The Dark Side of SBI’s “Ghost” Subsidiary

At one point funds reached 100 billion yen through borrowing from SBI and underwriting corporate bonds. Where did these funds end up being diverted to?

May 20, 2012

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No address information, no phone number details. Can a business function like this? Even though it is a 100% subsidiary of SBI Holdings (hereinafter referred to as SBI), this company is utterly obscure, or rather, it is enigmatic.

E-research. When we called NTT information and asked for this company name, we found that it is not registered. When we asked a private research company, they could only provide us with the old address for headquarters. However, it is unmistakeably an SBI group company.

This ghost-like company has only once drawn the attention of investors. It was in June, 2009. The E-research name appeared on the invitation to the SBI shareholders’ meeting. Literature showed the following as transactions with related parties, in other words transactions with the parent company SBI (see the table on the following page).

>Corporate bond underwriting: 39 billion yen End-of-term balance: 39 billion yen

>Borrowing of Funds: 67.5 billion yen End-of-term balance: (short-term borrowing) 45.5 billion yen

If we add all this together, the end-of-term balance was 84.5 billion yen – an eye-popping amount. Incidentally, the E-research name did not appear on SBI shareholders’ meeting invitations in the two years prior to that. That is to say that it suddenly appeared at the 2009 shareholders’ meeting as a company that borrows huge amounts and underwrites corporate bonds.

Why did this company appear as a transacting party for the main body of SBI at this point in time?

How was E-research set up in the first place? And how did it end up under the SBI umbrella? Furthermore, it would be interesting to see how it grew (?) in order to be able to borrow such huge amounts and underwrite corporate bonds.

Originally backed by CSK’s Aozono

According to old private research company documents tracked down by this magazine, in October, 1990, right in the middle of the internet boom, E-research was set up as an information provider for investors. Start-up capital was 287,300,000 yen. Large shareholders were CSK and Fujigin Capital and the CEO was Hiroyuki Ono who was originally an analyst at Nomura Research Institute.

CSK was a IT company founded by Mr. Isao Ohkawa, the famous venture capitalist in Japan, but after his death has been suffered from the financial difficulties and competition. In 2011 CSK was merged by SCS, a subsidaiary of Sumitomo corporation and now called SCSK.

According to a former executive of the company, the original backer was Masahiro Aozono, formerly of Nomura Securities and, at the time, Executive Vice President (later to be Chairman & CEO) of CSK.

“Even though Ono is originally from Nomura Securities, he was an analyst and is just an average person. The tailwinds of the internet boom were still blowing but, contrary to the internet-type company name, it is an unspectacular research company. But is it really still on the go? I thought it had been dissolved a long time ago.”

It was obvious that the management of this unspectacular research company would come up against a brick wall. In February, 2002, three years after its establishment, it received an injection of capital from SBI and, along with merging with Capital Dot Com and becoming a 100% subsidiary, it announced that it would be an subcontractor for SBI’s consulting business.

7 years later, E-research, which was supposedly a low-profile business that analysed market scale and business models, was suddenly engaging in large volume transactions with the main body of SBI.

Furthermore, related party transactions with SBI that can be considered as abnormal have been continuing since then. 65.2 billion yen was borrowed in FY2010, 9 billion yen was borrowed and 22 billion yen’s worth of corporate bonds were underwritten in the following financial year. How can a company with start-up capital of less than 300 million yen continue to procure such high amounts of funds? This can only be strongly driven by the main body of SBI, in other words, by Yoshitaka Kitao (CEO).

In the financial year in which E-research suddenly appeared in related party transactions, in other words, in 2008, the kind of large shareholder that SBI could not even wish for appeared like the messiah. The mystery large shareholder was Orbis Investment Management on which our last issue contained a detailed report. Orbis has their headquarter in British Bermuda and was registered in the U.K.

Leading Shareholder Orbis’s Fund Procurement

SBI and the Japanese real estate company Zephyr which went under in July, 2008 held each other’s shares. As soon as the 700,000 SBI shares held by the failed Zephyr were released, Orbis took them on for a total of 8.5 billion yen. This transaction was, within the industry, most extraordinary and was the beginning of the unusual relationship between Orbis and SBI.

