that they must either sell their SARs back to the company for virtually nothing or forfeit them altogether.

As a result of that “Hobson’s Choice,” the claimants say the defendants not only misappropriated tens of millions of dollars, but also made room for Nikko to create a new incentive plan designed to benefit Mr Shibata personally.

The case marks a fresh battle for Mr Shibata, a former chief operating officer at Nomura Holdings who stood down from Japan’s biggest investment bank in 2012 in the wake of an insider-trading scandal at the bank.

The 65-year-old executive, who was a key architect of Nomura’s acquisition of parts of Lehman Brothers in 2008, joined Nikko in the summer of 2013 as executive chairman. He was named chief executive and president the following January.

Mr Shibata and his co-defendants — Nikko, SMTB and its parent, Sumitomo Mitsui Trust Holdings (SMTH) — tried to dismiss the suit earlier this year, arguing that the case should have been brought in Japan. But last week judge Robert Sweet threw out that motion, saying the defendants maintained sufficient contact with the US to warrant jurisdiction. No date has yet been set for the court case. The defendants are contesting the lawsuit.

Daniel Fetterman of Kasowitz Benson Torres, counsel to the claimants, described that decision as “a significant victory.” His clients were victims of an “effort to rig stock option plans and defraud and deprive them of valuable rights,” he said.

Nikko, SMTB, SMTH and Mr Shibata declined to comment.

Nikko had $216bn in assets under management at the end of June. It is 90 per cent owned by SMTB and 10 per cent by DBS, the Singaporean bank. SMTB is in the process of combining its fund-management businesses to create Japan’s biggest, with more than $600bn in AUM.

SARs are similar to stock options, in that the holder profits from a rise in a stock price. But they differ in that the holder does not have to buy anything to receive the proceeds. In the Nikko case, scheme participants had the option, but not the obligation, to sell their SARs back to Nikko at the “fair market value” of the company, minus a pre-identified strike price.

By the end of 2015, all claimants had left Nikko. But by then, they allege, Mr Shibata had devised a scheme to force them to forfeit their SARs in order to free up money for a new pay plan. According to the suit he did this by hand-picking three evaluators — a little-known Tokyo firm called Plutus, UBS (Nikko’s house bank) and PwC (Nikko’s auditor) — and providing them with limited information. Their estimates fell short of strike prices in two separate but similar plans, created in 2009 and 2011.

The trio valued Nikko at ¥617 per share, below the 2009 plan’s ¥625 strike price — calculated in the depths of the great recession — and much less than the 2011 plan’s ¥737 strike price, which reflected Nikko’s increased value two years later.

Their valuation was also well below the ¥853-per-share value calculated in mid-2014 by Duff & Phelps — a widely used valuation firm that the defendants excluded from the process. UBS and PwC declined to comment. Plutus did not respond to requests for comment.

In the blurb to its purchase offers Nikko advised plan members that the fair value of the shares was less than the relevant strike price, and that Nikko was willing to buy the SARs for a nominal ¥1 per share. The SARs would be extinguished outright if they refused.

The claimants are seeking damages in excess of $100m. They include Tim McCarthy, the former chairman and CEO of Nikko, Billy Wilder, former president and chief investment officer, and Fred Reidenbach, former chief financial officer. They are represented jointly by Kasowitz Benson Torres and Todd Higgins of Crosby & Higgins. Shearman & Sterling is acting for the defendants.

Additional reporting by Nobuko Juji in Tokyo

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