The accounting scandal that rocked the Japanese stock market last week escalated Monday with the arrests of the high-profile CEO and other executives ofInternet company Livedoor. Prosecutors charged Takafumi Horie, the 33-year-old founder of the company, and his colleagues with violating securities laws by filing false earnings reports. The arrests came a week after news broke that investigators had raided the company’s offices.
That action helped spark a three-day sell-off of Japanese stocks, shut down trading on the Tokyo Stock Exchange for the first time in its history, and may have prompted an executive tied to the company to commit suicide.
Horie gained icon status by flaunting the traditions of the notoriously conservative Japanese business community and by creating a hard-charging, acquisition-hungry Internet force — a reputation solidified by his attempt to take over the country’s largest TV network last year.
Three other executives, including two in charge of finances at Livedoor and the president of the company’s marketing division, were also arrested.
The latest developments cost Livedoor dearly on the stock markets once again, with shares incurring the maximum one-day loss allowed by the rules of the Tokyo Stock Exchange. The shares have plunged more than 50 percent in a week, erasing more than US$3 billion in market value and putting the company, whose main business is selling concert and event tickets online, in danger of being delisted.
The rapid-fire nature of the unfolding scandal has frightened many investors away from Japanese Web firms after the sector enjoyed a huge run-up during 2005, with Livedoor at the vanguard.
Meanwhile, the U.S. Internet sector endured a dreadful week of its own; Yahoo and eBay were among the companies that disappointed shareholders with lackluster earnings growth or lower-than-expected forecasts.
Little, if any, fallout from the Livedoor debacle is expected to impact U.S. firms, although companies that operate in Japan, such as Yahoo, may face more intense regulator scrutiny there going forward.
Last week, Horie said the company was conducting its own investigation into its accounting of a 2004 acquisition that became Livedoor’s interactive marketing unit.
Prosecutors have apparently focused on the timing of earnings disclosures; less than $10 million is believed to be involved. The company may have systematically used misleading reporting of the timing of acquisitions to boost revenue, Japanese media accounts have suggested.
Like many U.S. Internet firms, Livedoor has grown through an aggressive acquisition strategy that saw it buy some 20 companies in less than five years, many of them through stock transactions.
Japan is seen as a bellwether for U.S. Internet companies because it, along with other countries in the far East, has been several years ahead in terms of high-speed broadband and wireless access for homes and businesses.
Horie hoped to leverage the advanced communications network there to execute the kind of coup that America Online scored in the U.S. when it bought established media company Time Warner.
The arrival of true convergence — with television and Web occupying the same pipeline — has revived hope for the huge synergies that drove the AOL-Time Warner deal six years ago, said Forrester analyst Charlene Li.
Livedoor hoped to “capture the magic that never materialized in the case of AOL,” Li added. However, the brash attempt to use a loophole in the stock trading rules — rules since changed by regulators — may have brought Livedoor more attention than it wanted.
Still, the fact that investors have not overreacted to the Livedoor situation by lumping all dot-com stocks together shows that the situation is viewed, at least so far, as an isolated incident, Li added.