A Victory for Accountability

In December 2005, a “fat fingered” Mizuho Securities trader (unnamed, and now presumably unemployed) sold 610,000 shares at 1 yen instead of selling 1 share at 610,000 yen. The error resulted in Mizuho losing 27 billion yen (about US$225 million at the time), perhaps the most expensive single trading error in history.

Mizuho decided to sue the Tokyo Stock Exchange for not having a safety system in place to prevent these types of errors, and almost four years later, the court has ruled that the TSE is liable to the tune of 10.7 billion yen, or about 40% of the original damages. The presiding judge called the lack of safety measures “absurd” and that the exchange failed to exercise the suitably duty of care. In addition to a lack of failsafes preventing such a trade, the TSE’s computer system was unable to process the cancellation order after Mizuho tried to withdraw the trade.

On the one hand, I am frustrated by the ruling because of the vague formula used to calculate the award, which I think is just an arbitrary number that the judge felt was right, rather than a careful calculation. Mizuho was deemed to be partially at fault, and the judge came to the conclusion (perhaps using some type of metric that the TSE bore 70 percent of the blame. The damages to Mizuho are pretty easy to calculate: 27 billion yen — plus three years of interest! How 70% responsibility for the loss results in an award of 40% of the amount of damages makes no sense to me. Such is the problem with judges in Japan, or as some Japanese critics would call it, 裁判できない裁判官 — judges who cannot judge.

I see the ruling as a victory for accountability, which is sorely lacking in Japan. The very word means responsibility what happens, yet in Japan it is regularly translated as 説明責任, or the mere “responsibility to explain.” That has often been the approach to accountability in Japan — as long as someone can explain what happened, there is no blameworthiness or real liability. Hopefully we’ll look back at the TSE “Fat Finger” ruling as the first major move by courts to introduce a -Western- modern style of accountability.

13 thoughts on “A Victory for Accountability”

  1. Do you know who bought the shares in question? I am a bit surprised that mizuho was unable to work out a deal with the purchaser(s), though I guess they were under no obligation to return the shares.

  2. I don’t have any articles to quote, but I remember there was talk of some of the institutional traders undoing their purchase, perhaps as a sort of professional courtesy (recognizing, possibly, that with such weak safeguards the same thing could happen to them). Whether that actually happened or not I don’t know, but I recall some squabble with Credit Suisse not wanting to return what they’d bought.

    Nobody was legally obligated to return anything, though, and I remember reading an article in the Mainichi about a day-trader working from his home who hit a multi-million-dollar jackpot when he spotted the mistaken sale price.

  3. Mizuho asked the brokers on the other side to cancel the trades but they declined the opportunity to give up profits. In some cases, the trades were on behalf of clients who had no intention of giving back any money voluntarily. The day trader known as B.N.F. famously made 2.2 billion from the error. (In October last year, he put down a cool 9 billion in cash to buy the ten-floor chomp chomp Akihabara building next to the station). Foreign brokers were especially unsympathetic because no Japanese broker offered to cancel their transactions after UBS made an almost identical mistake in 2001 when trading Dentsu shares on the day they first listed.

    I think Mizuho Securities actually lost a lot more than 27 billion. That was the initial number given by president Makoto Fukuda a day after the trade but he noted the number might rise because that could only have been a paper loss estimate. Since they sold shares they didn’t have, there would have been a forced buy-in to settle which is always much more expensive. Their actual claim for compensation was 40.7 billion yen so the award from the court was only 25% of that figure.

    I heard that the trader involved wasn’t sacked but realized his future with the company was limited and so made a quick exit after the investigation concluded.

  4. Asahi Shimbun says:

    The Mizuho Securities trader personally disabled the alarm displayed on their trading terminal. However, Mizuho Securities became concerned with the mistaken order and issued several cancellation orders, but the TSE system did not accept these, and the sale orders were finalized regardless. Mizuho lost 40.7 billion yen because of this, and filed a lawsuit for damages in October 2006, citing deficiencies in the TSE trading system as the cause for being unable to cancel the orders.

    The Tokyo District Court dealt with this issue by determining damages from the point at which the court determined the TSE was able to halt trading, and the court ordered the TSE to pay 70% of this amount.

