Tobashi scheme

Last updated

A tobashi scheme is a financial fraud through creative accounting where a client's losses are hidden by an investment firm by shifting them between the portfolios of other (genuine or fake) clients. Any real client with portfolio losses can therefore have its accounts flattered by this process. This cycling cannot continue indefinitely, so the investment firm itself ends up picking up the cost. As it is ultimately expensive, there must be a strong incentive for the investment firm to pursue this activity on behalf of its clients.

Contents

Etymology

Tobashi (Japanese : 飛ばし) is Japanese for "flying away". It describes the practice where external investment firms typically sell or otherwise take loss-bearing investments off the books of one client company at their near-cost valuation to conceal investment losses from the clients' financial statements. In that sense, the losses are made to disappear, or 'fly away'. [1]

Structure

The scheme often makes use of off-balance sheet financing or special purpose vehicles with non-coterminous accounting periods. Assets and liabilities are transferred at fictitious valuations, in the hope that losses are deferred until the market recovers. There are no rules as to how frequently the assets are transferred, and because there is little transparency over the valuation, losses can grow at every sale. [2]

As the market rout in the 1990s was drawn out, simple loss deferrals would no longer be sufficient. Advisors would devise schemes where they would be compensated for holding on to their bad investments over time by other means, such as buying specially issued bonds or paying for non-existent services. [1]

During the Japanese stock market boom in the late 1980s, investment bankers persuaded many Japanese companies to raise capital by issuing bonds with warrants attached, although they did not require the funds for operational purposes. Clients were tempted by the potential returns the investment firms said they could generate on stock market investments. However, as stock values fell, companies were in a vicious circle where not only their investments soured, the debt remained after issued warrants expired, weakening the companies' capital base. [3]

In Japan, it is an offence under the Securities and Exchange Law for a brokerage itself to compensate the final client's losses. [2] In 1991, it became a criminal offence for brokers to compensate clients for investments which had gone bad or to otherwise conceal their losses. In the late 1990s new accounting rules introduced required investment valuations to be mark-to-market, forcing losses or gains to be shown in the financial statements. Despite the tightening, a loophole involving intangible assets continued to be exploited: Japanese acquisition accounting rules allow companies to record M&A fees on their deals as part of consideration, and goodwill on consolidation may be depreciated over 20 years. [1]

Scandals

The Wall Street Journal reports that in 1992 alone, four securities firms were exposed in the local press for various tobashi scams; Cosmo Securities, Daiwa Securities, Yamatane Securities, and the former Maruman Securities all had more than one billion yen of losses that were concealed. [4]

Yamaichi Securities

In January 1992, Yamaichi Securities executives resorted to such a tobashi scheme, setting up a separate company called Yamaichi Enterprise which opened an account at the Tokyo branch of Credit Suisse. Depositing ¥200 billion in Japanese government bonds, the Yamaichi subsidiary then used the dummy companies to generate profits for clients while eventually absorbing losses of ¥158.3 billion. A separate scheme using foreign currency bonds resulted in losses of ¥106.5 billion being hidden in Yamaichi's Australian subsidiary.

In August 1993, Japan's Ministry of Finance inspected 47 financial institutions for tobashi, all of whom denied the practice. In December the MoF asked for reports from all 289 brokers on tobashi activity.

Olympus scandal

In October 2011 amidst the controversial removal of the newly appointed chief executive officer, it was revealed that Olympus Corporation had been operating a tobashi scheme in which US$2 billion was said to have been siphoned off to cover bad investments made up to 20 years ago. [5]

On 8 November 2011, in what The Wall Street Journal referred to as "one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history", the company admitted that the money had been used to cover losses on investments dating to the 1990s. [6] and that it had adopted "inappropriate" accounting practice. The company laid the blame for the inappropriate accounting on ex-president Tsuyoshi Kikukawa, auditor Hideo Yamada, and executive VP Hisashi Mori, [7] all of whom resigned.

