AIJ – mini-Madoff or yakuza slush fund? It’s too early to tell

(Update: Jake Adelstein has left a response in our comments section)

Friday morning the news broke that Japanese regulators shut down AIJ Investment Advisors, a small investment management firm, because its 183 billion yen in funds under management had mostly gone missing. The company specialized in managing pensions for smaller companies. It seems likely that a massive fraud has taken place.

Scandals like these are not obscure, victimless crimes – they directly affect people’s lives. For instance, semiconductor equipment maker Advantest apparently had 8% of its pension assets invested with the firm. These funds are very unlikely to be recovered at this point. That’s 8% less the firm has to pay its workers post-retirement, which it will have to make up for somewhere. The unwitting employees of AIJ will no doubt lose their jobs as well. A company the size of Advantest might be big enough to weather a loss like that but 100+ other clients that were wooed by the attractive returns might not be so fortunate. Layoffs, bankruptcies, ruined lives, misery all around.

The fund reported consistent returns regardless of market conditions, achieved with exotic financial instruments—classic signs of financial fraud that corporate pension managers should have seen coming a mile away. It’s too early to know exactly what happened, though. According to the WSJ, the ratings agency R&I called attention to the suspiciously favorable returns in 2009.

Too early to call “yakuza”

Even though the facts have yet to come out, that hasn’t stopped Jake Adelstein, among others, from promoting a possible yakuza connection. That’s understandable since he bases his media career around being the West’s yakuza expert. However, I take issue with him coming out so early in favor of an organized crime angle. He doesn’t know any better than the rest of us, at least judging from the justifications he has trotted out so far.

He argued in favor of a yakuza connection in the Olympus scandal not too long ago, and the New York Times ran a report that the police were looking into yakuza involvement. However, the independent investigative committee found no evidence of yakuza and I have not seen any major refutation on that point.

Despite seemingly getting it wrong on Olympus, Jake has again taken to Twitter to play up a connection in the AIJ scandal. As with Olympus, the New York Times has run an article that echoes and bolsters his claims. The feed and the article make lots of claims that I will paraphrase here:

  • AIJ is a Yamaguchi-gumi front (Jake)

  • This is true because one of the board members (not the head) was convicted of paying protection money to a corporate extortionist (sokaiya). And once someone has paid millions in protection money and gotten caught, that means they will turn around and steal billions (I am assuming because the yakuza tells them to). (Jake)

  • The head of the firm is also ex-Nomura (NYT)

  • The DPJ-led government turns a blind eye to financial fraud because the former FSA minister may have accepted yakuza donations at some point. (Jake)

  • The Nomura connection and the dates when AIJ and another firm received approval to offer financial services means the AIJ scandal “shares many characteristics with the Olympus scheme” (NYT)

  • Jake sent an email to a friend explaining his suspicions about AIJ in 2008. He says that his sources told him AIJ manages the Yamaguchi-gumi’s pensions.

I am ready to be wrong, but at this point I am not convinced. These unconfirmed claims, appeals to authority, and guilt-by-association tactics do not amount to actual evidence to justify labeling this a yakuza crime. Yet, anyway.

It may well be that the Yamaguchi-gumi raided AIJ and took all the money, or demanded favorable treatment as a customer. But a serious and contemptuous crime has apparently taken place even without a yakuza connection, so there’s no need to rush to apply a label, in my opinion. Jake and Hiroko Tabuchi of the New York Times, I beg you to please rein in your speculation until we have more facts.

Actual damage possibly smaller than 183 billion yen

It’s also worth noting that the 183 billion yen number includes potentially phony returns, so if the entire cumulative return of 245% is phony but the cash remained, that would leave AIJ with 53 billion in cash. That would leave “most of” the money missing even with most of the principal intact. That’s still a lot it’s indeed gone, but we don’t even know that much right now. And if the company has only been lying about returns that means they have likely been fraudulently collecting return-based fees.

