Subject: Hot Tip That Proved False Shows Rules Are Different in Tokyo Market Date: Published: 4/3/87 118 lines Source: Wall Street Journal. Copyright Dow Jones & Co. Inc. A Hot Tip That Proved False Shows Rules Are Different in Tokyo Market --- By Karl Schoenberger Staff Reporter of The Wall Street Journal TOKYO -- It sounded like an extremely hot tip, with such an aura of secrecy that at least one foreign fund manager declined to use it on ethical grounds. But rather than being an insider conspiracy, the tip -- that the U. S. would soon approve a Japanese drug to treat sufferers of acquired immune deficiency syndrome -- was the product of outsider fantasy. And for a brief period, it became a catalyst for speculative fever. The story of how a major Japanese securities company helped spread a spurious rumor and sparked a Tokyo Stock Exchange buying spree in Ajinomoto Co. last week also illustrates some of the major differences between Tokyo and other major stock exchanges. The differences include matters as basic as its operating philosophy and what drives the market. Securities analysts say all the big Japanese brokerages play the rumor game to benefit shares of companies in which they have a large stake. On any trading day, hundreds of such rumors circulate here, causing spasms of buying and selling. Increasingly, foreign brokers and fund managers are learning how to play along, but some find themselves struggling with the choice between getting the maximum return for their clients and sticking to the ethics they learned at home. "Reality here is different from ideals," a foreign fund manager who has worked in Tokyo for several years says. "Your standards don't change, but you've got to be practical and sensible. You've got to pick up the investment tools of the market." Generally bullish sentiment on Ajinomoto began in February, when the stock emerged as a favorite among Japan's AIDS stocks, so called because they are expected to benefit from research on drugs that may prove effective against that mysterious fatal syndrome. The pharmaceutical unit of Ajinomoto, a giant food-processing concern, developed an experimental anti-cancer agent called Lentinan a couple of years ago. This year, amid growing concern about AIDS in Japan and speculation that the drug might be effective in treating the disease, Ajinomoto drew wide attention. Masami Tada, a former securities analyst and now a salesman at Daiwa Securities Co., the leading market-maker in Ajinomoto the past two months, says he learned from a "reliable person" that the U. S. Food and Drug Administration would soon act to approve Lentinan for use on AIDS patients. He says he "strongly recommended" that clients buy Ajinomoto and that those who took the advice made big profits. Another fund manager at a foreign financial institution, who asked not to be identified, says Mr. Tada phoned his employer last Friday after trading had closed and offered exclusive advice. Mr. Tada said Daiwa had learned that FDA approval of the drug was imminent and asked that the news be kept confidential, the fund manager says. The salesman advised the foreign institution to quietly place orders for Ajinomoto that night, the manager says. He says he understood that Mr. Tada's information had come from a source within Ajinomoto. Mr. Tada declines to identify the source or to respond to the fund manager's comments. Other fund managers at the foreign company bought on the tip, the fund manager says, but he didn't. He says he believed that to do so might constitute insider trading because news of the FDA action wasn't yet public. In fact, the tip about pending FDA action wasn't only non-public; it was erroneous. But the soul-searching fund manager didn't know that when he watched Ajinomoto's share price soar on heavy volume in the half-day Tokyo session Saturday. The stock, which had closed at 3,770 yen ($25.50) a share the day before, ended that session at 4,270, a gain of 13%. By Monday, the rumor had evaporated, and Ajinomoto's shares declined with the rest of the market, closing at 4,000, which is also where it ended yesterday. A spokesman says Ajinomoto hasn't filed any applications with the FDA relating to Lentinan. Bristol-Myers Co., a U. S. company licensed by Ajinomoto to produce Lentinan, says it isn't planning any AIDS-related tests for the drug and hasn't sought FDA approval. The FDA says it knows nothing about Lentinan. Japan's four leading brokerages -- Daiwa, Nomura Securities Co., Nikko Securities Co. and Yamaichi Securities Co. -- are all frequently associated with the kind of trading characterized by Daiwa's Ajinomoto campaign. Whether such activity constitutes insider trading when the tip is genuine, or market manipulation when it isn't, falls into a gray area in Japan. Regulators are secretive about their policing efforts, which critics say are minimal. Only five securities cases have been brought to court since Japan's securities laws were enacted 39 years ago. Securities officials at the Ministry of Finance say it isn't their job to track every rumor. They rely largely on self-regulation by securities companies. And as Japanese brokers point out, the volatility of the Tokyo exchange can easily be mistaken for suspicious trading. The market here tends to move more on speculation than on fundamental analysis of corporate earnings. Sorting through its whirlwind of fact and fiction is a challenge for the foreign analyst or fund manager. "His isn't a market driven by valuation; it's driven by information," John Baldwin, an analyst for Jardine Fleming (Securities) Inc. in Tokyo, says. "And we spend all of our time trying to figure this kind of thing out." (This article is made available here by Dow Jones Co. for the personal and non-commercial use of callers to this bbs, in the hope that it will be of some help to those who are suffering from the disease and others who are seeking to help them.)