1

Summary ・Whether or not transactions of shares, investment trusts, and warrants at issue are considered to constitute illegal excessive volumes of transactions (Affirmed) ・Whether or not there was a breach of duty of explanation in a case of solicitation of investment in warrants (Affirmed)

【LEX/DB(TKC Corporation)28031411】 Case of Claim for Damages The Osaka District Court, 1992 (Wa) No. 2187 Judgment of August 29, 1997

Judgment Toyonaka-shi, Osaka-fu Plaintiff X Counsel for the Plaintiff: Toshihiro Miki Counsel for the Plaintiff: Hiroe Nakai Counsel for the Plaintiff: Kanichi Kushida Counsel for the Plaintiff appointed as subagent by the Counsel for the Plaintiff: Hiroshi Nakajima 6-1 Koamicho, Nihonbashi, Chuo-ku, Tokyo (Place of service: Wako Securities Co., Ltd., Ikeda Branch, 3-1-116 Sugahara-cho, Ikeda-shi, Osaka-fu) Defendant: Wako Securities Co., Ltd. Representative Director of the Defendant: Masaaki Sugishita Counsel for the Defendant: Yasuyuki Nakai Counsel for the Defendant: Toshiyuki Oume Counsel for the Defendant: Yasuo Kimura Counsel for the Defendant: Yuki Matoba Counsel for the Defendant: Toshio Kawamura Counsel for the Defendant: Kenji Fukuda Counsel for the Defendant: Kinichi Osuga Counsel for the Defendant: Kenji Yukawa

2

Main Text of Judgment

1. The Defendant shall pay the Plaintiff 123,774,480 Yen plus the delay damages accrued thereon from March 1, 1991 till the full payment thereof at an annual rate of 5 percent.

2. The other claims made by the Plaintiff shall be dismissed with prejudice on the merits.

3. The court costs shall be borne by both parties; one-half of the costs shall be borne by the Plaintiff and the remaining half shall be borne by the Defendant.

4. This judgment may be provisionally executed for only the paragraph 1 of the Formal Judgment.

Facts and reasons

Section 1. Claim of the Plaintiff The Defendant shall pay the Plaintiff an amount of 245,898,961 Yen plus the delay damages accrued thereon from March 1, 1991 till payment thereof at an annual rate of 5 percent. Section 2. Summary of the Case This is a case in which the Plaintiff demands compensation for damage, based on the breach of agreements or act of tort, claiming that he had been induced to excessive transactions, or churning, by the Defendant for the purpose of acquiring commissions from margin /spot transactions of stocks, warrant transactions, and investment trust transactions conducted between the Plaintiff and the Defendant. I. Underlying Facts (There is no dispute between the parties with respect to facts with

no evidence indicated.) 1. Parties (i) The Plaintiff was born in 1926, graduated from Dalian Commercial High School

and studied at Naval Aviation Preparatory School, and was temporarily employed for about three months at a local securities company in Kyoto (chore boy). Then, he was engaged as a police officer and drove patrol cars from 1949 to 1975. After retiring from the duty as police officer, he worked as driver at a private firm. He has not held any job since he retired in 1987.

3

(ii) The Defendant, a joint stock company, has acquired the Minister of Finance’s license pursuant to the Securities and Exchange Act and is engaged in the securities business. Transactions with the Plaintiff were conducted at the Defendant’s Ikeda Branch. Hirobumi Ihara, Manager of Marketing Division II (Eigyo 2-ka) of the Branch, and a non-litigant (hereinafter “Ihara”), was in charge of transactions with the Plaintiff for the period from around the summer of 1988 to February of 1991.

Further, two persons were successively posted as General Manager of the Ikeda Branch of the Defendant, namely, Yuki Maeda, a non-litigant (hereinafter “Maeda”), posted from 1989 to around February 1990, and Yasuharu Sugata, another non-litigant (hereinafter “Sugata”), posted from February 1990 to around 1991.

Mr. Ihara and Mr. Sugata are registered Sales Representatives pursuant to the Securities and Exchange Act (Evidence of the witness Hirofumi Ihara (first testimony and second testimony; hereinafter, collectively referred to as the “Ihara Testimony”), evidence of the witness Yasuharu Sugata (hereinafter, the “Sugata Testimony”)).

2. Background of transactions (i) Background of transactions between the Plaintiff and the Defendant until around

July 1988 and the Plaintiff’s investment trends, etc. The Plaintiff conducted stock transactions from around 1955 by commissioning the

Defendant (trade name at that time: Kabushiki Kaisha Oi Shoken) to make the transactions.

The Plaintiff purchased stocks of so-called largest corporations in different industries in units of 1,000 shares, including a number of non-litigant companies listed on the first section of the Tokyo Stock Exchange (hereinafter “Tosho”), namely, Matsushita Electric Industrial Co.,Ltd., Mitsui & Co., Ltd., Tokio Marine and Fire Insurance Co., Ltd. (hereinafter company names may be abbreviated), three to five times per year on average, and held the shares for long periods. The total number of such shares held amounted to 34 stock issues collectively valued at a total market price ranging from 90,000,000 yen to 100,000,000 yen in 1987.

The Plaintiff recorded the names of stocks he held in his diary, checked the price movements every day in the newspaper, calculated the current market price of the stocks, and enjoyed confirming the outstanding amount of his stock assets.

(ii) Background from around July 1988 to July 1995 (1) In 1988, the Plaintiff came to know that his deceased wife Y, a non-litigant

4

(hereinafter “Y”), had continuously commissioned the Defendant to make stock transactions by using the account of her relative Z, a non-litigant (hereinafter “Z”). The Plaintiff then converted all of the stocks, etc. in the account of Z to cash and transferred the cash to the account in the name of Y at the Defendant, on the grounds that the stocks and convertible bonds in the account mentioned above had been purchased with the Plaintiff’s salary and Y’s income.

As a result of this, the cash in the account of Y amounted to approximately 94,000,000 yen and the Plaintiff purchased an investment trust product (twin select 88-2) from the Defendant using 50,000,000 yen in the account (Evidence No. Otsu-9 and Otsu-10).

(2) Y died on September 23, 1988 and the Plaintiff has lived alone since. (3) The Plaintiff sold all stocks, etc. in the name of Y mentioned above and transferred

the proceeds of the sale from the account of Y to the account of the Plaintiff (Evidence No. Otsu-9 and Otsu-11).

(4) The Plaintiff sold virtually all shares of the 34 stock issues mentioned above over the period from July 1989 to October of the same year (Evidence No. Otsu-11).

(iii) Moves from July 1989 to February 1991 (the stock purchases, sale, and other

commissioned transactions between the Plaintiff and the Defendant during this period will be collectively referred to as the “Transactions”).

(1) Pursuant to the solicitations of Mr. Ihara, the Plaintiff started conducting stock margin transactions at the Defendant’s Ikeda Branch on July 26, 1989, the details of which are indicated in Exhibit 1 “Table I (List of Margin Transactions; hereinafter, simply referred to as “Table I”; every table indicated in the Exhibit at the end of this document will be similarly referred to). These transactions were as summarized in Table III.

