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JPMorgan in Insider Trading Probe

Zacks Equity Research

There seems to be no end to regulatory and legal woes for JPMorgan Chase & Co. (JPM). Now, the Japanese regulatory authority, Securities and Exchange Surveillance Commission (:SESC), is probing the role of the company in revealing non-public information to a Japanese hedge fund.

JPMorgan has been accused of leaking confidential information related to the planned equity offering by Nippon Sheet Glass Co. Ltd in August 2010. People who are familiar with the investigations stated that an employee of JPMorgan shared this particular information with a Tokyo-based hedge fund, Asuka Asset Management.

The shares of Nippon Sheet Glass had fallen nearly 15%, two weeks before the planned share offerings. Moreover, the trading volume was about four times the normal level. In August 2010, Nippon Sheet Glass announced 234 million share offerings, leading to an equity dilution of 35% for its existing shareholders.

It was during the time of the offerings, that Nippon Sheet Glass came to know of the information leakage. At that time, both the underwriters – JPMorgan and Daiwa Securities Group Inc. – were asked to perform internal investigations. However, none came up with any evidence regarding insider trading.

But, the SESC probe revealed that Asuka had benefited nearly ¥60.5 million ($760,000) from this disclosure of information and the source of the information was an employee of JPMorgan. Asuka admitted the involvement of one of its fund manager in the alleged insider trading. Hence, the SESC has now recommended a penalty of ¥130,000 ($1,600) against Asuka.

However, there has been no indication whether JPMorgan would be penalized for leaking confidential data. Under Japanese law, the source of information is not held legally responsible for any insider trading activity. Fines are only imposed on those who benefit from using the insider data. Additionally, even if JPMorgan is penalized, the fines are expected to be nominal.

In a separate case, the SESC also fined a unit of Sumitomo Mitsui Trust Holdings Inc. for alleged insider trading activities in relation with Mizuho Financial Group Inc.’s (MFG) equity offerings in 2010. One of the underwriters, Nomura Holdings Inc. (NMR) was the source of the information leakage.


Amidst the financial crisis, with many sources of revenue turning out to be unproductive, getting benefits from disclosing non-public information has become a lucrative business for many brokering houses. Further, Japanese regulators are often condemned for not giving stringent fines to all those involved in the insider trading activities.

JPMorgan is the first foreign bank to get involved in a controversy related to insider trading in Japan. Moreover, earlier this month, the company had announced a huge trading loss that has threatened its overall financial stability. These incidents have also brought the company’s internal control mechanism under the scanner.

Currently, JPMorgan retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.

Read the Full Research Report on JPM

Read the Full Research Report on NMR

Read the Full Research Report on MFG

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