"ItÆs quite obvious that the overall scheme, including the amounts involved would be extremely anomalous for Marubeni, and not a business that Marubeni could possibly conduct," the company says in the press release. Marubeni has fired two employees for possible involvement in the case and claims that it too was a victim of fraud.
However, under Japanese law Marubeni is responsible for the behaviour of its employees and a person familiar with the said law says Lehman has a strong chance of getting its money back.
The case revolves around a scheme whereby an affiliate of Lehman Brothers Japan partnered with a firm called Asclepius to provide funds to hospital rehabilitation business involving Marubeni. A source familiar with the case says usual negotiations followed with Marubeni employees, agreements were executed and the partnership received documents committing to repay the funds plus fees. When the payment became due, Marubeni refused to pay on the grounds that the documents were alleged to be forgeries.
What appears to have happened is that two genuine Marubeni employees, through a breathtaking con trick using fake documents and impostors posing as senior Marubeni managers were used to convince Lehman that Marubeni would pay back the loan.
LehmanÆs case is strengthened, the person familiar with Japanese law says, by the fact that some of the meetings were held at conference rooms at Marubeni's headquarters and that the people that met with the bank carried Marubeni's official business cards and used the company's email addresses to conduct these business activities. This would have made it reasonable to believe that Marubeni was behind the transaction, as was assured by the employees that met with Lehman representatives.
"The case does raise huge issues of internal controls at Marubeni," notes one source.
The case is extraordinary, as sources say that the scam had been going on for at least two years. Since Lehman discovered the fraud, there have been reports that other investors have also been duped and yesterday Japanese boutique investment firm FinTech Global issued a statement saying it had failed to recover funds invested in the scheme. According to an English translation, FinTech said it had invested Ñ2.2 billion in a voluntary partnership related to Asclepius, the same company that Lehman partnered with.
ôThe dealmakers had a strong track record, which is one of the reasons Lehman would have gone ahead with the deal,ö says one source.
In the press release defending itself, Marubeni highlights an "extremely unusual services agreements under which Marubeni would pay the service fee to the investment partnership even if the third party which accepted the investment partnershipÆs request to perform the services failed to perform".
The release, which is published on MarubeniÆs website, notes that the partnership comprising Lehman and Asclepius sub-contracted the work for an "enormous" consideration amounting to "several billion" yen to a third party, which was to act as the project manager. This third party is not named in the Marubeni press release, but other sources have identified it as a privately-owned company called Gforme.
The partnership was to pay Gforme first and get repaid "some months later" by Marubeni. According to the press release, the Marubeni repayment was to include "interest calculated at unrealistic rates, which were dozens of times in excess of MarubeniÆs ordinary funding rates", which it says should have raised red flags. However, other sources contend that higher-than-normal interest rates are common for more risky financing deals of this type.
After beginning negotiations in August 2007, Lehman made a loan to Asclepius at the end of last year so that Asclepius could pass the money on to Gforme, say sources familiar with the deal. ItÆs that loan, comprising interest and principal and amounting to Ñ35.2 billion, that Lehman is trying to recover. All due diligence procedures appropriate for such cases were followed, say sources close to the deal.
GformeÆs role was reportedly to use the funds to fulfil the terms of the contracts with Japanese hospitals, namely the provision of high-tech equipment and services. Parties to the deal were reportedly persuaded to part with their money because Asclepius promised very attractive margins between the price at which it could obtain equipment from Marubeni and the price at which it could sell the same equipment to Japanese hospitals. Some sources describe LehmanÆs loan to Asclepius as a bridge loan.
According to the story reportedly told by the fraudsters, Marubeni was willing to repay generously the partners (Asclepius, Gforme and Lehman) for their upfront efforts to secure the contracts with Japanese hospitals in return for becoming the "consolidated vendor" to the hospitals. The fact that Japanese hospitals are inefficient in their procurement operations, using many different vendors and thus bearing high costs, added credibility to their story, say sources.
The alleged scam fell to pieces after the second loan repayment from a fake Marubeni account was missed, and Lehman asked Marubeni to investigate. ItÆs not clear why that loan repayment was missed at that particular point, given the relatively long track record of Asclepius. ItÆs also not clear how the alleged fraudsters benefitted if loan repayments were being made until that moment. The person familiar with the case says Japanese police is investigating MarubeniÆs role in the scheme, but none of the persons involved has been brought in for questioning yet and no-one has been described as a fugitive.
LTT Bio-Pharma said in a statement yesterday that it is cooperating fully with the authorities in their investigation into whether former officers of its wholly-owned subsidiary Asclepius and related parties solicited funds from investors based on the premise of a fictitious investment project. According to the translated filing, the president of Asclepius was dismissed on March 7 and the company was announced bankrupt on March 19.
According to a statement released by the US bank, "Lehman Brothers expects this transaction will have no financial impact going forward because of the merits of the case. In addition, the firm took appropriate reserves in the first quarter and believes it has applicable insurance coverage."
ItÆs clear that the case will not do anything to improve the friction which often arises between foreign financial houses on the one hand and Japanese companies and financial corporations on the other. Foreign financial entities are often seen as predatory and unreliable.
In an unrelated case, US investment fund Loan Star has been accused by the Tokyo Regional Taxation bureau of not reporting some Ñ14 billion earned in profits in 2003 and 2004, according to Nikkei Net Interactive, a leading Japanese finance website. Lone Star had reportedly bought the funds from Tokyo Star Bank, a company it recently sold to Advantage Partners. Japanese regulators are also looking at the relationship between Cerberus Capital and Aozora Bank, in which the Cerberus has a 46% stake. Cerberus is under suspicion by the regulator of having put pressure on the Japanese bank to finance its deals.
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