Further, the Plaintiff conducted spot stock transactions, bond transactions (convertible bond transactions, Japanese government bond transactions, warrant transactions), and investment trust transactions, as indicated in Table II, by entrusting them to the Defendant. These transactions were as summarized in Table IV.

The changes in the cumulative profit and loss of the Transactions were as indicated in Table V.

The status of profit and loss, if separated at the end of June 1990, was as indicated in Table VI (separated at the end of June 1990).

The total commissions paid by the Plaintiff to the Defendant’s Ikeda Branch from

5

1989 through 1991 were as indicated in Table VII. The Plaintiff and Defendant conducted warrant transactions on and after May 22,

1989, as indicated in Table VIII. (2) Because the loss from the Transactions increased due to the aggravation of the

stock market in September 1990, the Plaintiff decreased the amount of transactions with the Defendant after October of the same year, disposed of the stocks already purchased and those held in long positions, etc., and terminated the transactions with the Defendant in February 1991.

As a result, the Plaintiff held only 100 shares of Ikeda Bank (the name of the corporation is abbreviated; the same shall apply hereinafter) and 500 shares of Sony. However, the Plaintiff still held some investment trusts in his custody account with the Defendant’s Kyoto Branch.

(3) The commissions, etc. Mr. Ihara acquired from Transactions with the Plaintiff accounted for approximately all of the commission acquired from private customer transactions conducted through Mr. Ihara for the period from around July 1989 to February 1991, and this accounted for almost all the commissions acquired from transactions charged by Mr. Ihara for the same period.

II. Plaintiff’s Arguments 1. Background of the Transactions, etc. (i) Up until the Transactions (1) The Plaintiff conducted stock transactions continuously and exclusively through

the Defendant from around 1955 onward, and his confidence in the Defendant deepened as time went on. As the Plaintiff received assistance from the Defendant in selling the stocks held by Y in the name of Z and transferring the proceeds from the sale of the stocks to Y’s account, his confidence in the Defendant deepened further.

The persons who had been in charge of the Plaintiff’s account at the Defendant, including Mr. Ihara, knew very well that the Plaintiff had the intention of purchasing the stocks of largest corporations in the respective industries represented on the first section of the Tokyo Stock Exchange, and holding them for long periods as so-called savings-type investments.

(2) After the Plaintiff had nursed Y for a long period of time, Y died, and the Plaintiff was very tired, both physically and mentally. It was around this time, that is, in the period before and after Y’s death, that Mr. Ihara recommended that the Plaintiff conduct securities transactions, explaining that high rates of interest comparable

6

to the rates offered by a bank could be earned. The Plaintiff was thinking of managing a limited number of stable issues from

among the 34 stock issues the Plaintiff held at that time. On the death of Y, he was also thinking of starting from zero after selling all of the stocks he held.

Accordingly, the Plaintiff sold all the stocks, etc. held in the name of Y as noted in 2. (ii) (3) and (4) above, and concentrated the proceeds from the sale of stocks in the account of the Plaintiff, and sold almost all shares of the 34 stock issues mentioned above.

Then the Plaintiff deposited the proceeds from the sale of stocks with the Defendant through Mr. Ihara, with the intention of accruing interest at a rate equal to or higher than the rate from bank deposits.

(ii) Background of the Transactions (1) Commencement of the Transactions Messrs. Maeda and Ihara solicited the Plaintiff in around July 1989, suggesting that

he “try margin transactions to earn some extra money.” The Plaintiff had no experience whatsoever in margin transactions. Further, as

mentioned above, he was thinking of asset management by narrowing down to a limited number of stable, blue-chip stocks and he possessed ample assets necessary for living after retirement. Therefore he had no need to seek big profits by conducting margin transactions.

However, the Plaintiff was unable to say no to the enthusiastic solicitations from Mr. Ihara, who had taken care of him in various ways. Further, Mr. Ihara solicited saying that it would be a sound investment of deposited assets to earn some extra money. As the Plaintiff had confidence in the Defendant, he believed that the Defendant would not subject the Plaintiff to any risk of high loss, and agreed to conduct margin transactions under Mr. Ihara’s guidance.

It is not a fact that the Plaintiff had the intention of increasing his assets from 200,000,000 yen to 300,000,000 yen or 400,000,000 yen, or that he started conducting margin transactions to achieve the above purpose in the belief that spot transactions would only bring limited results.

(2) The transactions between the Plaintiff and the Defendant were as follows: A. The margin transactions were carried out in the following manner. Stocks were

purchased and sold in transactions in which the issues, prices, and quantities of the stocks were selected at Mr. Ihara’s discretion. The details of the transactions were notified to the Plaintiff through a woman employee of the Defendant’s Ikeda

7

Branch after the transactions were completed. The Plaintiff never rejected Mr. Ihara’s proposals.

B. The Defendant delivered transaction reports to the Plaintiff, but as the number of transactions and amounts of money involved were so large, the reports became voluminous and the Plaintiff had difficulty in understanding the increasingly complex relationships between purchases and sales. As the Plaintiff had confidence in Mr. Ihara, he did not care to inspect the reports and did not understand the whole picture of the transactions, including the profit and loss.

C. The precise picture of the transactions was not reported by the Defendant to the Plaintiff.

Whenever the Plaintiff questioned Mr. Ihara on the state of the stock transactions, Mr. Ihara merely repeated the same reply, namely, that losses were kept to a minimum. However, the Plaintiff did not question him further, because he had confidence in Ihara,.

D. When demanded by Mr. Ihara at the Defendant’s Ikeda Branch, the Plaintiff affixed his signature and seal on the transaction report, without receiving any explanation regarding the documents. Further, the report measured 115 cm in length on average, and was not something the Plaintiff could understand.

E. The Defendant says that the form of transactions with the Plaintiff changed after the last day of June 1990, but this is not a fact and transactions continued before and after this point at Mr. Ihara’s discretion.

Further, it is not a fact that Mr. Sugata recommended the Plaintiff to settle margin transactions in September 1990 and the Plaintiff rejected this recommendation.

(3) The Plaintiff became uneasy when the stock market conditions deteriorated in around September 1990. On October 4 of the same year he demanded that Mr. Ihara inform him of the exact outstanding amount, and he received a reply from Mr. Ihara indicating that the current outstanding amount was 160,000,000 yen. Up to that point the Plaintiff had considered 320,000,000 yen to be his defense line (in other words, the Plaintiff had intended not to conduct transactions that would potentially reduce the asset amount in the transaction account to lower than this amount), and was therefore stunned by this reply.

While the Defendant assumed a conciliatory attitude towards the Plaintiff by inviting him to Arima Onsen (spa) on the 14th of the same month, it had the Plaintiff affix his signature and seal on the transaction report (Evidence No. Otsu-13-6), on the 8th of the same month, and had him repay the money borrowed from Japan Securities Finance Co., Ltd. on the 9th of the same month.

