Tobashi scheme

A tobashi scheme is a financial fraud where a client's losses are hidden by an investment firm by shifting them between the portfolios of other (genuine or fake) clients. Any real client with portfolio losses can therefore have their accounts flattered by this process. This cycling cannot continue indefinitely and so the investment firm itself ends up picking up the cost. As it is ultimately expensive there must be a strong incentive for the investment firm to pursue this activity on behalf of their clients.

Tobashi is Japanese for "flying away". It describes the practice where external investment firms typically sell or otherwise take loss-bearing investments off the books of one client company at their near-cost valuation to conceal investment losses from the clients' financial statements. In that sense, the losses are made to disappear, or 'fly away'.

The scheme often makes use of off-balance sheet financing or Special purpose vehicles with non-coterminous accounting periods. Assets and liabilities are transferred at fictitious valuations, in the hope that losses are deferred until the market recovers. There are no rules as to how frequently the assets are transferred, and because there is little transparency over the valuation, losses can grow at every sale.

As the market rout in the 1990s was drawn out, simple loss deferrals would no longer be sufficient. Advisors would devise schemes where they would be compensated for holding on to their bad investments over time by other means, such as buying specially issued bonds or paying for non-existent services.

During the Japanese stock market boom in the late 1980s, investment bankers persuaded many Japanese companies to raise capital by issuing bonds with warrants attached, although they did not require the funds for operational purposes. Clients were tempted by the potential returns the investment firms said they could generate on stock market investments. However, as stock values fell, companies were in a vicious circle where not only their investments soured, the debt remained after issued warrants expired, weakening the companies' capital base.

In Japan, it is an offence under the Securities and Exchange Law for a brokerage itself to compensate the final client's losses. In 1991, it became a criminal offence for brokers to compensate clients for investments which had gone bad or to otherwise conceal their losses. In the late 1990s new accounting rules introduced required investment valuations to be mark-to-market, forcing losses or gains to be shown in the financial statements. Despite the tightening, a loophole involving intangible assets continued to be exploited: Japanese acquisition accounting rules allow companies to record M&A fees on their deals as part of consideration, and goodwill on consolidation may be depreciated over 20 years.

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