3RD LD: Nikko Cordial admits execs responsible for padding, names new pres.
(EDS: RECASTING WITH NEWS CONFERENCE)
Nikko Cordial Corp. admitted Monday that its management is responsible for falsification of its group earnings for fiscal 2004, and the major brokerage house said its chairman and president will step down to take the responsibility.
Nikko Cordial, which now faces a record 500 million yen penalty for improperly booking profits, has decided to appoint Chief Strategic Planning Officer and Chief Information Technology Officer Shoji Kuwashima, 51, as its president to replace Junichi Arimura, 57. The appointment is effective on Tuesday.
Its chairman, Masashi Kaneko, 67, will also resign over the scandal at Japan's third-largest securities firm.
The improper accounting ''is attributed to not only one individual, but was caused by insufficient organizational management,'' Arimura said at a news conference after a special board meeting in the morning which approved his and Kaneko's resignation.
Nikko Cordial said it will set up a special investigation committee consisting of external experts in order to uncover the causes of the accounting problem and compile preventive measures.
Nikko Cordial initially blamed the improper accounting on one of its employees and said it considered the resignation of the two top executives unnecessary.
The brokerage last Monday announced corrections to its group earnings results for fiscal 2004 and fiscal 2005 due to the improper accounting and the Tokyo Stock Exchange has transferred Nikko Cordial stock to its supervision spot to confirm whether the company has met delisting standards.
Arimura acknowledged at the news conference that the company failed to book losses at a special-purpose company -- NPI Holdings Inc. -- in its consolidated earnings.
''In terms of consolidated earnings, we lacked awareness about ensuring management transparency,'' he said.
Nikko Principal Investments Japan Ltd. Chairman Hirofumi Hirano and President Kazuyuki Kido will also step down in connection with the accounting problems, Nikko Cordial said regarding the subsidiary.
Nikko Principal Investments established NPI Holdings, and failure to incorporate a loss of 14 billion yen at the company in the group's earnings is the center of the accounting problem.
Arimura admitted that Nikko Cordial should have incorporated the losses in its consolidated earnings as ''the (special-purpose company) was effectively controlled by NPI.''
''The origin of this affair is that of both the valuation loss and profit generated through a deal between NPI Holdings and NPI, we only incorporated valuation profits in our group earnings,'' he said.
NPI booked a gain of 14 billion yen on shares in Bellsystem24 Inc., which it acquired through NPI Holdings, as a group profit for fiscal 2004 through a derivatives deal using so-called ''exchangeable'' bonds issued by NPI Holdings.
Although the derivatives scheme resulted in a valuation loss of the same amount at NPI Holdings, the loss was not incorporated in the group earnings.
In this case, NPI purchased the exchangeable bonds and had an option to receive cash by redeeming the bonds or to exchange them for Bellsystem24 shares.
An exchangeable bond gives the holder the option to exchange the bond for stock of a company other than the issuer at some future date.
Nikko Cordial initially announced pay cuts for its management in hope of leaving the scandal behind, but its position came under fire from the financial authorities and the securities industry.
Last Friday, Financial Services Minister Yuji Yamamoto indirectly urged Kaneko and Arimura to step down.
On Dec. 18, Japan's Securities and Exchange Surveillance Commission recommended to the Financial Services Agency that a 500 million yen penalty be imposed on Nikko Cordial following the brokerage's announcement that it would correct its financial statements.
Nikko Cordial said Monday it would accept paying the fine.
Last Monday, Nikko Cordial said it would revise its consolidated net profit for fiscal 2004 to 35.14 billion yen, down from the originally announced 46.94 billion yen, on operating revenues of 295.18 billion yen, down from 313.92 billion yen. Group pretax profit would be lowered to 58.84 billion yen from 77.72 billion yen, the company said.