Toshihide Iguchi was an Executive VP and US Government Bond trader at Daiwa Bank ‘s New York Branch, held responsible for $1.1 billion in unauthorized trading losses accumulated over a period of 12 years beginning in 1983.
Daiwa Bank was owned by Resona Holdings, Inc. (TYO: 8308) is the holding company of Resona Group, the fifth-largest banking group in Japan as of 2012.
Resona Holdings is headquartered in the Kiba area of Koto, Tokyo. The main operating entities of the group are Resona Bank, a nationwide corporate and retail bank headquartered in Osaka, and Saitama Resona Bank, a smaller bank headquartered in Saitama City which primarily serves Saitama Prefecture. Most of these banks’ operations are descended from Daiwa Bank and Asahi Bank, which merged in 2003.
Resona was formed as the Osaka Nomura Bank in 1918. This entity served as the financing arm of the Nomura zaibatsu founded by Tokushichi Nomura. Its securities brokerage operation separated in 1926 to form Nomura Securities, now Japan’s largest securities company. The bank was renamed Nomura Bank in 1927 and became the main bank for the Osaka Prefecture government in 1929, immediately following the 1929 stock market crash.
The Nomura zaibatsu was dissolved in the wake of World War II, and the bank was renamed to The Daiwa Bank in 1948. It was one of the only major banks that offered both banking and trust services during the postwar era.
In 1995, a New York-based Daiwa bond trader, Toshihide Iguchi, lost $1.1 billion speculating in the bond market and was charged with forgery and falsification of bank records. The bank was criminally indicted in November 1995 and ordered to leave the U.S. market; in the wake of this incident, there were talks of a merger between Daiwa and Sumitomo Bank, which would have created the world’s largest bank at the time. Daiwa closed its United States operations in 1996, and eventually pulled out of overseas banking entirely in 1998.
Born in Kobe, Japan, Iguchi moved to the U.S. at age 19 to spend a few months with his father who was living in New York temporarily on business. Enchanted with America, he decided to go to college there and enrolled in Southwest Missouri State College where he majored in psychology. He married, and worked as a truck salesman at a local Chevrolet dealer during his college years. After graduating, he was hired at Daiwa’s New York branch to work in the Securities Custody Department. In 1980, he was given the role of a portfolio manager.
In 1983, he lost $70,000 trading Federal Reserve Notes and concealed this loss to protect his reputation and job. He continued trading attempting to recoup the loss; however, the loss accumulated. Meanwhile, the Securities Custody Department expanded to the largest department of Daiwa’s New York Branch as the Japanese investment in US securities soared. Toshihide Iguchi’s department was producing more than 50% of the Branch’s profits. While he was managing the fastest growing division of Daiwa’s international division, his clandestine trading operation escalated to recoup ever deepening losses.
In July 1989, Toshihide Iguchi and his two junior traders made a $3 billion bet on US Treasury Bonds and lost $350 million. Immediately after this incident, as a result of whistle-blowing by one of the dealers, the New York Fed sent an examiner to look into Daiwa’s bond trading operation, but found nothing.
In 1991, the downtown Securities Custody Department moved to the World Financial Center with a new state-of-the-art trading room. It was a bold move because the downtown office was approved by New York State Banking Department as a custody operation center only. Shortly after, Iguchi was promoted to Executive VP of the New York Branch. In 1992, during a New York Fed examination, Daiwa concealed the trading operation in its downtown office from the examiners by relocating the bond traders to the Branch’s main office in midtown.
In 1993, on the advice of its lawyers, Daiwa voluntarily confessed to its falsehood and assured the Fed it was not concealing any impropriety. The Fed conducted a thorough investigation of the operation of the downtown office for two weeks but found nothing unusual. After six months of deliberation at the Federal Reserve Board in Washington, Daiwa received a formal reprimand for their trickery. “Daiwa engineered trickery in hopes of deceiving the Fed examiner and made false statements. Daiwa’s act is a violation of 18 U.S.C. 1005. The Federal Reserve Board hereby requests the management of Daiwa here and in Japan never to engage in this sort of unethical conduct again.” The Ministry of Finance in Japan dispatched a group of examiners to check the Daiwa NY Branch following this news, but found no irregularities. Despite this incident, both the New York Fed and the Ministry of Finance of Japan, the highest regulatory authorities in the US and Japan, couldn’t detect Iguchi’s more than $1 billion loss.
In September 1995, fearing the damage his losses may cause the bank if inadvertently discovered, Toshihide Iguchi wrote a confession letter to the president of Daiwa Bank, Japan detailing what had transpired with the complete detail of all the unauthorized trades he had done during the previous 12 years. By this time, the loss was in excess of $1 billion. According to Iguchi, concealing this loss to protect his reputation and job was the impetus for his subsequent unauthorized trading.
Upon receiving this confession letter, Daiwa instructed Iguchi to continue concealing the loss and assist other bank officers in verifying the loss. Two weeks later, Daiwa reported the loss to its regulator, the MOF, which instructed Daiwa not to disclose it for two more months as they were scheduled to announce two major bank failures. Japan was in the midst of the worst financial crisis since the Great Depression, following the burst of the economic bubble of the 1980s. However, Daiwa’s US lawyers strongly advised Daiwa to report the loss to the US regulators and on September 18 Daiwa reported the loss and submitted a criminal referral form on Iguchi along with his confession letter. Meanwhile, Iguchi, who was completely kept in the dark, was working day and night to verify the loss, until he was arrested at his home in New Jersey. With his confession letter in the hands of the FBI, Iguchi had no choice but to admit authoring the letter. He was incarcerated at the Metropolitan Correctional Center, New York City for 15 months, befriending George Harp (a founding member of the Aryan Brotherhood), Greg Scarpa (a Mafia hitman), Abu Marzook (a Hamas leader) and Latin Kings members. During his incarceration, Iguchi penned a memoir of his life in America in Japanese and while he was still imprisoned, the book became a #1 bestseller in Japan.
In 1997, Toshihide Iguchi was sentenced to four years in prison and sent to Allenwood Prison Camp to serve the remainder of his term. There he wrote another book about George Harp, the only surviving founding-member of the Aryan Brotherhood, titled King of the Prison, which was published in Japan.
Photo by Globalkitty /CC BY-SA 3.0
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