SMBC Nikko complained to regulators over trader’s death after questioning

Japan’s third largest brokerage SMBC Nikko lodged a complaint with financial regulators last year after a senior trader died following intensive questioning during a probe into alleged market manipulation.

SMBC Nikko’s complaint has come to light after four of its senior executives were arrested last Friday, as prosecutors raided the company’s Tokyo headquarters and employees’ homes.

Japan’s Financial Services Agency launched a probe into the brokerage last spring. Prosecutors, who took on the case in December, are investigating the company’s handling of certain large blocks of shares, according to chief executive Yuichiro Kondo.

SMBC Nikko is alleged to have used its proprietary trading desk to boost the price of stocks being sold by institutions as large blocks, though legal experts say it is unclear where the criminality lies.

“They flipped through every bit of paper on the floor and off the floor. They also went into people’s homes, confiscated all their cell phones, personal computers, and did it in front of their families,” said one person familiar with the details of the regulator’s investigation.

Nikko staff began to agitate for the company to push back as the probe proceeded. These calls intensified in June when a senior trader in his 50s died of a brain aneurysm shortly after multiple interrogation sessions that lasted up to 10 hours.

Although Nikko did not directly link the death with the questioning, according to people familiar with the company’s complaint, it focused on the stress caused by the regulator’s investigation.

A representative from the Securities and Exchange Surveillance Commission, which ran the probe as part of the FSA, declined to comment on whether it investigated the trader or received a complaint from Nikko. It added that it also could not comment on whether it was investigating Nikko.

SMBC Nikko declined to comment.

People familiar with the details of the investigation said none of the four arrested executives, who have been detained indefinitely, believes the law was broken and that the FSA’s probe had also failed to demonstrate this.

The four men are two Japanese and two foreign nationals, including the head of Nikko’s equity business, Trevor Hill, and his deputy Alexandre Avakiants.

Since the arrests, big institutional clients have begun to sever longstanding relationships with the company, morale has slumped and executives have said they plan to resign within coming months, according to people both within and outside Nikko.

“Clients are cutting us off now, because in Japan they make decisions on reputational risk,” said one employee.

Another added that while Nikko’s equity business would not be hit hard immediately, the likely pattern would be a steady decline.

Hill and Avakiants played a pivotal role in turning the company into a powerhouse with offices in Hong Kong, New York and London. The pair’s relationships, knowledge and experience will not be easily replaced from within Nikko and external hires were unlikely given the investigation, according to people at the company who have worked with the pair for years.

“It’s not sustainable. If you want to grow the business you need people who understand the business and have been in these situations,” said an employee.

Hideyasu Ban, an analyst at Jefferies, said “some portion of the income of the investment banking business and the equity-related business of SMBC Nikko, which is estimated to have earned ¥40bn to ¥50bn ($346mn to $432mn) in the quarter, is likely to disappear for a certain period”.