Prosecutors continue investigation as Livedoor faces possible delisting

Friday, January 20, 2006

The Tokyo District Public Prosecutors Office has been investigating allegations surrounding Livedoor‘s acquisition strategies and stock sales. Japanese newspaper Yomiuri Shimbun reports that the company may have made 4 billion yen ($35 million) in profits by following illegal takeover practices. Livedoor has been known to use acquisitions to support its rapid growth. It currently owns about 50 technology companies providing financial services and other software over the internet.

Recent investigations have centered around the acquisitions of two companies Royal Shinpan, a consumer finance company and Cueznet Co. an online matchmaking firm. Livedoor announced its intent to acquire the two companies in August and September of 2004.

According to allegations, an investment fund was used to purchase shares in the targeted companies before the announcements were made public. It is believed that after the stock swaps in October 2004, Livedoor received the shares of the two companies through this fund. The investment fund also received new Livedoor shares in exchange which were then allegedly sold off to a foreign investment fund. Livedoor is reported to have issued 12.6 million new shares for the two stock swaps.

Since Livedoor owned most of the fund, the profits from these sales were siphoned back into Livedoor. The investment fund JMAM Salvage Ichi-go Toshi Jigyo Kumiai was deemed a voluntary organization and hence avoided registration and disclosure regarding its investors and its investments. Concealing ownership of targeted takeover companies violates securities and exchange laws. A prosector commented “Stock swaps are not illegal, but it is problematic if a company makes deals aiming to make profits by selling its shares this way.”

Livedoor shares continued their fall for the fourth straight day on Friday. The stock has now lost about 52 percent or $3.3 billion in market capitalization since news of the investigation broke through on Monday evening.

The Tokyo Stock Exchange(TSE) is considering delisting stocks of Livedoor Co. and its affiliate Livedoor Marketing Co. Livedoor is scheduled to submit the findings of its internal investigation to the TSE by Friday. “If we can confirm they violated listing regulations, we’ll have no choice but to decide to delist their stocks,” TSE Chairman and President Taizo Nishimuro told reporters at a news conference.

A company’s delisting would seriously impact its ability to raise funds.

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