Inadvertently Investing In Criminal Enterprises

Have you ever wondered if there was a possibility that you might invest in some criminal organization? Without knowing it, that is? Well, one of the Japanese companies I was following, Suruga (TSE: 1880), was recently outed as a business that thrived on corruption. Who knows what the final outcome will be but the CEO, who is also the majority owner of the company, just threw away his company. Crime does indeed not pay!

I was looking at the chart of Suruga and couldn't figure out why the stock dropped so much.

(source: Tokyo Stock Exchange)

There were a few days where the stock didn't trade a few weeks ago. Being in Canada, it's hard to know what was happening but I finally found some news from Google. As a side note, news is one of the problems with investing in foreign stocks (although I will note that a small-cap like Suruga wouldn't generate much news even if it were Canadian.)

It looks like Suruga's explosive growth over the last few years was due to the use of a land-shark:

A real estate company president who was recently arrested on suspicion of conducting unlicensed negotiations aimed at forcing tenants to move out of buildings in Tokyo, received about 15 billion yen from Suruga Corp. as a reward for his work and to cover expenses he incurred carrying out his land-sharking scheme, sources said.

The reward was given to Hiroshi Asaji, 59, president of Koyojitsugyo, an Osaka-based real estate firm, for his work to ensure tenants in five buildings in Tokyo were evicted, the sources said...

The incident revealed that a huge amount of money from the redevelopment in central Tokyo was channeled to Asaji, who is believed to have close ties with gangs...

As the total cost to buy up the five buildings was a little more than 70 billion yen, Suruga made an initial profit of about 27.5 billion yen. Even after paying 15 billion yen to Asaji, Suruga still made a huge profit, the sources said...

Suruga began making good money from redevelopments in central Tokyo about five years ago. At this time the company had begun entering into deals with Asaji, who is believed by the MPD to have close relations with Yamaguchi-gumi, a nationwide criminal gang.

Real estate industry insiders say Suruga's rapid growth was a result of Asaji's land-sharking operations...

Though legal issues regarding buildings in central Tokyo are complicated, resulting in such negotiations often taking a long time, Asaji managed to clear the building of tenants within a year...

In June, a bank that deals with Suruga informed the company that Asaji's company might have ties with Yamaguchi-gumi. But Suruga continued to strike business deals with Koyojitsugyo's affiliates until the end of 2007.

The MPD believes Suruga's decision to severe ties with Asaji was delayed because the two sides' business interests matched.

(source: Suruga paid land-shark 15 bil. yen / Firm grew rich after

hiring alleged gangster to clear buildings of tenants,

March 7 2008, The Yomiuri Shimbun.)

None of the allegations have been proven in a court of law, so everything I say is my opinion.

Needless to say, I'm removing Suruga from my watch list. Good thing I never came close to investing in it. Having done some research on the company, I suspect the allegations are true. The amount that was alleged to have been paid to the land-shark is very large for a company this size so I'm sure Suruga knew what it was doing. Furthermore, Suruga's book value grew by 23%, 42%, and 77% in the last three years. As the old saying goes, if it's too good to be true then...