Japan's AIJ chief admits loss cover-up, apologizes

TOKYO Tue Mar 27, 2012 5:09am EDT

1 of 2. A logo of AIJ Investment Advisors Co is displayed on a directory board at the entrance of a building where the advisory firm is housed in Tokyo March 21, 2012.

Credit: Reuters/Yuriko Nakao

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TOKYO (Reuters) - The president of Tokyo-based money manager AIJ Investment Advisors admitted to Japanese lawmakers on Tuesday to covering up losses of $1.3 billion in clients' pension money, but said he had no intention of cheating his clients.

In his first public comment since the scandal broke in February, Kazuhiko Asakawa apologized to clients and the financial industry for the cover-up and said he had been confident that the losses could be recovered.

AIJ lost the funds through bad bets on equity and bond derivatives, wiping out the bulk of the $2.4 billion in client assets it was managing, Japan's financial regulator, the Financial Services Agency (FSA), said last week.

More than 90 corporate pension funds, mostly smaller ones, were invested with the money manager, which was handling pensions for about 880,000 people.

"I want to use this opportunity to apologize to all beneficiaries who believed in our funds and purchased them," Asakawa told a financial committee of parliament.

Pensions are a sensitive political issue in Japan, a rapidly ageing society that is grappling with how to pay for a swelling population of retirees.

Asakawa said he personally produced a falsified investment report by inflating the asset size and investment results to cover up the fact that his fund was running at a loss.

"I didn't want to return the money to clients at a loss," said Asakawa, dressed in a dark blue suit, in response to a question from the committee. "I'm deeply sorry, but I had absolutely no intention to cheat our clients from the beginning."

LOSSES FROM 2009

The Securities and Exchange Surveillance Commission (SESC) found AIJ's investment loss totaled 109.2 billion yen ($1.32 billion) from equity and bond derivatives trading conducted between 2002 and 2011.

During the nine-year period, AIJ collected about 145.8 billion yen, mostly from small companies that entrusted their pension funds to the asset manager.

The FSA stripped AIJ of its registration as a discretionary asset manager last week as it was unable to account for most of its assets under management and had falsified its report to investors.

The FSA also ordered Tokyo-based brokerage firm ITM Securities to suspend operations for six months last week for allegedly selling AIJ's funds to clients with the knowledge that the report by AIJ was false.

ITM President Hideaki Nishimura said he considered himself a victim as he had limited knowledge of how AIJ was managing its funds.

"If I have to choose (between being a victim or a wrongdoer) then I would say I am a victim. I had no knowledge of the investment, although with regard to marketing we did wrong," Nishimura said.

AIJ's funds started losing money in about April 2009 and the losses had grown by March 2010, but the funds recorded positive returns after the Lehman shock in late 2008, Asakawa said.

The SESC said Asakawa traded Nikkei 225 futures and options and Japanese government bond futures and options through brokers in Singapore, adding that Asakawa's basic investment strategy had been to bet against the market trend by shorting JGBs, betting that yields would go up.

Asakawa said he wanted to equally split the remaining assets to holders of his funds.

According to an investigation by the SESC, AIJ held 8.1 billion yen in deposits.

AIJ's management fees totaled about 2.6-2.7 billion yen over nine years, Asakawa said, adding that he had received a salary of about 70 million yen each year.

($1 = 82.8300 Japanese yen)

(Reporting by Emi Emoto, Noriyuki Hirata and Chikafumi Hodo; Editing by Chris Lewis)

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