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The Biggest Stock Scandal Story Never Told

By Dr. Steve Sjuggerud
Tuesday, January 30, 2007

"Money Comes First In This World"
– Businessman Hiromasa Ezoe's motto, before he was busted

Imagine a stock scandal so big that Bill Gates, George Bush, and Bill Clinton each get taken down.

It happened in Japan in 1989. Yet to this day, (as I heard while here in Japan) the guy behind the scandal – Hiromasa Ezoe – hasn't served a day behind bars.

Ezoe was chairman of Recruit Cosmos. He was bribing politicians, bureaucrats, and corporate execs by offering them Recruit shares before it went public. It's believed that Ezoe gave out nearly a million shares. The shares nearly doubled when they went public, giving the illicit recipients massive profits.

The scandal unfolded quietly at first... In June 1988, a minor public official from the city of Kawasaki resigned, admitting he used inside information to buy shares of a stock called Recruit Cosmos. By the end of 1988, the country's powerful Finance Minister, Kiichi Miyazawa, resigned over the deal. Five days later, Japan's answer to Bill Gates resigned: Hisashi Shinto, chairman of NTT, then the world's largest company, stepped down after acknowledging his involvement in the deal.

The scandal knocked out the prime minister's government, too... At first, the prime minister denied any involvement and ousted 15 of his 20 ministers as he tried to save himself.It ultimately led to the downfall of the then-leader of Japan, Prime Minister Takeshita. Takeshita's political secretary, who had received money on his boss' behalf, hanged himself. His suicide note read: "Behind the scenes of this peaceful democracy are the same bloody struggles to the deal that were waged time after time by medieval warlords."

Then the prime minister hired a new Justice Minister, Takashi Hasegawa. But even Hasegawa was forced to resign less than a week after accepting the job. As it turned out, he was on the take from Recruit Cosmos, too!

All in all, 155 people were implicated.

And in the book The House of Nomura, Albert Alletzhauer said: "The Recruit Scandal, uncommon only in its magnitude, posed a potentially serious problem... Clearly the money-politics era was gone.  [The Recruit Scandal] was the first post-war fracture in Japan's old-boy network.  It was a sign from the people of Japan that they had had enough."

The stock market peaked that year (1989). In 1990, it fell by 40%. 

The fantastic financial historian Edward Chancellor wrote in Devil Take the Hindmost"Speculation ran amok because no one in a position of power had any interest in controlling it."

To this day, Japanese investors are still a little spooked. They don't trust stocks. I spoke with a well-known British analyst who's lived in Japan for more than 20 years, researching Japanese stocks. He told me the Japanese consider stock trading "unseemly – equivalent to gambling – not something you talk about in polite company."

After nearly two decades of pessimism in Japan, stocks and real estate are down more than 50% from their long-ago highs. They're just starting to trend up.

I think we've already hit bottom. It's time to start buying Japanese assets...

Good investing,


Market Notes


From its summer high of $78 a barrel, the price of crude oil has fallen 30%. A large portion of the decline has come in the past month.

So shares in big oil producers, like ExxonMobil, should be dropping like stones, right? Not really… despite falling oil prices, the world's largest oil company has taken a measly 6% hit from its high.

Extreme Value editor Dan Ferris explains why Big Oil shares have held up so well lately: "The big oil companies haven't fallen much because they make plenty of money on $50 oil… and they're dirt cheap by any standard… ExxonMobil trades for just 6 times pretax earnings… Chevron is around 4.7 times… and ConocoPhillips is around 3.7."

In other words, Big Oil shares are at valuation levels that will produce large, safe gains for a long time.

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