Extract taken from 'The Securities Ligation Review – edition 5'
Public enforcementi Forms of action
As explained in Section I.i, both criminal actions and administrative actions could be taken against a potential defendant for violations of the FIEA. See Section III.iv for the major types of actions and possible consequences of those actions.
The SESC has the authority to conduct investigations for criminal prosecution and for administrative enforcement. These investigations are conducted by two principal divisions of the SESC. When the SESC considers bringing cases to the public prosecutor's office for the filing of criminal charges, the cases are dealt with by the Investigation Division of the SESC. In administrative enforcement cases, it is the Disclosure Statements Inspection Division of the SESC that conducts the inspection and makes recommendations to the SESC to issue an order to impose administrative penalties on a potential defendant. The Investigation Division and the Disclosure Statements Inspection Division sometimes collaborate with each other to a certain extent, but such collaboration is limited because under Japan's procedural due process, inspections for administrative enforcement must not be conducted for the purpose of filing a criminal prosecution.
The number of cases where the Disclosure Statements Inspection Division of the SESC recommended the imposition of administrative penalties for violations of disclosure rules under the SESC is decreasing slightly, but has basically remained constant in a range of between five and nine cases per year from 2012 to 2016, according to a report published by the SESC in 2017.ii Procedure
As mentioned above, in cases of administrative enforcement, the Disclosure Statements Inspection Division of the SESC conducts the inspection (FIEA, Articles 26 and 177) and makes a recommendation to the JFSA Commissioner on the imposition of administrative penalties. If the JFSA Commissioner finds a violation, he or she will order the commencement of administrative proceedings (id., Article 178). The administrative proceedings are conducted by a panel comprising three examiners designated by the Commissioner, unless the case is a simple case, in which case the proceedings are conducted by a single examiner (id., Article 180). The examiners are tasked with preparing and submitting to the Commissioner a draft of their decision. The Commissioner will issue an order, based on the draft decision, for the defendant to pay an administrative penalty (id., Articles 185-6 and 7). A lawsuit for the rescission of the order to pay an administrative penalty should be filed within 30 days from the date on which the order comes into effect (id., Article 185-18).
In an inspection by the Disclosure Statements Inspection Division of the SESC, it may instruct relevant persons to report on matters or submit documents concerning the case, and conduct a dawn raid. Although the Disclosure Statements Inspection Division does not have any authority to arrest anyone or to conduct any search and seizure with a warrant, it is difficult in practice to refuse to cooperate in Division inspections because anyone who refuses, hinders, or avoids inspections can be punished by imprisonment for not more than five months or by a fine of not more than ¥500,000, or both (id., Article 205(vi)).
In cases of criminal enforcement, the Investigation Division of the SESC conducts criminal investigations, and if it finds a violation, it will file a criminal complaint before a prosecutor. The Investigation Division does not have the power to arrest anyone, but it can conduct a search and seizure with a warrant issued by a judge of a district court or summary court that has jurisdiction over the location of the SESC (id., Article 211(1) and (2)). The criminal prosecution of securities-related enforcement actions is subject to the general rules of criminal procedure.
As seen above, in a securities-related enforcement action in criminal cases and administrative cases, the SESC has strong powers to collect evidence and investigate cases, compared with private actions, where extensive discovery as in the United States is not available (see Section II.ii).iii Settlements
There is no system of settlement between the government and the defendant in administrative actions or criminal actions. However, the Criminal Procedure Code was amended in May 2016. The amendment, which will become effective on 1 June 2018, introduced a new plea-bargaining system in Japan. Under this new system, a prosecutor may enter into a formal plea-bargaining agreement with a suspect or defendant (either a natural person or a corporate entity) who provides certain evidence or testimony in relation to certain types of crimes, including violation of the FIEA, to drop criminal charges or agree to a predetermined punishment. This system is different from the US plea-bargaining system because a suspect or a defendant who only admits his or her own crimes, and not to the criminal acts or liabilities of others, is not entitled to use this plea-bargaining system. A suspect or defendant is required to disclose what he or she knows about the crimes committed by others to have the charges against him or her dropped or reduced or the possible punishment against him or her reduced.iv Sentencing and liability
Generally speaking, administrative penalties are determined according to calculation methods set by the FIEA, and criminal penalties are determined by courts within the range set by the FIEA by taking into account the seriousness and maliciousness of the violations. The following are examples of administrative and criminal penalties for major types of violations.Administrative penalties
If a company's annual securities report contains false statements, that company can be punished by an administrative penalty of ¥6 million or 0.006 per cent of the total amount of the value of the company, whichever is higher (FIEA, Article 172-4(1)).
If a company's Quarterly Securities Report, Semiannual Securities Report, Extraordinary Report or Internal Control Report contains false statements, that company can be punished by an administrative penalty of ¥3 million or 0.003 per cent of the total amount of the value of the company, whichever is higher (id., Article 172-4(2)).Criminal penalties
If a company's annual securities report contained false statements, any person who submitted that report can be punished by imprisonment of up to 10 years, or a fine of up to ¥10 million, or both (id., Article 197 (1)(i)). If a representative of an entity or an agent, employee, or other worker of a company violated the same rule, both the individual person and the company can be punished by a fine of up to ¥700 million (id., Article 207(1)(i)).
In cases where a company's Quarterly Securities Report, Semiannual Securities Report, Extraordinary Report or Internal Control Report contains false statements, any person who submitted that report can be punished by imprisonment of up to five years, or a fine of up to ¥5 million, or both (id., Article 197-2(iv)), and the company can be punished by a fine of up to ¥500 million (id., Article 207(1)(ii)).