Trial for Dot-Com Entrepreneur in Japan Shows Shift in Japan's Economy

When the trial of Japan's most famous dot-com entrepreneur opens Monday, a much wider issue will also be before the court: this nation's tenuous shift to a more freewheeling market economy.

Takafumi Horie, 33, founder and former president of Internet startup Livedoor Co., faces charges of securities laws violations in falsifying earnings data to inflate the company's stock price. He has repeatedly said he is innocent.

But in many ways, the Livedoor scandal is more than a story of one cocky tech-savvy man. It has brought far deeper repercussions to Japan's financial world.

Donning T-shirts instead of dark suits, Horie, a dropout of the prestigious University of Tokyo, defied old guard Japan Inc., long dominated by a web of cross-shareholdings in which companies hold stocks in each other to bar outsiders.

Starting about two years ago, Horie tried — unsuccessfully — to buy a professional baseball team and take over a radio broadcaster that is a key part of a powerful media conglomerate led by Fuji Television Network Inc.

Horie was praised by some as a courageous innovator but scoffed at by others as a brash novice. He appeared on TV talks shows and used his visibility to draw individual investors to Livedoor's stock, raking in millions as the Net portal that Livedoor operated grew increasingly popular.

At one point, Horie seemed destined to celebrity status.

He dated actresses. The Roppongi Hills complex where he lived and worked became synonymous with the beautiful life. He ran for parliament last year and won high-profile backing from the ruling party, although he lost the election. He appeared in TV commercials. He announced he was investing in space travel as a business.

But that's as good as the ride got.

In January, rows of prosecutors marched into Roppongi Hills in a raid that was televised live on nationwide TV. Horie was arrested a week later.

The sell-off of Livedoor's stock that followed triggered a plunge in Tokyo shares dubbed "Livedoor shock" and even shut down trading because the exchange couldn't handle that many trades.

Individual Livedoor investors, estimated to number some 220,000 people at one point, were outraged.

Prosecutors say Horie and other Livedoor executives used dubious methods to buy up other companies, set up "dummy" companies to hide losses and jack up the capital value of their group companies.

Livedoor is suspected of pretending to have an affiliate acquire a company that was already under its control and selling stock in that company to doctor its books, prosecutors say.

Key to the trial is how much Horie knew about such antics and whether he was aware of wrongdoing or if he had conspired with the other executives to fabricate results, as prosecutors contend.

If convicted, he faces a maximum penalty of five years in prison or 5 million yen ($42,000) in fines, or both.

The whole affair stirred up loud criticism of the government for failing to adequately monitor securities transactions and other financial practices because Livedoor's repeated stock splits and aggressive takeovers had been widely known.

Parliament passed a bill in June to tighten oversight of investment funds amid calls for stricter and clearer rules governing the securities market, partly in response to the Livedoor scandal.

But so far, there has been no move to create an independent body that would be equivalent to the U.S. Securities and Exchange Commission. Japan only has a smaller team of bureaucrats with lesser punitive authority to do the job, and mostly relies on prosecutors to crack down on such wrongdoing.

Robin Greenwood, assistant professor of finance at Harvard Business School, said that Horie used a loophole in regulations about stock splits to edge up Livedoor shares.

In the U.S., stock splits don't change the value of a company. In Japan, stock splits made shares momentarily unavailable for trade, jacking up the price as supply failed to keep up with demand, he said.

Settlements in Japan were still done with paper shares, while in the U.S., the paper system has long been replaced by electronic trading. That allowed Horie to carry out totally legal stock manipulation, Greenwood said.

"It is somewhat surprising how long it took them to figure out what was going on," he said in an e-mail.

Greenwood and others worry that the Livedoor debacle will keep individual investors away from the market. Some of the efforts Horie represented were positive, such as openly bidding for companies and appealing to investors. But stodgy old-style management could exploit Horie's fall from grace to block sorely needed change.

"It is convenient for Japan's old guard," Greenwood said. "They can claim that Horie was bad news for shareholders, and therefore that this justifies any steps that management might take to entrench themselves."

There's no doubt that Horie symbolizes an emerging new generation of daring Japanese who look remarkably different from the docile "salaryman" who clung to jobs backed by a lifetime employment system, which is gradually unraveling amid global competition.

Horie, released on bail in April, has stuck to his assertion of innocence. The Japanese police and incarceration system are infamous for coaxing confessions out of those in custody.

"I have not admitted to any of the charges, and I did not order or approve illegal acts," Horie said in a statement to the media in May.