It’s my understanding that investment managers are required to keep funds in segregated accounts at trust banks, to avoid the easy temptation of embezzlement. For example, if I buy a mutual fund, the fund manager doesn’t get to touch my money at all (unless I am totally naive). It goes into a trust, and the manager simply gives instructions on which securities to purchase based on the contract. AIJ was a “discretionary” manager, meaning that the managers had free rein over (but not direct access to) the funds as long as the action fit a pre-determined investment policy. Of course that assumes AIJ was following procedures when collecting funds. If AIJ was somehow just accepting cash and managing without a trust arrangement, that is a dreadful problem and could warrant prosecution even without any theft. The regulators’ statement (PDF) orders AIJ to “immediately confirm” the status of funds, including fund segregation. Ick.

Update: According to a story over this weekend, the firm apparently invested most of the cash in a single Cayman-registered investment trust of its own creation, which it then outsourced management of to a British-affiliated bank in Bermuda. This would suggest they may have used the funds as a way to get around fund segregation and gain access to the funds.

23 thoughts on “AIJ – mini-Madoff or yakuza slush fund? It’s too early to tell

  1. Jake Adelstein and Hiroko Tabuchi quickly replied on Twitter that the article does not directly allege yakuza involvement. This is true, but why talk about yakuza links at all if you aren’t insuinating some sort of relevance to the current story? The fact that someone paid off a sokaiya a decade ago seems pretty irrelevant to me.

    I am treading on thin ice by discussing work stuff on the blog, but I would like to add that the FSA already requires bankers (and, I assume, other regulated financial institutions like brokers and investment managers) to do an “anti-social forces check” on every counterparty they deal with. This is a pretty thorough process which includes Googling for rumors that the individual or company is related to the yakuza. There are dedicated teams who follow up on particularly questionable cases. As a bank employee, I probably could not open an account for Jake Adelstein without going through a detailed case review with our compliance department.

  2. “Despite seemingly getting it wrong on Olympus, Jake….”

    I recall that he even threw down on Twitter and made a bet that Yakuza involvement was central. It must be hard to make ends meet as a freelancer in the current media environment and big media is too anxious for Yakuza angles to make otherwise ho hum Japan stories saleable.

    Shotgun reporting. Various claims in big press outlets March of last year: meltdown, fuel pool 4 ablaze, coming catastrophic MOX explosion. Claim three things without evidence, get one right, people start talking Pulitzer. Blast away and you are bound to be right sometimes.

  3. The other frustrating thing in this weird yakuza-behind-everything cottage industry is that there is a strong possibility that the yakuza may indeed be “involved” in these scandals but most likely in a fringe and minor way. Surely some of Olympus’ dozens of crooked offshore investment firms used sketchy people, money, or connections. But that is pretty much irrelevant to the main story — white collar elites at the tops of the companies are the ones who made the decisions to carry out the fraud. All your Yokoo and Axes Japan type guys were from blue-chip firms and the top private universities. Screaming “yakuza” makes it sound like only sworn criminals commit crimes in Japan, and society’s elites are truly looking out for everyone.

    Being on expert on something usually entails some manner of subtlety and differentiating situations on the degree of involvement. But the yakuza here are being pushed as part of a personal ambition/career plan rather than with any regard for the actual facts.

  4. This is an interesting note from Bloomberg Businessweek’s article on Woodford and Olympus:

    “Additionally, Jake Adelstein, author of the book Tokyo Vice and the underworld reporter for Yomiuri, another major Japanese newspaper, told Woodford that he had heard Woodford’s life was in danger.”

    http://www.businessweek.com/magazine/the-story-behind-the-olympus-scandal-02162012_page_6.html

    This seems to suggest that Adelstein was one of the reasons that Woodford was so paranoid about the yakuza in the first place, as the story was breaking.

  5. “Screaming “yakuza” makes it sound like only sworn criminals commit crimes in Japan, and society’s elites are truly looking out for everyone.”

    That, and he was also screaming “yakuza are truly looking out for everyone” after the tsunami….

    It all makes one wonder how much Tokyo Vice has in common with Speed Tribes.

