Recruit Scandal

By Ichiro Suzuki In the summer of 1988, in the middle of the infamous Japan Bubble, what was originally thought as an obscure newspaper article turned out to be the largest white collar crime in the country’s history. Recruit Scandal resulted in over a dozen arrests, all of which ended up with suspended sentences for receiving bribery, while Recruit Corporation founder was charged for bribing them on the other side of the transactions. The scandal led to resignation of then Prime Minister Wataru Takeshita, while pushing his secretary to take his life. Recruit Corp founder Hiromasa Ezoe distributed shares of privately-owned real estate developer Recruit Cosmos, a Recruit Corp subsidiary, to nearly 100 politicians, bureaucrats and business executives. Recipients were not given shares for nothing. They paid for them and Recruit had arranged financings to those who didn’t have sufficient cash. In October 1986, the first year of the Bubble, Recruit Cosmos went public. Its soared immediately and those who were given an access to pre-IPO shares had pocketed handsome profits right away. In 1988, The Asahi Shimbun, the left-leaning, second largest newspaper in circulation, brought this incident to light, and the story spread immediately as other media outlets started intense coverages, too. The public in general was enraged that some privileged people had profited easily from a sale of stocks at a time when the gap between the “haves” and the ‘have-nots” were growing and surging real estate prices were making home ownership beyond reach for many. The public’s anger was based essentially on jealousy, which often plays a critical part in the Japanese society. Special Investigation Dept. of the Tokyo District Public Prosecutors’ Office had chosen to respond to this media frenzy. They are feared men and women with a discretionary power to arrest suspects. They boast of 99% prosecution rate on those who are arrested. At the outset, they were of the opinion that the way profits were made did not constitute a criminal offense. Receiving pre-IPO shares, which are paid for instead of granted for nothing, never grantees profits. Anything can happen between the point of receiving shares and the date the company goes public. A year before the Recruit Scandal broke out, Goldman Sachs suffered heavy losses as a lead underwriter of British Telecom IPO. After the terms and conditions were finalized between the firm and the U.K. government, global financial markets were shattered by the Black Monday on October 19, 1987, with shares around the world getting brutalized. BT’s IPO price turned out to be sharply lower than what would otherwise have been the case and lower than the price Goldman Sachs bought them from the government. A generation later, after its much hyped IPO in June 2013 Facebook shares drifted under water for a year, stalking anger among those who ‘fortunately’ got hold of IPO shares. Such disasters can happen. Executives with Daiwa Securities, lead underwriter of Recruit Cosmos, had an opinion that what Recruit cannot be considered as a bribery. They even said that distributing pre-IPO shares to well-connected people was customary in Japan’s business community at that time, since doing so would add some badly needed prestige to a fledging start-up. Distributing shares to almost 100 people, Ezoe asked them no favor in return. He might have done it to sell the name of his company or simply out of a childish display of his goodwill. It can’t be a bribe since he asked no favor from the recipients of shares. Nonetheless, in 1988, Tokyo prosecutors decided to move, pressed by the public fury. This is an scary and frightening aspect of Japan’s judicial system. Public sentiment sometimes takes precedence over cold legality of the law when a case doesn’t look good optically. Masahiro Ezoe started his company while being a student at the University of Tokyo. He created a business out of recruiting ads for students on a student newspaper at the university. Starting from recruiting ads, Ezoe expanded his business into a weekly publication of classified ads in general, becoming a middle-man between providers and receivers of information in specific areas. Then, he went on to issue a new weekly publication on rental apartment and condominium spaces by aggregating all the information in the rental housing market. He was in a sense doing what Google did a generation later, well before the dawn of the internet. Behind the success of Recruit, traditional media outlets ,newspapers in particular, suffered acutely since Recruit ’stole’ advertising budgets that otherwise would have flowed into newspapers. This is exactly what Google did much later. By the time the scandal broke out, Ezoe was building a data center in order to rent out computing power to those who needed it, years ahead of the dawn of the internet. He set his eyes on telecommunication services as Recruit’s next growth potential. Ezoe’s aggressiveness and brash behavior raised eyebrows of heavyweights of Corporate Japan that was at the apex of its prosperity in the 1980s. These old guards scorned Ezoe and his company since he was making money as a go-between of information, not making things that was considered as sacrosanct. They had a firm belief and an immense pride in manufacturing. Old guards had no idea about the coming age of information technology that is not defined by hardware, and this is why Japan stumbled in the age of IT revolution that sprang up in the final years of the 20th century. So when Ezoe got into a trouble in 1988, he received no sympathy from anyone. The media took a pleasure in pounding him because he was stealing the ad revenue that they thought was belonging to them. The public responded to the scandal negatively because he was a symbolic figure of making money for doing nothing, and an epitome of growing wealth gap. Corporate Japan scorned him since he was in a ‘false business’, not in a business of making things that was a real business to old guards. Soon after Ezoe’s lengthy litigation was finally concluded in 2003, another young tech entrepreneur was arrested by Tokyo prosecutors. Takafumi Horie, founder of internet firm Livedoor, was accused of manipulating share price of a radio station that Livedoor tried to acquire. He made an attempt to take over the radio station’s much larger parent, an unlisted media conglomerate that owned a major newspaper and a TV station. Again, his brash behavior did not fit to the mold of a good old tradition of the Japanese society. While his merger attempt made him popular among younger generation, Horie angered establishments by trying to shatter the status quo and an unwritten law in the business community. It was said that prosecutors picked on Horie in response to public anger since he was a new rich creating an inflated wealth out of thin air, at a time when a lot of people were without jobs in a stagnating economy. Unlike Ezoe’s suspended sentence, Horie had to spend 30 months behind the bar. The Financial Times always questioned the legality of his arrest, prosecution and indictment, and later concluded that the real crime Horie committed was challenging the establishment. That’s Japan. The nail that sticks out gets hammered down. This old Japanese saying keeps the country’s mindset in the 20th century. About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.