Currently, Orbis is thought to hold around 4.5 million SBI shares but the average procurement cost was 12,678 yen. The closing price on May 11 was 5,650 yen which is actually a huge loss of over 55%. If it were a serious fund, it would not be able to continue to hold SBI shares out of regard to shareholders who have suffered heavy losses. However, Orbis does not seem to be panicking. This is all for these lucrative funds but where exactly do they come from?

When SBI, which is lending, through related part transactions, unusually large amounts of funds to its subsidiary which seems to have almost no real function, diverts funds with which Orbis takes over SBI shares, this obscure company is an ideal repository, isn’t it?

On the May 7, this magazine sent a questionnaire to this ghost-like company via SBI.

1. What is the huge amount of funds procured from SBI being used for?

2. Why is the company under the umbrella of SBI?

3. Is the reason that neither the company’s telephone nor address details are available due to the fact that this is a dummy company?

Typically, however, we have not received a response. The mystery just gets deeper but the flow of these dubious funds is gradually showing its true colours.

On April 26, SBI published results for the fiscal year ending March, 2012. The figure for sales was 145,074 million yen. Net profit for the year was only 3,200 million yen despite declaring realized profit which will be expanded on later.

Investigative reports in this magazine in the past have focused on how SBI explains its mysterious transactions that were only disclosed to Hong Kong Exchanges and Clearing, the disengagement of its loss-making subsidiary, Homeostyle, as a consolidated subsidiary and the high value sale of SBI ALApromo (now SBI Pharma) which was exposed for actions tantamount to manipulating account settlement and making a mockery of the stock market.

This was the touchstone for measuring the leader of the SBI Group Kitao’s (SBI CEO who proudly talks about the capital market as a pure and fierce undercurrent) conscience with regard to the stock market but we were roundly cheated of our expectations.

It was really not possible to conceal Homeostyle’s sales losses so the approximately 900 million yen was appropriated as extraordinary losses. SBI should perhaps appropriate the whole 1,500 million yen that it admitted to this magazine that it lent to Homeostyle as extraordinary losses as well.

Furthermore, the problem is ALApromo shares. 5.83% of this holding (79.15%) was sold on March 30, the eleventh hour before the end of the financial year. This is a blatant use of realized profits for the purpose of settlement. This also goes for the transparent timing but what surprised investors more was that the sales profit was 4,200 million yen.

This is because the ALApromo market capitalization was over 72 billion yen when calculated from the number of shares sold. Even though ALApromo’s sales only amount to less than 60 million yen and it has been leaking losses of around 1 billion yen each financial year for the last few years, market capitalization works out at this ridiculous figure of 72 billion yen. And although it is not clear how it was calculated, appropriation to extraordinary profits was made with a kind of “what are you gonna do about it?” attitude. Tohmatsu, the auditor who is turning a blind eye, is also to blame.

Twitter from Takeshi Natsuno, Independent Non-executive Director

Moreover, SBI has positioned its bio-related companies such as ALApromo as one of its three core businesses that underpin the new group structure along with asset management and financial services. As if it weren’t already enough, SBI used pages 98 – 107 of its financial report to insist on the promising future of its bio-related businesses.

SBI’s joint R&D projects with a number of universities and research institutes and the agreement between SBI’s ALA (5-aminolevulinic acid which is a type of amino acid) business and the Bahrain government are mentioned. Bragging about one of these businesses being featured on television or in a newspaper is also conspicuous in a similar vein to cheap home shopping commercials.

The kicker is the Twitter mutterings that seem to have mobilized the group executives.

“I drink this stuff. The health supplements NatuALA Bio, NatuALA BCAA and the cosmetic range ALAplus that have been marketed by this company won Gold and Silver Quality awards at Monde Selection 2012!!!”

This is Takeshi Natsuno, creator of i-mode of NTT Docomo and Independent Non-executive Director at SBI, who is raving about these ALApromo products in a manner that sets your teeth on edge. Natsuno amply exhibits his popular frivolity – maybe this is a ploy to curry favour with Kitao?

Natsuno declined to answer this magazine’s questions saying “I discussed this with my lawyer and I feel it is better that I don’t make any comment,” citing the ongoing dispute between SBI and this magazine.

But however much SBI’s products and businesses are praised and flattered, there is no change in miserable state in which SBI finds itself.