8

However, the Plaintiff still had doubts about the details of the Transactions. He disposed of the stocks already purchased and his long position held in margin transactions, and terminated the Transactions. He suffered a large amount of loss through this process.

2. Illegality of the Transactions (i) Excessive transactions (regarding all the Transactions) (1) Securities companies and their employees are required to perform their duties for

customers according to the principle of good faith and fair dealing (Article 49-2 of the Securities and Exchange Act, duty of good faith and fair dealing), and may not solicit transactions that may be considered inappropriate in light of the knowledge, experience, and assets of the customers (duty of compliance with the suitability principle, Article 54, Paragraph 1, Item 1 of the said Act); as they are commissioned to conduct securities transactions continuously, they owe the duty of care of a good manager under a consignment contract or due to a continuous business relation (duty of care of a good manager under a consignment agreement) and may not conduct purchase and sale transactions that may be considered excessive in light of the purpose of consignment or the amount of money involved (Article 50, Paragraph 1, Items 3 and 4, Article 161, Paragraph 1 of Cabinet Office Ordinance on Restraining Excessive Numbers of Buying or Selling Transactions).

Excessive transactions, or Churning, mean securities transactions in excessive quantities or at excessive frequencies, without due regard of the investment knowledge, experience, or investment intentions of the investor, or of the amount or nature of the funds invested. Any solicitation by a securities company or its employees to conduct such transactions is in breach of the duty of good faith and fair dealing, the duty of compliance with the suitability principle, or the duty of care of a good manager under the consignment agreement mentioned above.

This “Legal Theory of Churning” is a theory formulated from case law in relation to securities transactions in violation of U.S. Securities Exchange Act of 1934, Section 10, Paragraph b (provision prohibiting manipulative and deceptive devices) and Section 15, Paragraph c (provision prohibiting manipulative and deceptive devices by brokers/dealers) and its requirements are as mentioned below. This should also be applied in the interpretation of Japanese law.

(a) That the quantity and frequency of transactions are excessive in light of the customer’s investment knowledge/experience or investment intentions, or in light of the amount and type of funds (requirement for excessiveness).

http://ejje.weblio.jp/content/consignment+contract

9

(b) That the securities companies, etc. directed and controlled the series of transactions in question (requirement for control or for control of accounts).

(c) That the securities companies, etc. attempted to earn their own profits by abusing the trust of the customer (requirement for malicious intent or requirement for willful misconduct or material negligence).

As requirement (c) may be naturally presumed if requirements (a) and (b) are fulfilled, (a) and (b) are the requirements to be considered substantially when assessing Churning.

(2) Requirement for Excessiveness (1) – Large Quantity and Frequency of Transactions

The Transactions are made in large quantities and frequently, as follows: A. Great diversity of subject issues and markets The stocks traded and the markets where they were traded amounted to 143 stock

issues (21 or more categories of business) and 8 markets during a period of only 1 year and 8 months (20 months), and these transactions involved various products including investment trusts, bonds, and warrants.

B. Large quantity / frequency of transactions The purchase and sale amounts during the abovementioned 20 months totaled to

more than 31,382,180,000 yen, and the number of purchases and sales was 776 (about 517 trades per year).

C. In a great majority of the transactions, the securities were held for only very short periods.

Of all the transactions executed, so-called intra-day tradings (the practice of buying and selling securities on the same trading day such that all new positions are closed before the market closes for that trading day) accounted for 12.6%, transactions of securities held for periods of less than 10 days accounted for 63.7%, and transactions of securities held for periods of less than 30 days accounted for 85.1%.

D. Turnover rate of funds The so-called turnover rate of funds (index indicating how many times the funds

turned over per a certain period of time) was 33.6 times per year, as indicated in Exhibit 9 (“Table IX Table on Calculation of Fund Turnover Rate”).

When the turnover rate of funds exceed 6 times per year, the transactions cannot be said to be based on calm and rational investment decisions, and should be considered to be irrationally frequent transactions. The turnover rate of funds in the Transactions was abnormally high, even in light of the above.

E. High amount and high-rated commissions, etc.

10

Commissions, etc. acquired by the Defendant’s Ikeda Branch over the 20-month period mentioned above through the transactions with the Plaintiff amounted to approximately 165,710,000 yen, as indicated in Table X. This is not only a high amount in itself, but this amounts to 74% of the amount of net loss of the Plaintiff, and 58% of the amount invested by the Plaintiff, which means that approximately three-fourths of the amount of Plaintiff’s net loss was the income of the Defendant in the form of commissions, etc.

(3) Requirement for Excessiveness (2) – Suitability A. The Transactions, characterized by the following, go far beyond the normal

transactions, and are not suited to general investors. a. “Change-over transactions” are made frequently over short periods of time. General investors normally conduct securities investments based on calm and

independent decisions after collecting information. However, the transactions such as those mentioned in (2) C cannot be considered to have been made in this manner of investment, by any means; to the contrary, they can only be considered transactions for investment to let a securities company earn commissions.

b. “In-and-out trading” transactions (shares of the same issue are bought and sold repeatedly) are frequently conducted.

In-and-out trading is not conducted based on a certain motive or rational investment decision, but is only meant to enable securities companies to earn commissions.

Transactions of Sanyo Shokai stock in II to VI, Sanyo Kasei stock in IX to XXV, Mos Food stock in XV to XXI, Naigai stock in XXIV to XLVIII, Tsumura stock in L to LV, Keiyo stock in LIV to LIX, Chiyoda Corp. stock in LXIX to LXXVII and Nintendo stock in CIII to CXI in Table XI (figures set out in the margin are indicated in Roman numerals) are so-called in-and-out trading transactions.

c. Escalation of “pyramiding trading” (transferring gains to margin collateral in margin transactions), and examples of “transactions where the gains are not more than the commissions paid” (securities transactions where the gains are zero or negative when commissions are deducted), and “mass sale by solicitation” (soliciting a large number of customers to purchase a large amount of securities of a specific issue) are found.

So-called pyramiding trading leads to the formation of open positions with the fullest scope of proceeds that may be collateralized by the margin collateral and substitute securities to expand margin transactions. This is an irrational transaction procedure where it becomes difficult to prepare additional collateral and the risk of

11

loss, etc. increases when the price of the securities fluctuates in the direction opposite to that expected.

Further, “transactions where the gains are less than the commissions paid” mean transactions which are made without considering the commissions by customers and which, when repeated, serve no purpose but to enable securities companies to earn commissions. “Transactions where gains are not more than the commissions paid” are found in various parts of the Transactions.

“Mass sale by solicitation” cannot be suited to general investors, as it not only inhibits them from making independent decisions, but also leads to market manipulation. “Mass sale by solicitation” is observed in each transaction in (3) B. mentioned above. Of the stocks, the Naigai stock and Keiyo stock are thinly traded issues (the numbers of trades are extremely small), and their prices therefore fluctuate intensely. The mass purchase of such shares is simply reckless.

d. “Speculative stocks” (stocks that take on an extremely speculative character as a result of trading with certain purposes by professional market manipulators known as “stock speculators”) are included.