See also

Related Research Articles

<span class="mw-page-title-main">Finance</span> Academic discipline studying businesses and investments

Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, which is the study of production, distribution, and consumption of money, assets, goods and services . Finance activities take place in financial systems at various scopes; thus, the field can be roughly divided into personal, corporate, and public finance.

<span class="mw-page-title-main">Creative accounting</span> Euphemism referring to unethical accounting practices

Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices, but deviate from the spirit of those rules with questionable accounting ethics—specifically distorting results in favor of the "preparers", or the firm that hired the accountant. They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities, and the intent to influence readers towards the interpretations desired by the authors. The terms "innovative" or "aggressive" are also sometimes used. Another common synonym is "cooking the books". Creative accounting is oftentimes used in tandem with outright financial fraud, and lines between the two are blurred. Creative accounting practices are known since ancient times and appear world-wide in various forms.

Investment banking pertains to certain activities of a financial services company or a corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by underwriting or acting as the client's agent in the issuance of debt or equity securities. An investment bank may also assist companies involved in mergers and acquisitions (M&A) and provide ancillary services such as market making, trading of derivatives and equity securities, FICC services or research. Most investment banks maintain prime brokerage and asset management departments in conjunction with their investment research businesses. As an industry, it is broken up into the Bulge Bracket, Middle Market, and boutique market.

<span class="mw-page-title-main">Valuation (finance)</span> Process of estimating what something is worth, used in the finance industry

In finance, valuation is the process of determining the value of a (potential) investment, asset, or security. Generally, there are three approaches taken, namely discounted cashflow valuation, relative valuation, and contingent claim valuation.

Yamaichi Securities Co., Ltd. was a Japanese securities trading firm. The company announced it would cease operations on November 24, 1997 and was declared bankrupt by the Tokyo District Court on June 2, 1999.

<span class="mw-page-title-main">Repurchase agreement</span> Form of short-term borrowing

A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in government securities. The dealer sells the underlying security to investors and, by agreement between the two parties, buys them back shortly afterwards, usually the following day, at a slightly higher price.

A financial analyst is a professional, undertaking financial analysis for external or internal clients as a core feature of the job. The role may specifically be titled securities analyst, research analyst, equity analyst, investment analyst, or ratings analyst. The job title is a broad one: in banking, and industry more generally, various other analyst-roles cover financial management and (credit) risk management, as opposed to focusing on investments and valuation; these are also discussed in this article.

Net asset value (NAV) is the value of an entity's assets minus the value of its liabilities, often in relation to open-end, mutual funds, hedge funds, and venture capital funds. Shares of such funds registered with the U.S. Securities and Exchange Commission are usually bought and redeemed at their net asset value. It is also a key figure with regard to hedge funds and venture capital funds when calculating the value of the underlying investments in these funds by investors. This may also be the same as the book value or the equity value of a business. Net asset value may represent the value of the total equity, or it may be divided by the number of shares outstanding held by investors, thereby representing the net asset value per share.

<span class="mw-page-title-main">Collateralized debt obligation</span> Financial product

A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities (MBS). Like other private label securities backed by assets, a CDO can be thought of as a promise to pay investors in a prescribed sequence, based on the cash flow the CDO collects from the pool of bonds or other assets it owns. Distinctively, CDO credit risk is typically assessed based on a probability of default (PD) derived from ratings on those bonds or assets.

The following outline is provided as an overview of and topical guide to finance:

The Kazakhstan Stock Exchange is a stock exchange located in Almaty, Kazakhstan. The exchange was founded in 1993.

<span class="mw-page-title-main">Bankruptcy of Lehman Brothers</span> 2008 bankruptcy of American investment bank

The bankruptcy of Lehman Brothers on September 15, 2008, was the climax of the subprime mortgage crisis. After the financial services firm was notified of a pending credit downgrade due to its heavy position in subprime mortgages, the Federal Reserve summoned several banks to negotiate financing for its reorganization. These discussions failed, and Lehman filed a Chapter 11 petition that remains the largest bankruptcy filing in U.S. history, involving more than US$600 billion in assets.