  6. “Jake Adelstein and Hiroko Tabuchi quickly replied on Twitter that the article does not directly allege yakuza involvement. This is true, but why talk about yakuza links at all if you aren’t insuinating some sort of relevance to the current story?”

    My hunch is that both Hiroko and Jake are connected to Yakuza.
    Yakuza needs more publicity these days especially Bunta Sugwara had suggested his “retirement”from silver screens.
    http://hochi.yomiuri.co.jp/entertainment/news/20120224-OHT1T00022.htm?from=yol

  7. The BloombergBusinessWeek article Marxy had linked sez “Sankei, one of Japan’s largest and most reputable newspapers, was also reporting that the missing Olympus funds were linked to Japanese organized crime.”

    Personally,I have second thought about Sankei being one of most reputable newspaper in the country.Anyway,their article sez “overseas media reports the Olympus money went to organized crime including Yamaguchi-gumi 「指定暴力団山口組を含む犯罪組織に流れた」オリンパスをめぐる一連の買収資金については、海外メディアでこう報じられるなど、暴力団の関与が取り沙汰されている”
    .http://sankei.jp.msn.com/affairs/news/111121/crm11112108350001-n2.htm

    Sankei mentioned no specific facts,but simply saying”this is what gaijins are talking about”.Now,who could be the one to give information of Yamaguchi-gumi involvement to oversea media,long before Japanese media had any information as such?My guess is everyone is landundering the same infromation coming from the very same source.

  8. Jake Adelstein is basically on the same quality as Uesugi Takashi, reporting sensationalizing facts without any substance evidence. I think the last year natural disaster and the following nuclear crisis journalism was truly revealing in exposing who has the real quality and dignity as a journalist and who has not.

  9. I’m very familiar with this firm and have looked at it several times over the years. I’d personally classify it under the heading “cooperative entity” aka 共生者.
    That’s based on my own research. I was working with another reporter from NHK on a story about this firm in 2008 and 2009 but we both decided that we couldn’t prove anti-social forces connections although we strongly suspected them. I sent a letter to the FSA about the firm and talked to a police officer about it as well.
    Nothing happened.
    A cooperative entity, as defined by the National Police Agency of Japan, is a firm that knowingly works with anti-social forces (which include the yakuza but are not limited to them) to make a profit. In AIJ’s case they allegedly took capital from yakuza forces—and that’s from a law enforcement source that has looked at the firm before. Does that make them “a yakuza company?”
    The fact that one of their former board members is a former Nomura executive prosecuted for paying off a gangster backed racketeer 総会屋 is not insignificant. Individuals that will work with criminals in the past generally do it again.
    If you’re going to defraud people and run off with lots of money, working with professionals and criminals is probably a good way to do it.
    I thought the New York Times coverage was very well-researched and nowhere does it say that the “yakuza” was responsible for it.
    Yakuza are capable of doing complicated financial transactions and taking over businesses as well as fiddling with stock prices.
    Here’s a case that barely made the English press that you may find instructive.
    You’ll notice that a great deal of time passed from when the crime was committed and when people were arrested.
    http://www.japansubculture.com/2011/11/tokyo-police-arrest-ex-ceo-of-tse-listed-company-for-financial-crimes-yakuza-involved/

  10. Jake:
    In terms of condemning the crime and being open to the possibility of organized crime involvement, I am on your side. I just felt like it was appropriate to respond to your tweets and the NYT story with caution since it’s so early in the story.

  11. Link’s dead,Jake.

    “Yakuza are capable of doing complicated financial transactions and taking over businesses as well as fiddling with stock prices.”

    No Doubt.NHK had covered this in length about 4 years ago.
    http://www.nhk.or.jp/special/onair/071111.html

    ” I was working with another reporter from NHK on a story about this firm in 2008 and 2009 ”

    Asking this from curiousity,but which department this NHK reporter belongs to?I have friends there.Could be someone I know of…..