Speculative stocks are stocks whose prices are manipulated intentionally through speculative intervention by stock speculators; the fairness of securities transactions is destroyed by such intervention and the stock prices become extremely unstable. Acquiring speculative stocks is extremely risky in comparison to acquiring normal stocks, and soliciting general investors to purchase such stocks is extremely risky and irrational. The Transactions involved numerous speculative stocks, including Tokyo Nissan Hanbai stock, Sanyo Kasei stock, Naigai stock.

e. The commissions, etc. Mr. Ihara acquired from customers were only from the Plaintiff, the amount and rate of which are large, and these commissions, etc. accounted for approximately 15% of the commission and other income of the Defendant’s Ikeda Branch.

B. The Transactions were hardly suitable for the Plaintiff Until then, the Plaintiff had experience only in spot trading of stocks of blue chip

companies listed on the first section of the Tokyo Stock Exchange, and when trading such stocks, he avoided speculative trading, and he diversified risk by investing in various industries and holding stocks stably for long periods.

Further, with regard to the Transactions, the Plaintiff was considering investing approximately 200,000,000 yen of securities assets in the near future by narrowing down his holdings to a limited number of stable blue chip stocks. He possessed sufficient assets for life after retirement and was under no special pressure to

12

aggressively increase his securities assets. He had the intention of limiting his portfolio of securities assets to a value of approximately 200,000,000 yen at the time of the Transactions through the holding of a limited number of stable blue chip stocks.

The Plaintiff was led to conducting margin transactions only because he was solicited by Mr. Ihara and others to “earn some extra money.” The Transactions were conducted at the discretion of Manager Ihara and they did not suit the investment experience and intentions of the Plaintiff.

(4) Requirement for Ability to Control The Plaintiff had no experience in margin transactions until then. He may have had

the knowledge that margin transactions were more risky than spot transactions, but it was impossible for him to conduct the frequent and large-amount margin transactions making up the greater part of the Transactions, either voluntarily or based on independent investment decisions. Furthermore The Transactions involved securities of various markets and issues, and made use of technique such as short-term change-over transaction, speculative stock oriented, dealing in thinly traded securities in massive lots used by so-called professional speculators or expert securities brokers . These transactions were possible only through the active involvement of Mr. Ihara himself.

Mr. Ihara had been entrusted by the Plaintiff to select the issues, unit prices, and quantities of the securities traded, and the funding methods. The Transactions were actually discretionary purchases/sales and satisfied the requirement for ability to control.

(ii) Illegality of warrant trading (1) Of the warrants, those in which the debenture part and the subscription rights are

detachable and subscription rights are separately securitized (the so-called detachable type warrants) may fail to qualify for the exercise of rights, or may become invalid and cease to exist, if the stock price does not exceed the exercise price of the subscription rights, and thus may be subject to the risk of becoming trash. Further, while the value of a warrant is determined, theoretically, based on parity between the exercise price of the subscription rights and the market stock price, a so-called premium will actually be added to the value, and the value will actually fluctuate sharply in relation to the movement of the stock price. For these reasons, investment forecasting is difficult, price posting is insufficient, and the process of price formation is opaque. Warrants were not known widely as an

13

investment product over the period from 1989 through 1991, and neither private investors nor marketing staff of securities companies had sufficient understanding of the risk, mechanism, or details of warrants.

Consequently, when soliciting customers for warrant transactions, securities companies and their employees are required to not only fully explain the mechanism, risk, etc. of the product (duty of explanation. Securities and Exchange Act Article 46, Rules of Fair Practice No.4), but also to make suitable solicitations in light of the knowledge, experience, and status of the assets of customers (duty of compliance with suitability principle, Securities and Exchange Act Article 54-1, Paragraph 1, Item l).

(2) As the Plaintiff lacked any knowledge or experience regarding warrants, and as he intended to make investments with the purpose of accumulating assets stably, warrant trading did not suit the Plaintiff.

However, Mr. Ihara not only neglected to give specific explanations regarding the characteristics and risks, etc when he solicited the Plaintiff to conduct warrant trading, but drew the Plaintiff into warrant trading by calling the instrument a “warrant bond,” which is misleading. Such a solicitation was a breach of duty of explanation and duty of compliance with the suitability principle mentioned above.

3. Liability of the Defendant (i) Liability based on breach of agreements With respect to the Transactions, although the Defendant had the obligation not to

engage in excessive trading and, further, had the duty of explanation and duty of compliance under the suitability principle when soliciting the warrant trading, Mr. Ihara, the party assisting with the performance of obligations of the Defendant, neglected these obligations and induced the Plaintiff to consent to unreasonable trading activity such as excessive trading. Thus, the Defendant is liable to compensate for damages incurred by the Plaintiff pursuant to his failure to perform these obligations (Article 415 of the Civil Code).

(ii) Tort liability As Mr. Ihara induced the Plaintiff to consent to excessive trading and breached the

duty of explanation and duty of compliance with the suitability principle when soliciting for warrant trading, he is liable to compensate for the damages incurred by the Plaintiff pursuant to Article 709 of the Civil Code.

The Defendant is the employer of Mr. Ihara, and as the act of tort mentioned above

14

was committed in relation to the performance of the Defendant’s business, the Defendant is liable to compensate the Plaintiff for the damages pursuant to Article 715 of the Civil Code.

4. Damages: Total of 245,898,961 yen (i) Actual amount of loss in the Transactions: 223,548,961 yen Refer to Exhibit 5 “Table V,” “Total Column” (including damages 21,725,612 yen

pursuant to warrant transactions mentioned at the end of “Table VIII” in Exhibit 8). (ii) Attorneys’ fees: 22,350,000 yen 5. Now therefore, the Plaintiff claims from the Defendant a payment of 245,898,961

yen, together with delay damages accrued thereon at the annual rate of 5 percent prescribed by the Civil Code, for the period from March 1 of 1991, the day after the act of tort was committed (the termination date of the Transactions is February 25, 1991), until the full payment.

III. Defendant’s Arguments 1. Background of the Transactions, etc. (i) Circumstances from July 1989 to June 1990 (1) Over the period from July 1988 to July 1989, the Plaintiff was intent on

administering and managing his own assets and assets left by Y. He was especially interested in the market price trend of the stocks he held and the market conditions throughout this period, and in around July 1989 he was interested in the outstanding balance of his own assets and intended to increase his assets.

In complying with the Plaintiff’s wishes, Mr. Ihara purchased investment trust products, convertible bonds and discount government bonds, etc, instruments recognizable as cash equivalents for the Plaintiff. Further, he recommended margin transactions to increase the assets of the Plaintiff in accordance with the Plaintiff’s wishes.

It is not a fact that Mr. Ihara solicited the Plaintiff to start margin transactions to earn some extra money for the Plaintiff.

