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Regulators Shut U.S. Operations of Daiwa; Authorities File More Charges

November 3, 1995

NEW YORK (AP) _ Federal authorities Thursday ordered Daiwa Bank Ltd. to shut its U.S. operations and announced a sweeping criminal indictment against the Japanese bank and a top manager, accusing them of directing a cover-up of $1.1 billion in bond trading losses.

It is the biggest U.S. criminal action against a foreign bank since authorities charged Bank of Credit & Commerce International in 1991 with recording nonexistent loans and deposits to inflate its assets and profits.

The move darkened an already pervasive cloud over the Japanese banking system, which is struggling to rid itself of $400 billions in shaky loans stemming from risky lending policies in the 1980s.

It also shows that authorities believe the Daiwa cover-up, initially blamed by bank management on one rogue New York bond trader, actually reached up the ladder of Daiwa Bank.

``At every turn, impermissible, unlawful options were selected by a number of (bank) officials, and that we can’t tolerate,″ U.S. Attorney Mary Jo White said in announcing the indictment at a Manhattan news conference.

Daiwa Bank could face more than $1 billion in fines if convicted on the 24-count indictment, including obstructing examinations of its branches, making false statements to federal agencies, and forging records.

The criminal taint against Daiwa, the 10th largest commercial Japanese bank and 21st in the world, is sure to compound its financial woes. The Osaka-based bank, with assets of $318 billion, has one of the most troubled loan portfolios among Japanese banks.

The bank issued a statement saying it intends to defend itself against the criminal charges and that in agreeing to the order shutting U.S. operations, it was not admitting wrongdoing.

Daiwa said it viewed the decision by U.S. prosecutors to file criminal charges as ``regrettable and unfortunate.″

It continued to portray itself as a victim of a scheme hatched by Toshihide Iguchi, a senior bond trader in its New York office, who last month pleaded guilty to hiding the $1.1 billion loss over 12 years.

The indictment and shutdown was announced before dawn in Japan on a national holiday, muting the immediate impact on financial markets there.

Federal and state banking regulators said Daiwa has signed a consent order agreeing to end its activities in 11 states by Feb. 2. There is the possibility of an extension to permit an orderly departure.

Daiwa’s U.S. operations include an asset management business, a commercial lending operation and other banking services.

The joint announcement by the Federal Reserve, the Federal Deposit Insurance Corp. and officials from New York, California, Illinois, Massachusetts, Florida and Georgia said Daiwa has agreed to provide regulators with its books and records.

Other than BCCI, international banking experts couldn’t recall another instance where U.S. authorities shut down a foreign bank for supervisory reasons. ``It could be unprecedented,″ said John B. Cairns, partner and international banking expert at Willkie Farr & Gallagher, a New York law firm.

A spokesman at the Federal Reserve said the action against Daiwa is the first time the central bank has used enhanced powers under a 1992 law to shut down a foreign bank. But he said the Fed joined with the Office of the Comptroller of the Currency in 1992 in shutting down a small Saudi-owned bank, National Commercial Bank.

Regulators said they were ousting the bank from the United States because it ``engaged in a pattern of unsafe and unsound banking practices and violations of law over an extended period of time that are most serious in nature.″

Iguchi first disclosed his wrongdoing in a rambling letter to Daiwa’s president on July 20 that detailed how he hid $1.1 billion in losses through 30,000 unauthorized trades.

In the criminal complaint, prosecutors accused senior Daiwa executives of meeting with Iguchi at the end of July at a Manhattan hotel to discuss how he could hide his trading losses. The executives agreed at the time that Iguchi should continue a cover-up by selling securities and forging bank records, they said.

Iguchi has confessed to a continued coverup of his losses over the next two months before the bank publicly disclosed the scandal on Sept. 25. He has pleaded guilty to forging bank records and embezzlement.

Masahiro Tsuda, a former manager of Daiwa’s New York branch, was accused in Thursday’s complaint of conspiring with other senior executives to hide Iguchi’s coverup. He was charged with deceiving federal regulators, forging records and failing to report Iguchi’s apparently criminal behavior. The indictment said others, who were not named, also were involved.

Tsuda was released after promising to transfer $100,000 in cash from Japan for bail by Nov. 9 and surrendering his passport. He is to undergo strict pretrial supervision.

In a statement, Daiwa lashed out at the indictments.

``Blaming Daiwa Bank in the criminal courts for thievery and other unauthorized activities makes no sense. It is clear that the bank remains the sole victim of Mr. Iguchi’s wrongdoing,″ said Takashi Kaiho, Daiwa Bank’s new president. Kaiho was appointed after the resignation last month of several top managers.

``Not a single customer of the bank suffered any financial loss,″ he said.

But federal prosecutors said that Daiwa customers lost money in connection with the unauthorized sale of $377 million in customer-owned securities managed by Iguchi.

The customers who were hurt included Daiwa employees in the United States and other U.S. customers. They were not identified.

Kaiho said the bank agreed to the shutdown of its U.S. offices to avoid ``conflict″ with U.S. authorities.

In addition, Daiwa said it will restructure its business operations around the world, reducing offices, limiting trading activities and imposing ``strict new management controls and reporting procedures.″

The bank said it will seek to reduce its staff to 7,000 from the current 9,600.

``Our greatest strength lies in Japan and Asia,″ so the bank will concentrate on those areas, said Kaiho.

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