<span class="mw-page-title-main">Accounting scandals</span> Scandal arising from the disclosure of financial misdeeds

Accounting scandals are business scandals which arise from intentional manipulation of financial statements with the disclosure of financial misdeeds by trusted executives of corporations or governments. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets, or underreporting the existence of liabilities. It involves an employee, account, or corporation itself and is misleading to investors and shareholders.

Repo 105 is Lehman Brothers' name for an accounting maneuver that it used where a short-term repurchase agreement is classified as a sale. The cash obtained through this "sale" is then used to pay down debt, allowing the company to appear to reduce its leverage by temporarily paying down liabilities—just long enough to reflect on the company's published balance sheet. After the company's financial reports are published, the company borrows cash and repurchases its original assets.

MF Global, formerly known as Man Financial, was a major global financial derivatives broker, or commodities brokerage firm that went bankrupt in 2011. MF Global provided exchange-traded derivatives, such as futures and options as well as over-the-counter products such as contracts for difference (CFDs), foreign exchange and spread betting. MF Global Inc., its broker-dealer subsidiary, was a primary dealer in United States Treasury securities. A series of perceived liquidity problems and large fines and penalties dogged MF Global starting in 2008, and led to its bankruptcy in 2011.

The Olympus scandal was a case of accounting fraud exposed in Japan in 2011 at optical equipment manufacturer Olympus. On 14 October, British-born Michael Christopher Woodford was suddenly ousted as chief executive. He had been company president for six months, and two weeks prior had been promoted to chief executive officer, when he exposed "one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history", according to The Wall Street Journal. Tsuyoshi Kikukawa, the board chairman, who had appointed Woodford to these positions, again assumed the title of CEO and president. The incident raised concern about the endurance of tobashi schemes, and the strength of corporate governance in Japan.

<span class="mw-page-title-main">Moscow Exchange</span> Stock exchange in Moscow, Russia

The Moscow Exchange is the largest exchange in Russia, operating trading markets in equities, bonds, derivatives, the foreign exchange market, money markets, and precious metals. The Moscow Exchange also operates Russia's central securities depository, the National Settlement Depository (NSD), and the country's largest clearing service provider, the National Clearing Centre. The exchange was formed in 2011 in a merger of the Moscow Interbank Currency Exchange and the Russian Trading System.

Mismarking in securities valuation takes place when the value that is assigned to securities does not reflect what the securities are actually worth, due to intentional fraudulent mispricing. Mismarking misleads investors and fund executives about how much the securities in a securities portfolio managed by a trader are worth, and thus misrepresents performance. When a trader engages in mismarking, it allows him to obtain a higher bonus from the financial firm for which he works, where his bonus is calculated by the performance of the securities portfolio that he is managing.

References

  1. 1 2 3 Soble, Jonathan (10 November 2011). "Olympus Q&A (subscription)". Financial Times. London. Archived from the original on 10 November 2011. Retrieved 11 November 2011.
  2. 1 2 "Yamaichi chief gives Diet testimony on 'tobashi' trades". The Japan Times. 9 December 1997. Retrieved 8 November 2011.[ dead link ]
  3. ↑ Duane, Dan (14 March 2010). "The Lehman Report, "Repo 105", and "tobashi"". Practical Stock Investing. Retrieved 10 November 2011.
  4. ↑ Koh, Yoree (8 November 2011). "At Olympus, High Times, Dark Shadow". The Wall Street Journal. Retrieved 8 November 2011
  5. ↑ Powell, Bill (9 November 2011) "Olympus Scandal: A Confession, but Still No Answers". TIME. Retrieved 10 November 2011
  6. ↑ Soble, Jonathan (29 September 2011). "Olympus used takeover fees to hide losses" . Financial Times. Archived from the original on 11 December 2022. Retrieved 8 November 2011.
  7. ↑ "Olympus President: Will Do Utmost To Avoid Delisting". The Wall Street Journal. 7 November 2011. Retrieved 8 November 2011.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.