Two months after his arrest at Haneda Airport and confinement at Kosuge detention center, we now have a good picture of the criminal case against Carlos Ghosn-and it looks like pretty thin soup.
As reported in the media, the evidence shows not criminal malfeasance, but at most lapses in judgment and corporate protocol that ultimately did not result in any actual harm to Nissan Motor or its shareholders or personal enrichment of Ghosn.
The criminal case turns on a series of technical and subjective judgments about whether the words of the relevant statutes and regulations apply to the transactions in question.
By any objective measure, the misconduct alleged was less serious than the corporate misfeasance that is routinely overlooked in Japan or handled by noncriminal administrative wrist-slapping.
The first, and for many weeks the only, criminal charge brought against Ghosn was that Nissan's periodic securities filings disclosed just the currently payable portion of his compensation. They failed to report the portion deferred until after his retirement.
Ghosn's motive for not wanting to report his full compensation currently-that it was embarrassingly large in relation to that of other Japanese CEOs and Ghosn's Nissan colleagues -- does not constitute serious criminal intent.
Further, the evidence indicates that Ghosn tried in good faith to structure the deferred compensation in a way that would permit him legally not to report it currently under the rules, which require current reporting of director-level compensation only to the extent the right to receive it has become "clear."
Though the documentation has not been made public, it appears that it was structured as some kind of post-retirement consulting arrangement that would, at a minimum, require Ghosn to provide Nissan with services after retirement to collect the compensation.
It is hard to imagine that Nissan would have failed to report Ghosn's deferred compensation over many years without professional legal advice that it did not need to be currently reported because Ghosn's right to receive it was conditional.
It is equally hard to understand why Nissan's Japanese management, having condoned the deferred compensation arrangement and its nonreporting for years, is now using it as the lead card in the criminal case.
Beyond this, criminal liability under the Financial Instruments and Exchange Act for false disclosure is explicitly predicated on the requirement that it be "material"- that is, it would have a significant impact on an investor's decision to sell or buy Nissan shares.
For investors, the amount of Ghosn's unreported deferred compensation, about $10 million per year, is clearly very small compared to Nissan's $90 billion in annual revenues.
Meanwhile, Japan's weak securities disclosure standards permit Nissan not to reveal information that would be much more relevant to investors, such as the terms of the "alliance" contracts between Renault, Nissan's major shareholder, and Nissan.
It does not inspire confidence in Japan's justice system that Ghosn's guilt or innocence on the this charge will hinge on semantic distinctions over the meanings of "clear" and "material."
The second criminal charge against Ghosn is for two, related claims of "aggravated breach of trust" under the Companies Act. This vaguely-worded statute imposes criminal liability on directors of a company who for personal gain "commit an act in breach of such person's duties and causes financial damages" to the company. Typically this statute is applied to cases of embezzlement-executives taking company assets.
The first prong of the breach of trust charge has been loosely characterized in the press as "the shifting of Ghosn's personal foreign exchange losses to Nissan" but details of the transactions disclosed by Ghosn's lawyers show it to be less pernicious than advertised.
Ghosn entered into a foreign exchange hedging transaction with Shinsei Bank to protect his yen-denominated Nissan compensation against the risk of depreciation. Like many others he failed to anticipate the financial crisis of 2008, which sent the yen soaring and reduced the value of the Nissan securities he had offered Shinsei Bank as collateral.
Shinsei Bank asked Ghosn for additional security. Ghosn considered offering the value of his uncashed Nissan retirement allowance-but doing so would have required him actually to leave Nissan at a time he was a vital part of the management. Instead, he asked Nissan to guarantee his downside risk on the hedge, but pledged to fully cover the liability.
Critically, Ghosn's request for help with his unexpected difficulty received formal approval by the Nissan board. Admittedly the Securities Exchange Surveillance Commission (SESC), deemed the transaction improper a few months later and ordered Nissan to get rid of the hedging contract.
So, Nissan carried a contingent liability -- fully guaranteed by Ghosn -- as an accommodation to its CEO for approximately four months. Nissan suffered no actual loss and was never at risk because it was fully covered by Ghosn's retirement allowance. The transaction was not concealed; it was approved by the Nissan board and reported to the SESC, which saw no reason to request a criminal probe a decade ago.
So, you may ask, where is the crime? According to news reports, it turns out the prosecutors are not satisfied with the drafting of the board resolution. They are quibbling that the board resolution did not mention Ghosn by name and only referred generically to "foreign board members" as beneficiaries of the transaction. Moreover, the prosecutors are claiming the resolution was not specific on how Nissan was to be protected with 100% certainty against possible loss. Ghosn's criminal liability turns almost entirely on the wording of a board resolution that Ghosn himself surely did not draft.
The second prong of the breach of trust charge relates to the subsequent transfer, in compliance with the SESC's order, of the Shinsei Bank contract from Nissan to companies controlled by Saudi national Khaled Juffali. Nissan affiliates in the Middle East paid Juffali's companies $14.7 million over four years for variety of "support activities" in the region. The prosecutors claim that Nissan's money was paid for Juffali's guarantee of Ghosn's personal contingent liability.
It seems unrealistic, however, that anyone would pay $14.7 million of Nissan money for a guarantee of a contingent liability worth at most $16.7 million-a huge overpayment.
This strongly suggests that Juffali's companies were being paid for doing more than simply backing Ghosn's Shinsei liability. The more commercially-likely scenario is more innocuous, one in which Ghosn asked a friendly business counterparty to assume an essentially riskless contingent liability as a favor in the context of a long-term business relationship. This represents the kind of mutual exchange between companies with long-term relationships practiced daily by the Japanese corporate establishment.
No question, a more scrupulous and careful executive would have avoided pushing the gray boundaries of the law. But nothing we know that Ghosn allegedly did smells like a serious crime deserving prison. That he remains in confinement while the prosecutors argue semantics to deprive him of his freedom places Japan's criminal justice system in an awkward light.
Stephen Givens is a corporate lawyer based in Tokyo.