(2) In complying with the Plaintiff’s wishes, Mr. Ihara recommended transactions of stock issues that Mr. Ihara considered to be of good standing. Further, he obtained the Plaintiff’s specific approval with respect to 70-80% of the Transactions, and for the rest he obtained the Plaintiff’s prior approval comprehensively and conducted individual purchases/sales only at appropriate moments.

15

Mr. Ihara telephoned the Plaintiff every morning to inform him of the stock issues purchased/sold, and the Plaintiff approved the purchases/sales of those stock issues without expressing any particular disapproval. Further, at times, the Plaintiff actually entrusted Mr. Ihara to make decisions on the purchases/sales, numbers of prices, share prices, etc. In addition, the Plaintiff told Mr. Ihara that in margin transactions, profit should be realized when profits are evaluated; that when a stock has an unrealized loss it should be disposed of early and another stock issue should be sought in its place; that a strong attitude must be taken in stock transactions; and that it is better to purchase when a stock price goes down. Overall, the Plaintiff was seeking to conduct aggressive transactions.

The Plaintiff traded the shares of Nihon Godo Finance knowing it was a speculative stock.

Mr. Ihara reported the status of profit and loss to the Plaintiff, and the Plaintiff himself obtained information regarding the price changes of open position shares through telephone calls from Mr. Ihara or by reading publications such as the Nihon Keizai Shimbun, and confirmed the profit and loss conditions of the margin transactions.

(3) At a Japanese-style restaurant called “Kogane,” on around May 28, 1990, Branch Manager Sugata, in the presence of Mr. Ihara, explained to the Plaintiff that the Plaintiff did not necessarily need to conduct margin transactions, as he already had plenty of assets, and that there were more risks involved in margin transactions than in spot transactions, as there were the elements of interest payments and due dates. He went on to advise that as the frequency of purchases/sales had been increasing dramatically, the Plaintiff should reduce margin transactions and place more weight on spot transactions. Margin transactions should be limited only to earn some extra money, he explained.

The Plaintiff, however, said that he would conduct margin transactions to increase his assets and that he was aware of the risks involved. He also said that transactions made through Mr. Ihara until that time were based on the Plaintiff’s true intentions and in compliance with his true wishes.

In this way, Mr. Sugata confirmed that the Plaintiff was well aware of the details of past transactions and that he intended to continue to conduct margin transactions and spot transactions as before through Mr. Ihara, the person in charge.

The Plaintiff earned a profit of 16,414,253 yen in total through the Transactions for the period from July 1989 to the last day of June 1990 (refer to Table V) and the assets in custody with the Defendant as of June 29 of the same year were as

16

indicated in Table XII, which amounted to the then market price of more than 300,000,000 yen.

(ii) Circumstances from July 1990 to March 1991 (1) On June 29, 1990, Mr. Sugata demanded Mr. Ihara to confirm the intention of the

Plaintiff prior to each transaction and, at the same time, prohibited short-term loss-cut trading. The accrued profit and loss through the Plaintiff’s stock transactions was approximately 7,000,000 yen on the plus side (excluding investment trust-/bond-related trading).

In July of the same year, Mr. Ihara started to obtain the prior specific approval of the Plaintiff before conducting each transaction, and refrained from conducting short-term loss-cut trading and solicitations of such trading. The Plaintiff, however, did not change his inclination to pursue aggressive trades and asked for positive and bullish advice from Mr. Ihara, as before.

On the other hand, Mr. Ihara continued to trade mainly spot, by selecting the issues, and as a result, the number and amount of the Plaintiff’s transactions decreased greatly from July of the same year, as indicated in Exhibit 6 “Table VI.”

(2) When stock market conditions worsened with the invasion of Kuwait by Iraq in August 1990, Mr. Ihara recommended that the Plaintiff settle the open position of margin transactions and sell spot-trading stocks, but the Plaintiff did not change his aggressive attitude.

On that occasion, the Plaintiff had an accurate awareness that the market prices of stocks held and those in long positions in margin transactions had declined, and that the amount of unrealized losses was increasing.

(3) On around September 18 of the same year, Mr. Sugata urged the Plaintiff to confirm the details of the Transactions and settle the margin transactions, but the Plaintiff rejected the advice to settle.

However, in around October of the same year, stock prices declined further and, as a result, the Plaintiff ended up covering the margin transactions one after another and terminated the Transactions in February 1991.

2. Illegality (i) Regarding Requirements for Excessive Transactions In order to determine whether or not illegal excessive transactions took place, it is

not enough to consider the objective requirements, such as, (1) excessiveness of transactions or (2) ability to control.

17

That is, if the above two are the only requirements for the illegal excessive transactions, and satisfaction of them results in the securities company being held liable to compensate its customers for damages they have incurred, then the securities company will have to compensate for their losses at all times in the name of compensation for damages, even the losses from transactions have occurred in efforts to earn profit for those customers in accordance with their intentions. This will infringe the principle of self-responsibility, that is, the principle that profits and losses made in securities transactions should be attributable to the customer.

Consequently, in addition to the two requirements mentioned above, it will be necessary to satisfy the requirement for malicious intent, that is, that the securities company or its employee was acting with the aim of acquiring profit for the securities company, etc. in disregard of the intentions and interests of the customer.

(ii) Change in the form of Transactions before and after the last day of June 1990. Because the subjective elements of the investor (investment knowledge, experience,

inclination for investment, etc.), an ability to control on the part of the securities company, and the intentions of the persons in charge at the securities company, etc., that is, the requirements for illegal excessive transactions, are all things that may change over time. If a big change in these elements is observed after a certain period of time in a series of transactions, it would be reasonable to separate the transactions before and after such time and to judge whether or not the case at hand is a case of the illegal excessive transactions for each period.

That is, if the customer intended to continue transactions as before even after the securities company gave warnings and pointed out to the customer that the transactions were excessive or advised the customer to change the manner of transactions, or if the manner of transactions actually was changed (e.g., discontinuance of discretionary transactions), the transactions before and after the occurrence of the change should be separated and be assessed separately to determine whether illegal excessive transactions took place during each period.

As the manner of the Transactions completely changed after the last day of June 1990, the judgment as to whether or not this case is a case of illegal excessive transactions should be conducted separately for the period before and after such date.

(iii) Transactions from July 1989 to the last day of June 1990 (1) Requirement for excessiveness – suitability of the Plaintiff

18

The attribution, inclination for investment, etc. of the Plaintiff are as follows. The Transactions, in light of this, cannot be said to have been unsuitable for the Plaintiff and cannot be said to have met the requirement for excessiveness.

a. The Plaintiff had rental income from real estate he inherited from Y, and he also received pension as a retired public officer. He did not lack funds to cover post-retirement living expenses for the time being, and the assets constituting investment funds in the Transactions, namely, a.) the cash, etc. acquired from Y’s account (approximately 94,000,000 yen), b.) the proceeds from sale of 34 stock issues (approximately 80,000,000 yen), and c.) the bank deposits / deposited assets at institutions other than the Defendant’s Ikeda Branch (approximately 100,000,000 yen), were all surplus funds.

b. The Plaintiff started margin transactions with the intention of increasing his assets through securities transactions and intended to continue, expand, and actively conduct the transactions.

c. The Plaintiff also requested Mr. Ihara to actively recommend stocks of a speculative character to him.

