REFILE-Lavish nights at Club Godfather opened door to Japan pension fund bribery case

Thu Oct 10, 2013 8:27pm EDT

* Pension fund exec handed suspended 18-mth jail term

* Two KTOs fund execs also given suspended sentences

* Regulator cracking down on excessive client entertainment

* Regulator also probing unrelated cases at investment banks

By Nathan Layne

SAPPORO, Japan, Oct 10 (Reuters) - When a Tokyo-based investment manager set out to win business from a pension fund in northern Japan, the cost included dozens of nights drinking at Club Godfather, a discreet watering hole with a $200 cover charge and kimono-clad hostesses.

Kazuyoshi Takahama, now 71, was treated to more than 50 nights out at the club in Sapporo as KTOs Capital Partners, a hedge fund, lobbied for a share of the $245 million pension fund he helped oversee as its chairman, prosecutors say. Takahama favored shochu, a local liquor, while his free-spending hosts ordered up expensive wines.

Somewhere along the way, by his own admission, Takahama lost his way. From late 2009 through early 2010, he persuaded the investment committee he chaired to turn over a sixth of the pension fund's assets to KTOs to manage, prosecutors say. He didn't blink when two KTOs executives handed him an envelope with about $25,000 in cash at a hotel cafe in November 2010.

"I thought the money was a thank you for all I had done and a plea for my future cooperation," Takahama told a Sapporo court last month as he pleaded guilty to accepting a bribe. Takahama was sentenced to 18 months in prison on Thursday, a sentence that was suspended for three years.

While viewed as an extreme case, the prosecution of Takahama has been watched as a sign of the increasing willingness of Japanese regulators and prosecutors to crack down on what they see as the corrupting influence of entertainment. Like others in his position, Takahama was subject to the same regulations as public officials by virtue of the fact that the fund he oversaw was partially invested in Japan's national pension scheme.

The Securities Exchange and Surveillance Commission (SESC) brought a parallel case against KTOs in June for spending 2.6 million yen ($26,500) on entertaining Takahama and others, invoking a clause against providing "special benefits" to clients in Japan's financial instruments law.

In an unrelated case, the SESC has been investigating whether staff at Deutsche Bank AG provided what could be considered excessive entertainment to pension fund executives, people familiar with that probe say.

The securities market regulator is also looking into the same issue in a regular inspection of Goldman Sachs, one of several issues it is examining at the investment bank, people familiar with the matter said.

The SESC intends to check compliance pertaining to entertainment expenses at other investment banks, too, the people said.

Neither Deutsche nor Goldman have been accused of any wrongdoing. Both declined to comment for this article. In both cases, the investigations could end without the SESC taking any action. Club Godfather, which was referenced by prosecutors in laying out the case against Takahama, had no role in the matter apart from being a repeat destination for his entertainment.

WINDING DOWN

Wining and dining of pension fund executives had been a relatively common practice, said people involved in marketing financial products to the funds - until a 2012 scandal in which AIJ Investment Advisors was shut down for defrauding pensioners of more than $1 billion.

The lure of a big payday drove some bankers to shower pension fund executives with entertainment and gifts before that AIJ case. A broker stood to earn 3 percent of the size of a financial product sold to a pension fund upfront, regardless of its ultimate performance.

"There was a group of pension fund executives who made it clear they wanted to be entertained and treated well, and there was a group of sales professionals more than willing to oblige them," said a Tokyo-based investment adviser whose clients include pension funds.

The fund formerly overseen by Takahama manages the pensions of 7,000 employees of gasoline stand operators in Japan's northernmost prefecture of Hokkaido. The fund is typical of a class of nearly 600 pension funds across the country that have been formed as collectives along regional and industry lines.

Most are struggling to meet targeted returns fixed in a high-growth era and are set to be wound down as part of pension system reforms. Prime Minister Shinzo Abe has championed policies aimed at pushing more of Japan's retirement savings into assets like stocks that offer the potential of higher returns for an ageing population.

Takahama first came under scrutiny because he also oversaw the allocation of pension money to AIJ, which was found to have spent lavishly to secure the business of dozens of pension funds, investigators have said. Hokkaido police initially started building their case against Takahama on the basis of entertainment, according to two people familiar with how the investigation progressed.

Club Godfather, which became the meeting place of choice for Takahama, is a converted wedding hall featuring memorabilia from the famous Hollywood mafia series. Patrons sit in plush leather sofas and enjoy the company of hostesses.

RED FLAGS

In June, a week before Takahama was arrested, a senior SESC official gave a presentation to Japan's association of investment advisers in which he warned that some pension fund executives were considered public officials, and that entertaining them was potentially a criminal offence.

It was a message that the rules - known to the financial industry following a series of high-profile prosecutions of public officials for receiving entertainment and gifts in the 1990's - would be more actively enforced.

"If there are cases of huge entertainment then it's something we cannot ignore. We have to step in and send a signal to the market," another senior SESC official told Reuters.

Deutsche Bank has internal guidelines for entertainment. But a review of procedures within the bank found efforts to circumvent them, including the filing of inaccurate expense receipts, said a person with knowledge of the matter.

KTOs also had a check in place. According to the Sapporo prosecutor, the investment firm's compliance officer told the head of the company, Shin Tokioka, that the money being spent on entertaining Takahama was too much and had to stop.

Tokioka, 56, and another KTOs executive, Masashi Kikuhara, 47, pleaded guilty to paying a bribe, and were also given suspended sentences on Thursday. Tokioka has disputed the prosecutor's assertion that the money was aimed at keeping the fund's business, telling the court he paid Takahama for introducing him to other pension funds.

The Sapporo case highlights core governance issues that experts say are common to such pension funds in Japan. Takahama, a veteran of the defunct Yamaiichi Securities, was one of the few people at the pension fund with a strong grounding in finance, allowing him to easily sway the judgement of the investment committee he chaired, the prosecutor said.

Similar to the arrangements at other pension funds, Takahama also did not draw a fixed salary as chairman. That lack of compensation could leave people in Takahama's position susceptible to feeling they should be compensated in other ways, people involved in marketing to pension funds said.

"Despite your position as a quasi-public official you willingly and frequently accepted entertainment ... over several years," Shusaku Tatara, the presiding judge, said on Thursday in sentencing Takahama. "And on top of it all, you accepted a 2.5 million yen bribe."

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