SBI Securities Penalized Over IPO Stock Price Manipulation; Financial Services Agency Orders 1-Week Business Suspension

Yomiuri Shimbun file photo
The Financial Services Agency

The Financial Services Agency has taken administrative action, including a partial business suspension order, against SBI Securities Co., the largest online brokerage firm, for manipulating initial share prices on the market following initial public offerings (IPOs).

As the company’s executives led the manipulation of share prices, the FSA judged it seriously wrongful.

From Friday through Thursday (Jan. 12-18), SBI Securities is banned from accepting IPO share trading orders that involve the solicitation of investors on the listing date of IPO issues.

The FSA has asked SBI Securities to formulate a business improvement plan, including clarifying the responsibility of the leadership and strengthening the internal management system, and to report the plan to the FSA by Feb. 13.

According to the FSA, in 2020 and 2021, SBI Securities asked investors through brokerages to place buy orders for three IPOs it managed, and accepted the orders to prevent the opening prices after the listing from being lower than the public offering price (POP). The FSA identified the involvement of SBI securities executives in the manipulation of share prices.

The company was seen to have attempted to appear to perform its operations at IPOs successfully by manipulating initial share prices on the market. But it is now under scrutiny for distorting market fairness.

Trading below initial POP

According to the agency, when SBI Securities acted as the “lead manager” in handling listing operations during the IPOs of three issues between December 2020 and September 2021, it solicited nine institutional clients and 174 retail investors to place buy orders through intermediaries for financial products and accepted their orders.

This was aimed at keeping the “initial share price,” at which new issues of stock are traded following their listing on the market, from falling below the POP, at which new issues of stock are offered to investors by an underwriter before their listing.

Executive officers of the company at the time took the lead in such efforts. According to the Securities and Exchange Surveillance Commission, they solicited clients by saying, “There is no need to actually buy it.” In fact, most orders were canceled on the very day of listing.

When the initial share price on the market turns out to be higher than the POP, an underwriter is considered to have performed successfully, as investors who bought shares at the POP will benefit from unrealized profits.

On the other hand, if the issues of stock sell poorly at the time of initial listing, the initial price on the market may be lower than the POP, resulting in the share “trading below the POP.”

It is believed that SBI Securities aimed at preventing the initial price on the market from falling below the POP, wishing to enhance its reputation as a lead manager.

Top brokerage firm

SBI Securities has approximately 11 million client accounts, boasting of its status as the industry’s leader even when such securities giants as Nomura Securities Co. are included. To attract customers in the retail sector, SBI Securities has been moving ahead with such measures as charging no commissions in some of its dealings.

As the commission-free services will also lead to a decrease in its revenue, SBI Securities has been strengthening its corporate client division and has been vigorously promoting underwriting services to sell new issues of stock to investors during IPOs.

In IPOs, new issues of stock are generally underwritten by multiple securities firms. According to SBI Securities, 49 companies had IPOs in the first half of fiscal 2023, and SBI was among the underwriters for 47 of them, or 96%, more than any other brokerage firm. The company has also served as a lead manager, a role in which it can expect to earn more commission proceeds.

Sales pitch tools

Experts have long pointed out problems related to IPO share prices. If a securities firm by design sets the POP lower than deemed fair, it can be tantamount to raising the initial price on the market.

A person in the sales division of a major securities firm said it is common knowledge in the industry that “IPO shares are profitable. Therefore, we sell IPO shares only to our top clients as a sales pitch tool.”

If a company becomes acclaimed through a series of “successful performances,” it can gain more deals and increase the number of transactions with its clients.

According to a survey by the Japan Fair Trade Commission, the average initial price on the U.S. market is about 20% higher than the POP, while in Japan it is about 50% higher.

Hiroyuki Kansaku, a professor at Gakushuin University, said: “Securities firms are the gatekeepers of the market and are thus required to be neutral. It is inexcusable for them to manipulate prices that should be determined by the market.”