State must pay damages in consumer fraud: court

OSAKA (Kyodo) The Osaka District Court ruled Wednesday that the government was liable for financial damages incurred by consumers duped by mortgage securities company Daiwa Toshi Kanzai and ordered the state to pay 670 million yen to the victims of the massive fraud.

Legal experts say it is the first time the state has been ordered to compensate plaintiffs for damages related to financial assets.

The court ordered the government to compensate 260 of the 721 plaintiffs, who were seeking an award of nearly 4 billion yen for losses caused by investing in fraudulent mortgage securities products offered by the company.

The state was found partly liable because it renewed the troubled company's business registration in October 1997 despite signs of fraud — the major issue during the trial.

Presiding Judge Tomoichiro Nishikawa said the Finance Ministry's Kinki Finance Bureau "deserves the blame for having renewed the company's business registration despite the fact that there was a suspicion that its business might be fraudulent."

The regional finance bureau inspected Osaka-based Daiwa Toshi Kanzai in 1997 and found it had a huge negative net worth across the entire group, the court said. It then ordered the company to improve its operations.

However, even though the company did not present a viable improvement plan, the bureau decided to renew its business registration anyway in October that year.

The court said the bureau should have suspected the firm was engaged in fraudulent operations, based on documents and explanations received from Daiwa Toshi Kanzai.

The law requires that finance bureaus not permit registrations to be renewed if there are uncertainties about a firm's management. Registrations are valid for three years.

Daiwa Toshi Kanzai is believed to have caused some 110 billion yen in damage to about 17,000 customers, mostly elderly people, by falsely claiming its financial products were safe and would yield high interest.