    The last sentence is a bit cryptic, but as I read it, the court made a decision as to when the TSE *should have* cancelled the trades if its system worked properly, and then made the TSE 70% responsible for damages arising from that point forward. Thus the first series of trades would have been solely at Mizuho’s risk, on the premise that the TSE would not have time to respond to these even if their system had worked to pick up Mizuho corporate’s pleas for help.

  5. Joe, thanks for showing us that explanation from the Asahi, which makes it more clear that the trader had disabled the alarm system. That’s the first I read that the trader himself was negligent beyond punching in the wrong numbers.

    SBS, I’m surprised at your surprise that Mizuho couldn’t get the traders to give back money. Mulboyne phrases it with the appropriate sarcasm — “they declined the opportunity to give up profits.”

  6. “The Mizuho Securities trader personally disabled the alarm displayed on their trading terminal.”

    Doesn’t this make the Mizuho trader more of a Nick Leeson/Jerome Kerviel/Yasuo Hamanaka type – or at least nudge him in that direction – and not merely a “fat-fingered” oaf?

  7. (con’t – hit “submit comment” too soon; mea culpa)

    The trader’s action would, at first blush, certainly seem to offer an explanation as to why the TSE was held responsible for what appears to be only about 25% of the damages incurred a Mizuho. I don’t recall any bourses recompensing Societe Gererale, et al, for the transgressions of their rogue traders.

  8. Curzon, I too am often surprised at my lack of understanding of how business works. While I do not expect individuals to show, as Sublight says, “professional courtesy,” I was under the naive impression that corporate entities would. I have now revised my thinking with respect to business and posit the following:

    …words take too long. Click my username for the graph I just made that reflects my now revised thinking on the subject, which in a word, is… poisson… (not fish) 😉

  9. That’s a little too primitive, but I agree with your point. Said otherwise, the likeliest scenario where a company would give back money that was legally but perhaps not legitimately received would be if the amount of revenue or profit was relatively small but the perceived reputation risk from keeping the money was large. Of course the definition of “legitimately” is abstract and depends on perception, and thus once again gets to reputation.

    We can see a broader version of this principle in action by watching a company’s reaction to, say: a recall of a defective product, and how much money a company expend to remedy it, considering the cost of the recall v.s. the damage to the brand reputation; or an employee sexual harrassment or discrimination case, and how much the company pays to settle it; etc., etc.

    The rules that govern the relationships between commercial persons are very straightforward and easy to understand, but they follow different, more realistic and self-interested rules than ordinary social relationships, and therefore require a more deliberate and selfish pattern of thinking.

  10. Curzon, you have just encapsulated in words what I was going for in pictures. I get a lot of raving fanboys yelling at me, which is fine and expected. But these guys tend to not realize that companies, like apple for example, are for-profit ventures. For the profit of the shareholders. Bottom line that is nicely summarized in your recall example.

    Speaking of Apple and owning a number of their products, they seem to have found the magic fine line between maximized profits and a (largely) undamaged reputation when it comes to the timely acknowledgment of flaws, defects, and vulnerabilities.

  11. I caution readers to draw a fine line between publicly-held companies and privately-held companies. The former tend to be much more calculating in their decision making, since the managers are most driven to produce financial results for the distant shareholders. The latter have a much more human element to their actions and tend to more closely follow the personality of the individual(s) in charge. This is as true in the financial industry as it is in any other industry. This is also all I can say on this topic.

  12. Thanks for those words SBS — I’d also echo Joe’s caution that the business world is not a mechanical model of companies responding to the whims of anonymous shareholders. For-profit entities can be sole proprietorships, partnerships, privately held companies, subsidiaries, joint ventures, publicly listed, publicly listed with different classes of shareholders, and in many more forms. A large part of company behavior will be based on the relationship between the management of the company and the owners. Companies may often go against the wishes of their shareholders and yet be protected from shareholder claims (at least in US courts) by the “Business Judgment Rule,” whereby courts presume that directors are motivated by a bona fide regard for the interests of the company, and the shareholder must prove otherwise.

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