    “we couldn’t prove anti-social forces connections although we strongly suspected them. I sent a letter to the FSA about the firm and talked to a police officer about it as well.
    Nothing happened”

    I’m not surprised especially SESC is notoriously understaffed.But aren’t you basically saying “Absence of evidence is not evidence of absence”?.

  12. I took a course in Corporate Governance with a fairly well-published professor, and he gave a portion of each class to the Olympus and Daio scandals.

    I asked him whether or not he could buy the allegations of yakuza involvement bandied around mostly by the foreign press. He made the point that tabloid journalism is of little use to academics examining the corporate system or analyzing the governance flaws. In that sense, the line between kaishahō research and keihō research is broadly drawn.

    That being said, another professor of corporate law used to love to make to formulate conclusions based on the incentives of people at the centers of scandals. For instance, in the case of Yoshiaki Murakami, this prof was convinced that Murakami’s series of missteps were taken with the direct intent of trying to make good on promised returns to “anti-social forces” invested in his fund.

    He had no evidence to stake this claim, but his reasoning was sound and it spun a good yarn in front of a hundred grad students.

    Would he have posted it on Twitter? Hells no.

  13. Companies have been paying sokaiya for longer than that, but my understanding is that the original sokaiya were paid to keep out actual protesters (cf. Chisso hareholders meeting case), not cause the ruckus themselves, like what you’d see in the movie “Kin’yū Fushoku Rettō”.

  14. Foreign Policy has an article written up solely based on interview with you-know-who.
    http://thecable.foreignpolicy.com/posts/2012/02/24/obama_takes_on_the_yakuza?hidecomments=yes

    “The Yamaguchi-gumi is the Wal-Mart of organized crime. If you count smaller Yakuza groups under their umbrella, they are more than half of the market of Japan’s 79,000 Yakuza members and associates. They also support the DPJ and ruling coalition of Japan,” said Adelstein, adding that the Yamaguchi-gumi has ties to Olympus and TEPCO, two firms that operate within the United States.”

    Whao.

    “With so many Japanese companies invested in the U.S. and with so many American companies investing in the Japanese stock market, which is yakuza infested, it becomes a matter of U.S. national security,” Adelstein said. “Because of the yakuza’s deep involvement in the Japanese economy and Japan’s economic ties with the U.S., the actions of the Yakuza effect the U.S. economy, therefore it’s not just a Japanese problem.”

    Now that Americans are pulling out from both Iraq and Afghanistan,expect drones start bombing Ashiya and Kabukicho.

  15. NPA has been conducting anti-Yamaguchi-gumi operation for the past few years which resulted the arrest of kingpin Kenichi Shinoda AKA:Shinobu Tsukasa..The operation was very evident in Nagoya where I was living until last summer for Nagoya is the home ground for Kodo-Kai,the current nucleus group of Yamaguchi-Gumi.
    Ministry of Finance is also about to change taxation scheme from April 1st and one of the issue is establishing a system demanding individuals who possess more than 50million yen worth oversea properties.to report to the authority.This is a counter measure to deal with capital flight,but also to fight with organized crime.
    Looking into every Japanese media reporting American sanction against Yamaguchi-Gumi,I see not a single artilce mentioning displeasure from Japanese government source,nor from Americans whom never hesitate commenting under anonymity when not amused with their counterparts in Tokyo.”The Japanese government doesn’t seem to be on board”meme Adelstein repeating elsewhere seems to me an anormaly.

  16. I reposted the link below to the Inoue Kogyo case. It’s an example of yakuza involved in a listed company and some semi-complicated financial crime.

    There isn’t a smoking gun in the AIJ case but the criminal records of people who were board members shouldn’t be irrelevant. Are we supposed to wait until the police make the first arrests to mention that?

    The Financial Services Agency has been significantly deboned and defanged after the DPJ took power and appointed Shizuka Kamei, the minister of financial services. There has been a fair deal written about the negative effects of his reforms and his past connections to the Yamaguchi-gumi are well-known if you want to research it.

    The DPJ appointed former foreign minister Seiji Maehara receiving political donations and having friendly relations with an advisor to the Yamaguchi-gumi named Jun Shinohara has also been an issue raised in the Japanese Diet.

