* 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 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 discrete 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 official 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 mater said.
The SESC intends to check compliance pertaining to
entertainment expenses at other investment banks, too, the
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.
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
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.
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."