Japan Has Trouble With New Market

Friday, December 22nd 2000, 12:00 am

By: News On 6

TOKYO (AP) â€” One year after trading began on Japan's Mothers stock market, most of the companies listed have watched their share prices fall below their initial listings. But an even bigger concern involves suspicion that the market has been infiltrated by gangsters.

The Mothers market â€” a loose abbreviation of the phrase ``market of the high-growth and emerging stocks'' â€” was expected to fill a gap in Japan's financial system by helping entrepreneurs raise money that they couldn't get from risk-averse banks.

But despite high expectations, the share prices of about 70 percent of the 27 companies listed on the technology-laden exchange have fallen below their original values, compelling other firms to postpone their Mothers debut, said Hidetaka Takano, a spokesman for the Tokyo Stock Exchange.

The exchange operates Mothers, which marked its first year of trading on Friday.

The sell-off has been fueled by the global decline of Internet stocks and Japan's lagging economy. But speculation that underworld figures are infiltrating high-tech startups is raising questions about the prospects for a sector that Japan hopes will propel its economy out of a decade of near-zero growth.

Takano said news reports earlier this year of gangster infiltration of some of the exchange's listed companies contributed to share price declines. However, most of the damage has been limited to those companies singled out in the reports, he said.

Some analysts say allegations of mob involvement have cast a pall over startups, which make up most of the new market.

``What happened last year set back the rise of a real entrepreneurial culture,'' said Ron Bevaqua, senior economist at Commerz Securities Japan. ``It makes investors less willing to invest.''

In October, police arrested Masafumi Okanda, president of online music distributor Liquid Audio Japan, the first company to list on Mothers, for allegedly holding a company director captive in 1999.

Liquid Audio Japan, an affiliate of Redwood City, Calif.-based Liquid Audio, sells computer systems for delivering music over the Internet.

``We haven't seen any evidence'' that Okanda is involved with the mob, said Liquid Audio Japan spokeswoman Ai Nakayama. She denied that the company has links to organized crime.

Liquid Audio's shares have lost 98 percent of their value since the company's November 1999 listing, falling from 6.1 million yen ($54,164) to 125,000 yen ($1,110) during trading on Friday.

The company's financial results can't have helped. Liquid Audio lost 3.74 million yen ($33,200) in the July-September quarter, more than three times the 1.18 million loss ($10,480) in the same period of the previous year.

While mob investment in companies is not illegal, and police have yet to establish a link between gangsters and companies whose shares trade on Mothers and Nasdaq Japan, officials say small businesses are vulnerable to such influence.

Banks have traditionally been loathe to lend to start-ups because they view them as risky investments. With few alternative sources of cash, companies desperate for funds sometimes find the lure of quick money from organized crime groups too attractive to resist.

Crime groups typically take stakes in small companies desperate for capital in the hope of making easy profits when the companies list their shares, said Hiroshi Shinohara, a National Police Agency official.

He added that organized crime groups see startups as a relatively safe and easy way to make money as revenues from gambling, prostitution and other traditional rackets stagnate amid Japan's economic woes.

Japan has an estimated 81,000 yakuza. They've been forced to grow increasingly sophisticated, moving into Internet porn, other high-tech crimes and stock market manipulation.

Gangsters ``move in the direction in which they can make money. If they can get into these new stock markets, they will,'' Shinohara said.

Mothers and competitor Nasdaq Japan have less stringent listing requirements than the Tokyo Stock Exchange â€” precisely to help new companies raise money at a time when Japan is struggling to catch up with the West in Internet technology.

To bolster confidence in its new markets, exchange officials have cooperated with police since May to obtain more information about companies suspected of having mob connections.

In July, police arrested the chairman of Internet music distributor Entremuse on suspicion that he employed mobsters to force the firm's president to resign during a boardroom dispute. The arrest came just before the company was to list its shares on Mothers, Shinohara said.

Japan isn't the only Asian country that has problems policing its stock markets.

China's pioneering Shanghai Stock Exchange celebrated its 10th anniversary last week amid suspicion that Chinese investment funds are engaging in price manipulation and other shady dealings to rip off small investors.

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On the Net:

http://www.tse.or.jp/english/mothers/statistics.pdf (need Adobe Acrobat Reader)