Mizuho And Tokyo Stock Exchange Likely To Wage Legal Battle

Mizuho Securities Co. and the Tokyo Stock Exchange are likely to wage a legal battle over how Mizuho's massive losses on an erroneous stock order will be covered by the two parties
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Mizuho Securities Co. and the Tokyo Stock Exchange are likely to wage a legal battle over how Mizuho’s massive losses on an erroneous stock order will be covered by the two parties. This is likely to undermine the TSE’s desire to participate in global stock exchange consolidation. It comes after at least ten private meetings between the two sides.

Mizuho Securities, a unit of Mizuho Financial Group Inc., demanded late last week that the TSE pay damages worth 40.4 billion yen, claiming that the losses, totaling 40.7 billion yen, are the result of the exchange’s faulty computer system, which failed to cancel the botched order. Mizuho Securities told the TSE that the company will file a damages suit if the exchange fails to pay damages by Sept. 15. However experts have been sceptical about Mizuho’s chances of winning the case, since they placed a mistaken order.

The exchange is not prepared to meet the request of Mizuho Securities, and the dispute is now likely to be assigned to a forum officiated by a third party such as a court. “I don’t intend to pay financial compensation, so there is an extremely high possibility of the problem being solved through a court or other third party,” says Taizo Nishimuro, chairman and chief executive of the TSE. “The TSE isn’t liable if a deliberate act or a serious error was involved. Based on that, we take the position that there is no need for the TSE to shoulder a large amount of the loss.”

According to TSE member rules, the exchange is not liable for damages excluding cases of criminal intent and gross negligence. As the exchange claims that gross negligence played no part in the sell order being fulfilled, the central issue in the forthcoming suit will be whether the TSE is guilty of such negligence.

The problem on December 8th started with a simple error when Mizuho Securities Co. placed an order to sell 610,000 shares in J-COM Co. (a newly listed job-secondment agency) at one yen each, instead of one share for 610,000. The order was an obvious blunder given that J-COM had just 14,500 shares listed on the TSE’s Mothers market for start-ups on the same day. However when Mizuho made four attempts within the next 10 minutes to cancel its original selling instruction, the TSE system rejected the order.

A chaotic switch-back ride for J-COM shares followed as Mizuho tried to buy non-existent shares from the market to cover its original sale. Other side effects included a temporary plunge of more than 300 points in the Nikkei 225 share index and about 16 billion worth of windfall profits for other securities firms that took advantage of Mizuho’s plight to buy J-COM shares at less than market value.

The TSE could have stopped most of this by suspending trade in J-COM as soon as it learned of the mistake. Instead, it blamed Mizuho for using the wrong cancellation procedure at a press conference several hours after the market close. Three days later the exchange admitted its mistake. Failure to cancel was the result of a “deficiency” in the computer operating system that had not foreseen the peculiar set of circumstances involved in the Mizuho affair.

TSE planning head Yokoyama says the chances of the Mizuho cancellation order failing were “one in a million.” Part of Mizuho’s original sales order was executed at 672,000 per share because a purchasing bid was outstanding at that price at the time of the order. But this left most of the order to be executed at 572,000, a floor price automatically created by the initial deal. A continuous series of sales followed at 572,000, leaving no space for the Mizuho cancellation to get through.

“It was hard for us to anticipate all this,” says Yokoyama, “but we still shouldn’t have blamed Mizuho.” In late December, then TSE President Takuo Tsurushima resigned to take the blame for the system problem that exacerbated confusion over Mizuho Securities’ mistaken order, which came in the wake of a major trading system glitch the previous month.

Mr Nishimuro said recently that the TSE needed to seek a tie-up or merger with an American or other overseas exchange. The exchange has already delayed its listing until 2009, as it wants first to sort out its computer system problems. But Mr Nishimuro said if the TSE had to pay Mizuho, it would still press ahead with its system upgrade. The TSE recently invited approaches by software companies who wish to help run the computer system.