Tobashi scheme
Encyclopedia
A Tobashi scheme is a financial fraud where a client's losses are hidden by an investment firm by shifting them between the portfolios of other (genuine or fake) clients. Any real client with portfolio losses can therefore have their accounts flattered by this process. This cycling cannot continue indefinitely and so the investment firm itself ends up picking up the cost. As it is ultimately expensive there must be a strong incentive for the investment firm to pursue this activity on behalf of their clients.
with non-coterminous accounting periods. Assets and liabilities are transferred at fictitious valuations, in the hope that losses are deferred until the market recovers. There are no rules as to how frequently the assets are transferred, and because there is little transparency over the valuation, losses can grow at every sale.
As the market rout in the 1990s was drawn out, simple loss deferrals would no longer be sufficient. Advisors would devise schemes where they would be compensated for holding on to their bad investments over time by other means, such as buying specially issued bonds or paying for non-existent services.
During the Japanese stock market boom in the late 1980s, investment bankers persuaded many Japanese companies to raise capital by issuing bonds with warrants attached, although they did not require the funds for operational purposes. Clients were tempted by the potential returns the investment firms said they could generate on stock market investments. However, as stock values fell, companies were in a vicious circle where not only their investments soured, the debt remained after issued warrants expired, weakening the companies' capital base
.
In Japan, it is an offence under the Securities and Exchange Law for a brokerage itself to compensate the final client's losses. In 1991, it became a criminal offence for brokers to compensate clients for investments which had gone bad or to otherwise conceal their losses. In the late 1990s new accounting rules introduced required investment valuations to be mark-to-market, forcing losses or gains to be shown in the financial statements. Despite the tightening, a loophole involving intangible asset
s continued to be exploited: Japanese acquisition accounting rules allow companies to record M&A fees on their deals as part of consideration, and goodwill
on consolidation may be depreciated over 20 years.
executives resorted to such a tobashi scheme, setting up a separate company called Yamaichi Enterprise which opened an account at the Tokyo branch of Credit Suisse
. Depositing ¥
200 billion in Japanese government bonds, the Yamaichi subsidiary then used the dummy companies to generate profits for clients while eventually absorbing losses of ¥158.3 billion. A separate scheme using foreign currency bonds
resulted in losses of ¥106.5 billion being hidden in Yamaichi's Australian subsidiary.
In August 1993, Japan's Ministry of Finance inspected 47 financial institutions for tobashi, all of whom denied the practice. In December the MoF asked for reports from all 289 brokers on tobashi activity.
had been operating a tobashi scheme in which US$2 billion was said to have been siphoned off to cover bad investments made up to 20 years ago.
On 8 November 2011, in what The Wall Street Journal
referred to as "one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history", the company admitted that the money had been used to cover losses on investments dating to the 1990s. and that it had adopted "inappropriate" accounting practice. The company laid the blame for the inappropriate accounting on ex-president Tsuyoshi Kikukawa, auditor Hideo Yamada and executive VP Hisashi Mori all of whom resigned.
Etymology
Tobashi is Japanese for "fly away". It describes the practice where external investment firms typically sell or otherwise take loss-bearing investments off the books of one client company at their near-cost valuation to conceal investment losses from the clients' financial statements. In that sense, the losses are made to disappear, or 'fly away'.Structure
The scheme often makes use of off-balance sheet financing or Special purpose vehiclesSpecial purpose entity
A special purpose entity is a legal entity created to fulfill narrow, specific or temporary objectives...
with non-coterminous accounting periods. Assets and liabilities are transferred at fictitious valuations, in the hope that losses are deferred until the market recovers. There are no rules as to how frequently the assets are transferred, and because there is little transparency over the valuation, losses can grow at every sale.
As the market rout in the 1990s was drawn out, simple loss deferrals would no longer be sufficient. Advisors would devise schemes where they would be compensated for holding on to their bad investments over time by other means, such as buying specially issued bonds or paying for non-existent services.