(2) Requirement for ability to control In light of the circumstances mentioned above[Editor’s note: The word “above” is

an accurate translation but “below” should be correct in light of the context.], the Transactions cannot be said to have been conducted under Mr. Ihara’s leadership and cannot be said to have met the requirement for the ability to control.

a. The Plaintiff had virtually entrusted the transactions to Mr. Ihara on a discretionary basis, but Mr. Ihara nevertheless confirmed the Plaintiff’s intentions beforehand for approximately 70-80% of the transactions, and also obtained comprehensive approval beforehand for the approximately 20-30% remaining, as well. Further, Mr. Ihara had been entrusted by the Plaintiff to settle margin transactions in the case of urgency.

Mr. Ihara executed the Transactions thus, in compliance with the Plaintiff’s intentions.

b. The Plaintiff had an interest in the market price of the stocks he held, had Mr. Ihara inform him of the aggregate price, and checked the stock prices by himself based on newspaper articles; he was notified of the unrealized profit/loss and the realized profit/loss of open positions in margin transactions and of spot-trading stocks from Mr. Ihara and from a woman employee of the Defendant (a marketing assistant) by telephone, kept record of the information, received explanations from the Defendant based on the transaction table, and was aware of the transition of the

19

Transactions and status of his assets. (3) Requirement for malicious intent Mr. Ihara started and continued margin transactions pursuant to the Plaintiff’s

intentions. As he did not do this with the intention of earning commissions, the requirement for malicious intent is not met.

(4) According to the above, none of the requirements for the illegal excessive transactions mentioned above is satisfied for the Transactions from July 1989 to the last day of June 1990, and the Transactions were thus not illegal.

(iv) Transactions from July 1990 to February 1991 (1) Requirements for excessiveness – large quantity and frequency of transactions The number of orders and the Transaction amounts by the Plaintiff decreased

drastically after the last day of June 1990 (refer to Table VI), and the average holding period of securities purchased after July 1 of the same year was 66.49 days for spot transactions and 46.74 days for margin transactions, for an average of 57.77 days in total. The so-called short-term trades were no longer conducted.

Consequently, each of the transactions after July 1, 1990 does not satisfy the requirement for large quantity and frequency.

(2) Requirements for ability to control and malicious intent Mr. Ihara reduced margin transactions, refrained from conducting short-term trades,

and conducted the transactions after confirming the details of the orders with the Plaintiff in advance.

In spite of his own accurate recognition of the aggravated conditions of the stock market and the standing of his unrealized profit/loss at that time, and in spite of the recommendations from Messrs. Ihara and Sugata to reduce margin transactions, the Plaintiff did not soften his bullish stance. It was around October 1990 that he finally covered his positions and reduced transactions with the Defendant’s Ikeda Branch.

As each of the Transactions made after July 1 of the same year was conducted in accordance with the intentions of the Plaintiff himself, the requirement of the ability to control is not satisfied. Further, as Mr. Ihara was not acting for the purpose of acquiring profit for the Defendant, etc. while disregarding the intentions or interests of the Plaintiff, the requirement for malicious intent is not satisfied, either.

(3) As noted above, the Transactions made after July 1, 1990 have not satisfied any of the requirements for illegal excessive transactions, and are therefore not illegal.

20

(v) Illegality of warrant transactions In the transactions after July 1989, the Plaintiff had asked Mr. Ihara to select issues

of securities that would rise significantly, in order to earn profit in a short term. However, he did not take the stance of determining the pros and cons of investment based on an understanding of the characteristics of each product, nor did he ask for explanations of the products.

Volatility risk is greater for warrants than for stocks, and warrants have the characteristics of becoming valueless if their exercise periods are overdue. However, a warrant is a product which is capable of producing a large profit, much more profit than a stock. Therefore, considering the intention and manner of transaction of the Plaintiff, as noted above, Mr. Ihara was not under any obligation to explain the risks in warrant trading to the Plaintiff, and the solicitation of warrant trading without explaining the risks noted above to the Plaintiff was in accordance with the intentions of the Plaintiff, and therefore was not illegal.

3. Damage (i) Damage from July 1989 to the last day of June 1990 Assuming that the Transactions made from July 1989 to June 1990 were illegal, the

damage incurred by the Plaintiff due to these Transactions is as follows: (1) Realized loss of 16,414,253 yen fixed by the last day of June 1990 (refer to Table

V). (2) Loss of 26,174,313 yen fixed after settlement of spot-trading stocks and open

positions in margin transactions held as of the same date by the Plaintiff (Loss from spot transactions: 16,937,928 yen. Loss from margin transactions: 9,236,385 yen).

However, not all of the above is recognized as having legally sufficient causal relation to the Transactions.

(ii) Damage from July 1, 1990 to February 1991 (1) The form of the Transactions after the last day of June 1990 changed significantly

from that before this date, and the loss that accrued after that same month cannot be considered to have been damage incurred as a result of excessive transactions in the period before this date.

Further, while stock market conditions worsened with the invasion of Kuwait by Iraq after August of the same year, many other securities investors incurred equally significant losses from this, and it is not reasonable to consider the loss accrued

21

through the aggravated market conditions as damage arising from excessive transactions. Though the Plaintiff was aware of the aggravated stock conditions, the Plaintiff did not cover his position in margin transactions even when this was recommended by Mr. Sugata. The losses he incurred as a result of this should therefore be kept separate from the damage from excessive transactions.

(2) The long positions the Plaintiff took in margin transactions from July 1 of the same year up to August 3 of the same year were settled after September of the same year, after the sharp fall of stock prices attributed to the invasion of Kuwait. The loss incurred by the Plaintiff as a result of this totaled 72,127,448 yen, as indicated in Table XIII (list of profit/loss in margin transactions - with respect to long positions taken from July 1, 1990 to July[Etidor’s note: This is an accurate translation but this may be “August.”] 3 of the same year).

(3) The Plaintiff did not settle most the spot-trading stocks purchased in or after July of the same year on a short-term basis, but sold them after holding them for reasonable periods; loss incurred as a result of these transactions was not loss from excessive transactions, but loss incurred simply from aggravated stock market conditions.

Loss incurred by the Plaintiff from transactions of stocks purchased in or after July 1990 and sold after holding periods of 1 month or more totaled 80,917,024 yen, as indicated in Table XIV (List of spot transactions – with respect to stocks purchased in or after July 1990).

(4) Consequently, of the total loss of 223,548,961 yen incurred by the Plaintiff from Transactions in or after July 1990, 70,504,489 yen, that is, the amount remaining after deducting 153,044,472 yen, the total of (2) and (3) above, should be considered damage incurred from excessive transactions.

