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Japan: Insider trading at public broadcaster NHK (Part 1)

Japan's public broadcaster NHK has been the talk of the news and blogs over the last several days as it faces yet another controversy, with revelations having emerged of insider trading by three NHK employees on shares of Kappa Create Company [ja].

According to NHK, a news story about plans by restaurant chain Zensho Corp. [ja] to take Kappa under its wing was released onto NHK's internal prebroadcast reporting system at 2.38 p.m. on March 8th of last year, twenty minutes prior to its scheduled 3pm air time. Noticing the news story, two employees with years of experience in stock trading are reported to have gone home and bought between 1000 and 3000 shares in advance of the announcement, while another did so by mobile phone, with profits estimated at between Y100,000 and Y400,000 ($943 and $3,774).

President of NHK Hashimoto Genichi has already announced his resignation, four days before of the end of his term on Friday, in response to the news. The scandal however is not the first at NHK in recent years, and many are questioning the system which allowed insider trading to happen in the first place.

NHK Newsroom
NHK newsroom (from Richy's photostream)

This first part of a two part series focuses on technical details to the story left out of major news reports. Blogger and economics professor Ikeda Nobuo, who has intimate knowledge of the internal pre-broadcast system at the center of the scandal having once been an NHK employee, wrote a number of entries on the topic (on Oct. 18, 19, 20, 21 and 22), some topping the charts at goo blogs.

In the first entry, titled “NHK's IT literacy” and posted on Dec. 18th, he writes:


News about police questioning by the Securities and Exchange Surveillance Commission, due to suspicions of insider trading by employees of NHK, was the top headline on yesterday's 7 o'clock news. What was President Hashimoto, who's term ends in one week, doing for these past three years? In a certain sense, the current incident is more serious than the embezzlement scandal three years ago. Because while there are other industries with more embezzlement, a news organization using information for individual gain cuts right to the heart of “public broadcasting”.


At the press conference, [NHK Managing Director] Ishimura [Eijiro] said that: “Beyond a system-wide problem, the main cause was that there was no sense of ethics,” but this acknowledgment is false. [Prior to this incident], there was extreme price fluctuation just before the stock exchanges closed on March 8th of last year, so the surveillance committee requested a securities company to submit a record of questionable transactions. Because of this — and it would appear that they discovered this by chance — they learned that it had happened independently at Tokyo, Gifu, and Mito, and the mistake was thus in the administrative system, which had allowed employees from across the country to see the information connected to the crime twenty minutes early. I guess there may have been other incidents like this in the past as well.


Actually, I was involved in the first plan for this “New NC System” created in 1988. At that time, a system to make news documents ― from the uploading stage to the studio ― 100% electronic, and do away with paper, had just started in Japan. Although it sparked intense opposition from reporters who could not use keyboards, they nonetheless overcame resistance and implemented it. The concept of the “all-purpose manuscript” (汎用原稿), which has come out in the news this time, was something that was created at that time.


NHK has 8 channels, so they have to make use of the same news in many media. Up until [the all-purpose manuscript], people responsible for related programs overseeing TV news would go to receive manuscripts from the copyreading department. This was inefficient, however, so the universal manuscript, with all the data the reporter had originally collected, was converted to electronic form and sent to press; from there, every media editor could read it online, and in this way an editing system was created which joined together different applications. Therefore, from a very long time ago in broadcasting, not being able to access online the all-purpose manuscript, used in various media, was to not be able to do work.


However, at that time it was not possible to be strict about account management, so special news items like scoops were not released online as all-purpose manuscripts but instead made into news manuscripts. What was shocking about the incident this time is that the all-purpose manuscript (intended for the 3 o'clock news) involving the market quote was put online, with the lowest level of security so that all 5000 employees could see it, before 3 o'clock. Even 20 years ago, this kind of thing was never done.


I can only think that the system administrator (person responsible for editing) must be lacking in basic literacy. On top of this, that the director is trying to minimize this as the ethical problem of an individual… I don't even know what to say. Without going as far as the J-SOX Law [Japan's Financial Instruments and Exchange Law], even in ordinary corporate internal controls, it is fundamental to plan security so that it will stand up to the evil side of human nature. Sending information in its bare form and then blaming only the employee who misused it, this is like the tail wagging the dog.

NHKは「文科系」優位の会社で、しかも中枢はほとんど(ITとは無縁の)報道が握っているので、ITリテラシーが非常に低い。かつては私も総合企画室にレクチャーに行ったことがあるが、企業戦略の立案にかかわる幹部が、テレビとインターネットの違いを理解していないのには困った。デジタル放送からB- CASに至る混乱した方針も、企業の根幹にかかわるメディア戦略を(古いテレビ技術を守るインセンティブの強い)技術陣に「丸投げ」しているために起きた失敗だ。

NHK is a company of “arts-type” superiors, and furthermore the news department (who has no interest in IT) seizes the core position, so its IT literacy is extremely low. There was once a time when I went to lectures at the general planning office, but it was a pain because the management involved in design of corporate strategy did not understand the differences between television and the Internet. From digital broadcasting to B-CAS, chaotic policies were a failure created by the media strategy at the basis of the corporation, which “threw the whole task” at the engineering staff (who had a strong incentive to protect the old television technology).


Next time, Prime Minister Fukuda needs to drive in a recognition that before mentioning difficult things like ethics or governance, NHK needs to thoroughly educate its employees (particularly management) about the structure of IT (their own stock-and-trade), as well as what a network is, and what kind of media environment NHK is situated in.


