Former Nissan Motor Chairman Carlos Ghosn has been indicted for understating his executive salaries and transferring personal investment losses to the company.
Prosecutors say Ghosn violated the financial instruments and exchange law by intentionally concealing his delayed executive compensation despite knowing that, by law, it had to be reported in Nissan's financial statements.
They also claim he committed an aggravated breach of trust by illegally having Nissan pay money to an acquaintance in connection with the transfer of his portfolio losses.
There is a reasonable case for indicting Ghosn on both charges.
In Japanese criminal prosecutions, defendants are convicted in nearly 100% of cases. But the Ghosn case is not watertight since it contains some controversial elements requiring new court judgments. As a former Tokyo prosecutor and based on what I know of the case, I put the chances of Ghosn being found guilty at around 60%.
Whether Ghosn violated the law depends on whether the amount of the compensation he failed to report was in fact set and thus legally required to be disclosed, even though it would be paid later.
For a top executive's future compensation to be already confirmed, it has to have been approved by the board. Usually, the overall compensation for all board members is determined through a shareholders' meeting; the board leaves it to the representative director to allocate amounts to individuals.
At issue here is whether the Nissan board voted to leave these decisions on compensation to Ghosn with the understanding that the payment of part of his compensation would be delayed and made under a category different from its real nature, that is as an advisory fee paid after retirement.
Probably prosecutors have obtained testimonies from then Nissan directors saying that all decisions concerning executive compensation were left to Ghosn including the timing and presentation of payments.
If these testimonies are judged credible, Ghosn's delayed compensation should be regarded as fixed when the board voted to entrust him with the decisions.
Ghosn claims he did not intend to breach the financial instruments and exchange law, saying the draft proposal on his retirement pay post-retirement pay had been endorsed by lawyers in and outside Nissan.
But Japan's criminal code stipulates that a violation of the law can be deemed a crime even if the person committing it is unaware it is illegal. So, Ghosn's claim that he did not intend to make a false report is irrelevant.
Some argue that the around 1 billion yen of Ghosn's remuneration that was not reported in the financial statements is not a material factor because the sum is small compared with Nissan's sales.
This is not a reasonable argument. A company's financial statements are aimed not only at providing investors with earnings information but also with materials to assess its corporate governance, including on pay.
Comparing the unreported remuneration with Nissan's sales therefore misses the point. Ghosn's annual pay is undeniably important in assessing Nissan's corporate governance.
There are four conditions for judging a defendant guilty of aggravated breach of trust. The defendant is not guilty unless the act was conducted for the interests of the defendant or of a third party, or for causing damage to the company. The defendant is not guilty either unless the act was carried out with intent and caused financial damage.
Ghosn is charged on two counts of aggravated breach of trust. First, he is accused of causing financial damage to Nissan by transferring the currency swap contracts with Tokyo-based Shinsei Bank, which incurred paper losses, to the company. Secondly, he is charged with misusing Nissan's money to give $14.7 million to Saudi businessman Khaled Al Juffali for guaranteeing the credit when Ghosn transferred the assets from Nissan to himself.
As for the first count, precedents indicate that an act that creates a risk of financial damage can constitute an aggravated breach of trust even if it did not cause actual damage. So, prosecutors can claim Ghosn caused damage to Nissan by simply transferring the swap contracts with paper losses to the company.
Ghosn has countered this argument by pointing to an agreement between Shinsei Bank, Nissan and himself. Under the agreement, Ghosn was committed to paying any amount of money charged to Nissan when the contracts were settled. He argues this agreement effectively eliminated Nissan's risks.
It is, however, unclear from news reports whether, under the agreement, Nissan was completely exempt from any liability, if Ghosn failed to pay up. It is possible that Shinsei could pursue Nissan for any money needed when the swap contract matured. Therefore this agreement does not necessarily guarantee Nissan against losses.
Also, since swap prices fluctuate, there remains the question of how moving the swap contract to Nissan would expose the carmaker to risk. The prosecutors' case will demand a new judgment from the court. Prosecutors will win the case if they can prove that there was little possibility of the paper losses on the swaps disappearing or turning into profits because of market shifts. If they cannot, they will lose.
Ghosn also claims that his asset management company set up swap contracts with Shinsei Bank not for speculation but for converting his yen-based pay into dollars. But the motive for the swaps does not affect whether he was in breach of trust.
With regard to the payment to Al Juffali, the reason why Nissan paid over $14.7 million will be the principal issue.
Prosecutors need to show there was no good reason for the company to make a payment. Prosecutors argue that the money was for Al Juffali's guaranteeing the credit to help Ghosn arrange collateral for Shinsei Bank. So, the payment was made primarily for the former chairman not for Nissan.
But transferring the swap contracts incurring paper losses from Nissan back to Ghosn was beneficial for the automaker. This could be seen as justifying the $14.7 million payment to Al Juffali.
But, if Ghosn is found guilty of causing damage to Nissan by transferring the paper losses to the company in the first place, returning the contracts back to Ghosn could be judged an attempted cover up. So, the $14.7 million would have been paid for Ghosn's benefit, increasing the chances that it would be considered a breach of trust.
According to Ghosn's lawyer, the ex-chairman denies that it was thank-you money, insisting that "it was payment for work done on behalf of Nissan."
However, news reports indicate Ghosn has offered no specific information about this work. I find Ghosn's argument not quite convincing.
Tokyo prosecutors apparently believe they can effectively refute Ghosn's argument without testimony from Al Juffali by presenting other evidence, including data about Nissan's business in Saudi Arabia and testimonies by Nissan officials saying the Saudi businessman did nothing for Nissan worth the money he received.
Lastly, let me discuss the issue of bail. In Japan, defendants are not normally given bail while possibilities exists that evidence could be destroyed. So it is usual to detain a defendant until the pretrial conference procedures, which come just before the trial itself. Ghosn's bail petition should be accepted at that time. The court, prosecutors and defense lawyers should work together to ensure all the procedures go smoothly -- and bail will become possible for Ghosn.
Yasuyuki Takai is a former prosecutor at the Tokyo District Public Prosecutors Office and is an attorney-at-law at Tokyo Seiwa Law Office.