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Investigation Wreaks Havoc on Tokyo Stocks

The exchange is forced to close early as a raid targeting a business maverick sparks sell-off.

January 18, 2006|Bruce Wallace | Times Staff Writer

TOKYO — Spooked by a police probe into one of Japan's best-known Internet entrepreneurs, investors swamped the Tokyo Stock Exchange with sell orders today, driving the market down and forcing the world's second-largest exchange into an embarrassing early close.

The exchange's woes and the massive market drop rekindled questions about the durability of Japan's economic recovery, which had enjoyed a giddy run-up in stock values over the last several months.

The Tokyo market was shuttered 20 minutes before the regular close of business after a deluge of trade orders overwhelmed its computers. It was the second time since November the exchange had to close early for technical reasons.

The sell-off followed allegations that market darling Livedoor Co. and its maverick founder, Takafumi Horie, were under investigation for manipulating company stock.

Over the last few years, Horie built an online empire and became an icon of cool by doing business in Japan his own way, which is not, generally speaking, how business is done in Japan.

Expanding his holdings through a hypermerger strategy and thumbing his nose at the staid business establishment with his spiked hair, T-shirts and lust for the limelight, the 33-year-old Horie rode the role of rebel to become one of the richest businessmen of his generation.

Now, Japanese prosecutors want to know if any of that empire was built on illegal foundations.

In an overnight raid that began on live TV on Monday and was replayed repeatedly Tuesday, investigators carted away boxes of documents from Livedoor. Horie founded the company 10 years ago, and it had grown into a $6.3-billion web of about 50 online companies that peddle everything from stocks to rock concert tickets and used cars. Horie's home was also raided.

The investigation sent Livedoor's stock into free fall on Tokyo's Mothers market for emerging companies. Nearly $1 billion was lopped off its value Tuesday before trading in the stock was temporarily suspended, amid widening media reports of accounting irregularities.

The fallout hammered the rest of Japan's high-growth, higher-risk information technology sector, where other Internet-related stocks tumbled and the spillover onto the Tokyo Stock Exchange delivered the worst one-day loss since May 2004.

Tokyo's Nikkei 225 index ended down 464.77 points, or 2.9%, at 15,341.18 in today's shortened session, bringing its three-day decline to 6.8% -- equivalent to the U.S. Dow Jones industrial average falling 740 points.

No charges have been filed. Horie delivered a halting declaration of innocence Tuesday at a news conference in his glittering office tower in Roppongi Hills, home to much of Japan's information technology industry.

But the sight of Japan's cockiest capitalist under fire was a jolt to those Japanese who have come to regard Horie as brash but effective when it came to changing Japan's stultified business and social culture. That group includes Prime Minister Junichiro Koizumi, who recruited Horie to run as part of his reformist slate that won a landslide victory in September. Horie lost, but his high-profile candidacy reflected a rebellious mood.

Indeed, some of Horie's biggest victories have been symbolic ones. In 2004, he tried to crack Japan's cozy world of professional baseball with an expansion team. He was chased away by the sport's tradition-bound owners, but his challenge forced baseball to open to a new breed of owners.

Horie also raised hackles last year when he accumulated a large chunk of stock in broadcaster Fuji TV during after-hours trading. Horie failed to take over the company but became a partner in one of Japan's biggest media companies.

This confrontational approach incurred the loathing of the Japanese business establishment. It made no secret of being appalled by his use of stock splits and after-hours trading, financial schemes that even Horie has acknowledged fall into a gray legal area here. And they despised Horie's champagne airs: He uses a private jet and frequently appears on TV talk shows.

That abundance of enemies has led to wide speculation about what -- or who -- sparked this week's raid. Investigators said they were looking into Livedoor's takeover of an online advertising company in October 2004, a deal that sent the two companies' shares soaring.

Investigators are examining whether Horie or his associates already owned the target company through a subsidiary and used the ruse of a takeover to seed demand for the stock.

But Japanese media, quoting sources inside the investigation, reported that the inquiry had widened to include scrutiny of the company's strategy of splitting its stock in huge multiples (one split was done at 100 to 1), a tactic that may create more demand for the resulting cheaper shares and increase their value.

"Livedoor used its stock as a currency to buy other companies," said Ikuo Yasuda, a Tokyo lawyer for mergers and acquisitions. "In order to enlarge the company, they needed to do M&As, and to do the large-scale M&As, they needed to raise their stock price."

Prospective buyers of the stock have beaten a retreat. And many here are wondering whether, if Horie falls, Japan's momentum for change will go down with him.

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Times staff writer Tom Petruno in Los Angeles contributed to this report.

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