The Journal of Asian Law :	Current Issue
	THE DAIWA BANK CASE Tsuyoshi Yamada The following is a summary translation of a representative action brought by Daiwa Bank’s stockholders against the Bank regarding the New York Daiwa Bank scandal. A Daiwa bond trader covered up $1.1 billion in losses incurred through illegal trades over the course of eleven years. This case was decided by the Osaka district court, and it had a very strong impact not only among corporate directors, but also all over Japan, because directors of Daiwa Bank were ordered to pay approximately $775 million. This was first court decision that ordered directors to pay such a huge amount of money, and it fostered much debate about the derivative action system in Japan. Directors’ groups and some politicians insisted that compensation be limited to two years salary of the director. The case was divided into two parts, Case A and Case B. The Court found that the directors of Daiwa bank had a duty to establish a proper risk management system, but failed to do so. A proper risk management system would have included separation of front office from back office, and also of U.S. Treasury bill dealing business from custodian business. It also would have included the confirmation of a balance of U.S. Treasury bills in custody. The court found the directors did not breach their duty concerning the first criterion of this test—separation of front office from back office. The court did, however, find gross negligence in regards to the confirmation of U.S. Treasury bills in custody. Another aspect of the case was whether the $350 million in damages from the plea agreement arose out of a breach of the directors’ duty. The court dealt with the relation between behavior in violation of United States criminal law and the business judgment rule. One of the primary causes of this case was that the directors of Daiwa Bank refused to disclose information to the United States banking regulation authorities about the trader’s transactions and the amount of damage he caused. Because the damage was $ 1.1 billion, the directors apparently feared that the existence of Daiwa Bank and financial system itself would be in danger. In short, the directors probably wanted to cover up until they found out everything was safe. Next, Daiwa Bank directors consulted with officers of Japanese Ministry of Finance about these incidents confidentially, but did not notify United States authorities. The officer of the Japanese Ministry of Finance answered, “It’s not a good time to open this up.” Directors interpreted this answer as giving them permission not to disclose the incidents to the United States authorities. So they forged business documents including the Bankers Trust’s balance book (violation of 12 U.S.C. §208・20, 211・24) and failed to file a report until September 18, 1995. In order to understand this situation, one should appreciate the relationship between the Ministry of Finance and the banks in Japan. Until very recently, the Ministry of Finance was the authority of financial administration in Japan, and controlled every detail in the financial area. The Ministry of Finance’s authority was so strong that financial institutions had no choice but to follow their guidance. Also, it is commonly acknowledged that is was much easier to obey the Ministry of Finance than to make decisions themselves. The defendants insisted that the words “the statute” in the Japanese Commercial Code Art. 266 Sec.1 No. 5 did not include “foreign law,” and as it does not include it, therefore, there was no negligence if they did not know the relevant foreign law or statutes. However, the court did not agree: “Directors are granted very broad discretion, as long as they obey the law, including foreign law, in the management of the company. However, they are not granted discretion over whether to comply with law . . .Therefore, defendant Fujita, and the other directors who heard this from Fujita, breached the directors’ duty of care and loyalty.” Finally directors claimed that not reporting to U.S. authorities was within their business judgment. Reporting to the Japanese Ministry of Finance is sufficient. It also means that they would not have to make any decisions themselves, as long as they obey the Ministry of Finance’s official or unofficial guidance. The court ruled that: “Despite the fact that the Japanese economy is developed and expanding on a global scale, defendant Fujita and other directors persisted in utilizing local rules applicable only in Japan. They relied only on the authority and prestige of the banking bureau director of the Ministry of Finance in order to overcome the Daiwa Bank crisis. Consequently, they invited a harsh penalty by United States authorities. The defendants insisted that they could manage based on the Ministry of Finance’s decision. This would have permitted the defendants not to act based on their responsibility.”
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