Postscript: Home Affairs Minsiter Masuda has demanded an inquiry of all people involved, but without proof treating all 5000 employees as criminals does more harm than good. As I already noted in the comments, all logs of improper transactions should first be taken, and a rational investigation performed.


Postscript 2: Details of the press conference have been released in Sankei, and what surprised me was the answer that: “In the step from the original manuscript to the all-purpose manuscript, the “confidential” [label] was removed by the copy editor. All-purpose manuscripts are seen by on the order of 5000 people.” Well this is the same as 20 years ago. They are not even separating accounts. In the past only a report (to about 800 people) of the all-purpose manuscript was readable, and after the broadcast once it had become “data” it was viewable by everybody member of the department, but now all of NHK are using a server, and that's why the security level has dropped even more. There is a problem with the system design.

In Ikeda's next post on Jan. 19th, he remarks on how many hits the first post (above) attracted:


There were over 40,000 page views yesterday, the highest ever for this blog. It would seem that NHK employees are accessing [the site] in great numbers. Surprisingly enough, the NC system is the same as the one made when I joined 20 years ago, not only the basic design but even the terminal (NEC5300) itself. Since my knowledge might therefore be of some use, let me try to sort out this problem a little bit.


NHK has decided to carry out an inquiry before next weekend which will include all 11000 employees and contract employees, but this is just a stance directed at the administration, and there will be no substantial effects. Even if they keep doing these self-assessment inquiries, without any proof there are no employees who will come along and introduce themselves as “the one who did insider trading”. Rather, the oversight committee should obtain information from the 884 incidents of questionable transactions and compare it with system logs, wring out all the cases of questionable access, and then do an inquiry.


From the start it's not even clear what the basic facts of the case are. At the press conference, [NHK Managing Director] Ishimura [Eijiro] answered that: “Starting from 2h38min, 5000 people were able to access it”, but according to Sankei, 2 hours earlier “a portion of the people, the desk editor and so on” were able to read it. Therefore among the 3 people, there is a strong possibility that the television division (copyreading department) in Tokyo accessed it two hours early.


Placing an access restriction on television news [materials] however makes it impossible for work to continue, so this is fundamentally a problem of the morals of the person in question. However, in the case of television news as well, there is no need for people with no relation to the manuscript in question to see it. It should therefore be possible to prevent many problems by carrying out more detailed account administration and prohibiting pre-broadcast access (other than to the sender of the manuscript and desk editor responsible) to manuscripts like this one, which had its “ban lifted”.

もう一つは、アクセス制限しても、見出しに何と書かれていたかだ(*)。5300では見出しは一覧できるので、原稿が読めなくても、見出しに両社の固有名詞が入っていれば、インサイダー取引の材料になる。自宅へ帰って取引したというのは、 22分間では考えにくいので、2時間前から知っていた可能性が高い。出稿された原稿のタイトルを変えないで、アクセス制限だけかけていたという「頭隠して尻隠さず」の状態だった可能性がある。

Another point is that even if access is restricted, there is still something written in the heading (*). The title can be seen at a glance on the [NEC]5300, so even through the manuscript may not be readable, if the particular name of both companies is included in the heading, then it becomes data for insider trading. It's hard to think that someone could get home and make a transaction in 22 minutes, so there's a strong possibility that they already knew about it two hours earlier. There is a possibility that the “faults were only partly hidden” [Japanese proverb, literally: “hide the head but not the buttocks”/頭隠して尻隠さず], with the title of the manuscript that was submitted unchanged and only an access restriction imposed.


Also, according to Yomiuri [newspaper], somebody either in Mito or in Gifu, while the access restriction was in place, entered the password and saw the manuscript. Based on common sense, it's hard to think that anybody from a local broadcast station would have the right to access a manuscript prior to lifting of the ban [on viewing], but if somebody actually had it, [that would mean] there was something pretty weird with the system management. Worst case scenario, it's conceivable that the password was stolen.


The problem above all is the issue of why the access restriction was lifted 22 minutes early. Ishimura is saying that “5 minutes early would have been okay”, but the three o'clock news is only on General Television and Radio 1, so logically it would be alright to just release the all-purpose manuscript after the broadcast. Perhaps procedures have not been arranged for access restriction and cancellation.


When I was there, there were still only about 100 terminals, and only reports could be read, so there were not such major problems. However right now there are 1000 terminals, and to make matters worse it has become possible to connect via PC, which is equivalent to 5000 employees all having terminals. That delicate information, before broadcast, was “viewable by broadcast technicians coordinating relay and circuits” [indicates that] something was wrong with the system design.


The fundamental problem is that, while the security administration has hardly changed in 20 years, the range of access has steadily increased. NHK decided on the method while I was there, so I understand the contents of the system, but in the 20 years that they have used it since, it seems to have become like a black box. It's also astounding that they are still using the NEC mainframe. It has become a “prisoner of the IT general contractor”, richly customized and closed in.


Under these conditions, in a confused state with 6 computer network systems, for reporting, composition, data, accounting and so on (without any compatibility), it would seem that nothing has been improved. They should take the opportunity to cut ties with the IT contractor, integrate the system with the intranet, switch over to a all-purpose application, and review security administration. More than preaching about “ethics”, first and foremost is preventing with the system.


(*)According to Asahi, the title was “Eating out problem”, and it was the top news at 3 o'clock.

[Note: Hanako Tokita contributed important tips on translations in this article. Thanks Hana!]

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