    It’s an odd thing that Japan has no national law forbidding pay-offs or collusion with the yakuza but that the National Police Agency had to ask every local prefectural government to erect ordinances instead, resulting in 47 different ordinances with great similarities.

    The Inoue Kogyo case is below. I’ve seen almost nothing about it in the English press.

    http://www.japansubculture.com/2012/02/tokyo-police-arrest-ex-ceo-of-tse-listed-company-for-financial-crimes-yakuza-involved/

    PS. Aceface, the arrest made after the NPA declared war on the Yamaguchi-gumi Kodo-kai in September of 2009 was of Kiyoshi Takayama, the number two, not Mr. Tsukasa. Mr. Tsukasa was jailed shortly after assuming power in 2005, for violations of the firearms laws. He served his time and was released from jail last year.

  17. To Adamu:
    Jake:
    In terms of condemning the crime and being open to the possibility of organized crime involvement, I am on your side. I just felt like it was appropriate to respond to your tweets and the NYT story with caution since it’s so early in the story.
    Adamu-sama,
    I agree with you that caution is warranted. I think the NYT story was very objective and well-researched, and raises valid points. I probably should have waited to put together a lengthy article before tweeting what are I believe are valid conclusions of organized crime involvement based on research I did on the firm for many months in the past. However, I’m not the police so I don’t have the power to seize and search evidence that would definitely prove it. I will be more prudent in the future and your points are well-made.
    If you’ll look at the Inoue Kogyo article and the Japanese press reports, you’ll see that the police use association with yakuza as evidence of yakuza involvement in criminal cases. Association can take the form of receiving capital, engaging in financial transactions, or exchanging information. In the case of Shizuka Kamei, former minister of financial services—that association not only including hanging out and being friends with yakuza bosses, it included getting about five million dollars paid into his bank account from a yakuza boss—which he admitted in a session of the diet. However, that may be not be definitive proof that he was a yakuza associate for some people.

  18. “Aceface, the arrest made after the NPA declared war on the Yamaguchi-gumi Kodo-kai in September of 2009 was of Kiyoshi Takayama, the number two, not Mr. Tsukasa. Mr. Tsukasa was jailed shortly after assuming power in 2005, for violations of the firearms laws. He served his time and was released from jail last year.”

    I’m aware of the difference.Cops were after Tsukasa from the 90’s related with Takumi killing.So I’ll take back “few years”and change to “a decade”.

    “The Financial Services Agency has been significantly deboned and defanged after the DPJ took power and appointed Shizuka Kamei, the minister of financial services.”

    First of all,Kamei Shizuka isn’t a DPJ member(head of People’s New Party.)Secondly,it’s a bit difficult to say his primal motivation for derailing financial reform is based on his tie with the underworld.Kamei does have connection with some figures in the underworld like Kyo Eichu,but he and member of his party are heavily dependant to the support of postal office chiefs which has huge interest in killing Koizumi era postal-financial reform.Kamei,also being former police official also has police fraternity as his voting machine.He may need support from organized crime in some occasion,but it’s not crucial ones.

    “The DPJ appointed former foreign minister Seiji Maehara receiving political donations and having friendly relations with an advisor to the Yamaguchi-gumi named Jun Shinohara has also been an issue raised in the Japanese Diet.”

    Not exactly sure where this fits in.But Maehara was never in chare of finance in his career.He was also against public construction works which has been pork barrel project that had benefited yakuza.for decades.

    “It’s an odd thing that Japan has no national law forbidding pay-offs or collusion with the yakuza but that the National Police Agency had to ask every local prefectural government to erect ordinances instead, resulting in 47 different ordinances with great similarities”

    I think 暴力団対策法 IS a national law forbidding pay-offs or collusion with the yakuza.,The scheme you’ve mentioned was built in LDP years and DPJ has no responible of.And if prefectural police is in charge of law enforcement in it’s jurisdiction,it’s only natural that prefectural government is in charge of identifying local yakuza group/

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