4. Comparative negligence Even if one were to assume that all or some of the Transactions were illegal, in

light of the background of the Transactions, the attribute of the Plaintiff, his intentions with respect to the Transactions, the fact that he wanted to continue with the transactions after Mr. Sugata confirmed his intentions toward the transactions, and the fact that the loss was incurred solely due to transactions in or after July 1990, when more than one year had elapsed from July 1989, the start of the Transactions, the amount of damages to be compensated by the Defendant should be appropriately reduced due to comparative negligence.

22

IV. Principal issues 1. Whether the Transactions were what can be considered illegal excessive

transactions, 2. Whether there was a breach of duty of explanation or duty of compliance with the

suitability principle in warrant trading, 3. The amount of damage incurred by the Plaintiff and comparative negligence Section 3. Judgment on the issues I. Background of the Case etc. In addition to the basic facts noted above, the following facts are recognized as a

result of: the Evidence No. Ko-B-10-2 through -5, Evidence No. Ko-15-1 through -3, Evidence No. Otsu-2-1 and -2, Evidence Nos. Otsu-3 through 12, Evidence No. Otsu-13-1 through -6, Evidence Nos. Otsu-21 through 27, Evidence No. Otsu-28-1 through -3, Evidence No. Otsu-29-1 and -2, Evidence No. Otsu-30-1 through -9, Evidence No. Otsu-31, Evidence No. Otsu-32-1 through -4, Evidence No. Otsu-34-1 through -4, the Ihara Testimony (excluding those parts that cannot be adopted, as noted below), the Sugata Testimony, the results of examination of the Plaintiff himself (the first and the second; hereinafter, collectively referred to as the “Plaintiff Statement”; excluding those parts that cannot be adopted, as noted below) and the entire import of oral argument.

1. Situation until around July 1988. The Plaintiff and Y, who were childless, enjoyed themselves by saving up their

income after marriage. For them, saving was something that would serve as a substitute for children.

The Plaintiff conducted stock trading continuously with the Defendant from around 1955 onward. The Plaintiff also conducted stock trading with the non-litigant Nikko Securities Co. Ltd. during this period, but only for a short time.

Whenever the Plaintiff saved up a certain amount, he purchased stocks with the savings and took pleasure in recording the status of his stock portfolio in his diary, checking the fluctuating stock prices in articles, etc. in Nihon Keizai Shimbun (hereinafter, “Nikkei Shimbun”) and Sangyo Keizai Shimbun, calculating market prices, and confirming the day-to-day outstanding balance. Further, as the Plaintiff had many colleagues who also conducted stock transactions, he talked with these colleagues about policies regarding stock investment, about issues, etc., and listened to short-wave radio broadcasts to obtain information on stock markets and

23

the fluctuating prices of the stocks he held. He determined the issues, quantities and unit prices of the stocks to invest in by considering the information and advice from the person in charge at the Defendant, and conducted stock transactions accordingly.

The Plaintiff purchased mainly the stocks of largest corporations in various industries, including the shares of Matsushita Electric Industrial Co.,Ltd., Mitsui & Co., Ltd., etc. listed on the first section of the Tokyo Stock Exchange. Other than these, he also purchased the stocks of small-capitalized corporations that he considered to be promising, such as Tsutsunaka Plastic. He purchased stocks mainly in units of 1,000 shares, at an average frequency of three to five times a year, and held the shares purchased for long periods.

By around 1987, the Plaintiff held shares of 34 stock issues with a total market value in a range of 90,000,000 yen to 100,000,000 yen at the Defendant’s Ikeda Branch.

2. Circumstances from around July 1988 to around July 1989 (i) Y was hospitalized at Toyonaka Municipal Hospital from around 1986 for stomach

cancer, and in July 1988 the Plaintiff came to know that Y was continuing with her stock transactions at the Defendant using the account of Z.

By collecting information from the Defendant’s Ikeda Branch and questioning Y at the hospital in front of Messrs. Ihara and Toshinori Matsuo, a non-litigant employee of the Defendant (hereinafter, “Mr. Matsuo”), who visited Y, the Plaintiff discovered that the above-mentioned stocks were purchased using the Plaintiff’s salary and Y’s income.

On around August 4 of the same year, the Plaintiff instructed Mr. Ihara to have all of the above-mentioned stocks exchanged for cash and Mr. Ihara followed his instructions (sales proceeds, approximately 86,000,000 yen); on the ninth of the same month, the Plaintiff had the money withdrawn from Z’s account (amount withdrawn, 86,381,526 yen), had it brought to Y’s room at Toyonaka Municipal Hospital, and had it transferred to the account of Y (date deposited to the account, 10th of the same month; amount deposited, 87,391,440 yen). Further, on the 15th through 17th of the same month, he had the amount of the sales proceeds of the fractional shares deposited to Y’s above-mentioned account, whereupon the amount of cash remaining in deposit in the account amounted to more than 94,000,000 yen.

As the Plaintiff would not then been able to move the amount in the above-mentioned transaction account of Y for a while after Y’s death and interests

24

would not accrue on cash, Mr. Ihara recommended that the Plaintiff purchase investment trust products for the time being. On September 20 of the same year, the Plaintiff purchased investment trust products (twin select – 2/debenture type) of the Defendant with 50,000,000 yen out of the above-mentioned 94,000,000 yen.

(ii) Y died on September 23, 1988 and the Plaintiff started to live alone. On the 26th of

the same month he started to subscribe Nikkei Shimbun, and he enjoyed reading the paper from then onward. The Plaintiff regularly calculated the aggregate market price of stock assets held and watched the stock price trend. The Plaintiff visited the Defendant’s Ikeda Branch two to three times a week and chatted with Messrs. Ihara and Matsuo about stock market conditions, Y’s assets, and the inheritance. The Plaintiff also contacted Mr. Abe (first name undisclosed) (hereinafter, “Mr. Abe”), who was then the Manager of the sales division at the Defendant’s Kyoto Branch and who used to be in charge of the Plaintiff’s account, and participated in a securities seminar and explanatory sessions, etc. held at the Defendant’s Ikeda Branch.

In the beginning of December of the same year, the Plaintiff went to Takaoka-shi, Toyama-ken, where Z[Editor’s comment: Japanese original should be changed from Kawahara into Z as in page 3 or 4 of this translation.] resided, and investigated the above-mentioned stocks held in the name of Z. As the stocks prices rose, he sold fractional shares on the 9th and 12th of the same month.

On February 16, 1989, the Plaintiff transferred 26,000,000 yen from the account of Y to the account of the Plaintiff, and then transferred another 18,490,052 yen in the same way and purchased stock investment trusts and medium-term government bond fund on the 21st of the same month. On or around March 14th of the same year, he sold all the investment trust products, etc. mentioned above held in the name of Y, and transferred the sales proceeds of 52,861,629 yen from Y’s account to the Plaintiff’s account.

(iii) From around the spring of 1989, when his inheritance tax return had been

completed, the Plaintiff started asking advice of Mr. Ihara: “The Matsushita Electric Industrial and Toyota Motor shares are stocks of past companies. Is there any way to increase my assets from 200,000,000 yen to 300,000,000 yen or 400,000,000 yen?” To this, Mr. Ihara replied that asset management by way of spot trading had limits and recommended margin transactions and the purchase of warrants.