During the Japanese stock market boom in the late 1980s, investment bankers persuaded many Japanese companies to raise capital by issuing bonds with warrants attached, although they did not require the funds for operational purposes. Clients were tempted by the potential returns the investment firms said they could generate on stock market investments. However, as stock values fell, companies were in a vicious circle where not only their investments soured, the debt remained after issued warrants expired, weakening the companies' capital base
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
.
In Japan, it is an offence under the Securities and Exchange Law for a brokerage itself to compensate the final client's losses. In 1991, it became a criminal offence for brokers to compensate clients for investments which had gone bad or to otherwise conceal their losses. In the late 1990s new accounting rules introduced required investment valuations to be mark-to-market, forcing losses or gains to be shown in the financial statements. Despite the tightening, a loophole involving intangible asset
Intangible asset
Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset...
s continued to be exploited: Japanese acquisition accounting rules allow companies to record M&A fees on their deals as part of consideration, and goodwill
Goodwill (accounting)
Goodwill is an accounting concept meaning the value of an entity over and above the value of its assets. The term was originally used in accounting to express the intangible but quantifiable "prudent value" of an ongoing business beyond its assets, resulting perhaps because the reputation the firm...
on consolidation may be depreciated over 20 years.
Scandals
The Wall Street Journal reports that in 1992 alone, four securities firms were exposed in the local press for various tobashi scams; Cosmo Securities, Daiwa Securities, Yamatane Securities, and the former Maruman Securities all had more than on billion yen of losses that were concealed.Yamaichi Securities
In January 1992, Yamaichi SecuritiesYamaichi Securities
was a Japanese securities trading firm. The company announced it would cease operations on November 24, 1997 and was declared bankrupt by the Tokyo District Court on June 2, 1999.- History :...
executives resorted to such a tobashi scheme, setting up a separate company called Yamaichi Enterprise which opened an account at the Tokyo branch of Credit Suisse
Credit Suisse
The Credit Suisse Group AG is a Swiss multinational financial services company headquartered in Zurich, with more than 250 branches in Switzerland and operations in more than 50 countries.-History:...
. Depositing ¥
¥
¥ is a currency sign used by the Japanese yen and the Chinese yuan currencies. The symbol resembles a Latin letter Y with a double stroke. The base unit of both currencies shared the same Chinese character pronounced yuán in Mandarin Chinese and en in Standard Japanese...
200 billion in Japanese government bonds, the Yamaichi subsidiary then used the dummy companies to generate profits for clients while eventually absorbing losses of ¥158.3 billion. A separate scheme using foreign currency bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
resulted in losses of ¥106.5 billion being hidden in Yamaichi's Australian subsidiary.
In August 1993, Japan's Ministry of Finance inspected 47 financial institutions for tobashi, all of whom denied the practice. In December the MoF asked for reports from all 289 brokers on tobashi activity.
Olympus scandal
In October 2011 amidst the controversial removal of the newly-appointed chief executive officer, it was revealed that Olympus CorporationOlympus Corporation
is a Japan-based manufacturer of optics and reprography products. Olympus was established on 12 October 1919, initially specializing in microscope and thermometer businesses. Its global headquarters are in Shinjuku, Tokyo, Japan, while its USA operations are based in Center Valley, Pennsylvania,...
had been operating a tobashi scheme in which US$2 billion was said to have been siphoned off to cover bad investments made up to 20 years ago.
On 8 November 2011, in what The Wall Street Journal
The Wall Street Journal
The Wall Street Journal is an American English-language international daily newspaper. It is published in New York City by Dow Jones & Company, a division of News Corporation, along with the Asian and European editions of the Journal....
referred to as "one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history", the company admitted that the money had been used to cover losses on investments dating to the 1990s. and that it had adopted "inappropriate" accounting practice. The company laid the blame for the inappropriate accounting on ex-president Tsuyoshi Kikukawa, auditor Hideo Yamada and executive VP Hisashi Mori all of whom resigned.