25

While from around March to July of the same year, Mr. Ihara recommended and had the Plaintiff purchase investment trusts (such as, new system balance), from around May 28 of the same year he also recommended that the Plaintiff purchase warrants of Onward Kashiyama, and after having secured documents entitled “foreign securities transaction contract (Evidence No. Otsu-4)” and “acknowledgment related to transaction of foreign subscription warrants” (Evidence No. Otsu-5) from the Plaintiff, he had the Plaintiff purchase the above warrants as indicated in Table XI “Onward Kashiyama.”

The Plaintiff had no experience in warrant trading at that time and lacked sufficient knowledge etc. on the mechanism, etc. of warrant trading. As Mr. Ihara himself did not have a full understanding of the mechanism, etc. either, he simply told the Plaintiff that the warrants above were bonds with warrants and did not explain the mechanism or any of the risks involved.

The Plaintiff told Mr. Ihara in around July of the same year that he wished to sell the stocks then in his position and invest them in new issues. By October of the same year, he had gradually sold off virtually all shares of the 34 stock issues he held.

Further, in autumn of the same year, the Plaintiff sold his home for approximately 8,000,000 yen, and in early December of the same year moved to the apartment where he is currently living. The sales proceeds were first deposited in a savings account at a bank and then deposited in the account at the Defendant.

The Plaintiff stated that though he intended to invest in stocks by narrowing down to a limited number of stable shares and did not have the intention of earning big profits by stock investment, he was solicited by Mr. Ihara to conduct margin transactions to earn some extra money, was unable to decline and ended up starting margin transactions with the purpose of accruing interest at a rate comparable to that earned by bank deposits (Plaintiff Statement).

However, if he had intended to invest in stocks by narrowing down to a limited number of stable, blue-chip shares, he would not have needed to sell off most of his stockholdings then. Further, considering that he purchased no such stocks after the sale of the above, and further considering his background in stock investment and the fact that he had strongly adhered to stock investment in the first place, the above statement of the Plaintiff cannot be adopted. Instead, it is reasonable to conclude that the Plaintiff conducted the above transactions as a preparatory measure with the intention of increasing his assets more than before through margin transactions.

26

The Plaintiff understood that margin transactions were different from the spot transactions that he been conducting for so long up to that point, but he did not consider the risks as realistic or tangible.

3. Circumstances from around July 1989 (start of the Transactions) to around June

1990 (i) In or around July 1989, the Plaintiff held a total of over 300,000,000 yen of stock

assets and bank deposits etc., including cash acquired from Y’s account (approximately 94,000,000 yen) and sales proceeds from the 34 stock issues sold (approximately 80,000,00 yen). He further possessed real estate he had inherited from Y, earned income from rent and was receiving a pension, and thus did not lack post-retirement funds to cover living expenses.

(ii) On Mr. Ihara’s advice, the Plaintiff started margin transactions of stocks on July 25,

1989. In consultation with Mr. Ihara, he first made an order at a “limit price” to open a long position in shares of Sanyo Shokai (manufacturer of ready-made clothes), but he was not able to purchase the shares at that price. He later changed the “limit price” and the transaction was concluded.

As the stock price above rose slightly during the day, Mr. Ihara recommended that the Plaintiff sell the shares for profit-taking (to attempt to realize profit by selling shares or buying them back when a position turns profitable in the market), and the Plaintiff consented to sell the shares.

(iii) Subsequent circumstances of the Transactions (1) Stock issues to be purchased The Plaintiff stated to Mr. Ihara that he wished to change the stock issues in his

possession to growth stocks, asked Mr. Ihara to advise him on recommendable issues, and entrusted Mr. Ihara with the selection of the issues, trading prices, quantities, timing, etc. of the subject stocks etc.

Mr. Ihara, in return, selected the stocks of companies in growth industries, the stocks of companies in new industries, the stocks of whose prices were low relative to their business performance and stocks issued by companies in types of businesses then attracting attention in the market (including speculative stocks) etc. Having considered whether to conduct margin transactions or spot transactions with respect to these stock issues, and having checked the prices, quantities, etc., Mr. Ihara recommended the transactions to the Plaintiff and the Plaintiff agreed to

27

conduct the transactions in accordance with Mr. Ihara’s recommendations. The same applied to transactions in investment trust products and warrants etc.

When the Plaintiff acquired long positions in the stocks of Tokyo Nissan Jidosha, Sanyo Kasei Kogyo, and Naigai, these stocks were rumored to be speculative. Mr. Ihara, who knew of this rumor, did not inform the Plaintiff of the rumor but recommended these stocks to him, explaining that the companies had large amounts of hidden real estate assets in their possession and/or that their stock prices were low relative to their business performance.

The Plaintiff said many times that he intended to adopt the policy of taking profit as soon as profit was made with respect to the issues purchased by margin transactions, and when advised by Mr. Ihara to dispose of open positions etc. he did exactly as he was advised.

(2) Process of conclusion of transactions There were times when Mr. Ihara notified the Plaintiff of the stock issues, etc. to be

traded by a morning telephone call and advised him to conduct the transactions, but there were also occasions when the Plaintiff accepted Mr. Ihara’s recommendations during telephone calls he himself placed or during visits to Mr. Ihara at the Defendant’s Ikeda Branch.

Further, on many occasions Mr. Ihara purchased stocks, etc. and disposed of open positions without notifying the Plaintiff in advance, and later had a woman employee, a marketing assistant at the Defendant’s Ikeda Branch, report the details of the transactions to the Plaintiff. The Plaintiff, however, never complained about this.

When transaction of stocks, investment trust products, etc. were concluded, the woman employee mentioned above reported the results thereof to the Plaintiff by telephone (in some cases by leaving a message in an answering machine, when the Plaintiff did not answer). At the same time, a trading report was delivered by the Defendant to the Plaintiff.

The Plaintiff noted the details of phone calls mentioned above in a diary and organized all trading reports by piling them up on his desk. However, as the transactions were extremely numerous, the trading reports piled up voluminously and he was unable to understand the relationships between the sales and purchases when he tried to file through the reports. The Plaintiff never received any explanations from Mr. Ihara regarding this matter.

(3) Comments and actions etc. of the Plaintiff at the Defendant’s Ikeda Branch Up to around October 1990, the Plaintiff visited the Defendant’s Ikeda Branch two

28

or three times a week on average to receive custody receipts after the sale/purchase of spot-trading stocks, to deliver margin for margin transactions, or simply to hold conversations.

At the Defendant’s Ikeda Branch, Mr. Ihara talked with the Plaintiff about stock market conditions and the trends/prospects of price of stocks held by the Plaintiff and stocks of the Plaintiff in open positions. The Plaintiff stated that one should be bullish with stocks; that if one’s prospects turn out to be wrong, one should sell straightaway; and that for margin transactions, both quick action and slow action are required. When Mr. Ihara was away from the Defendant’s Ikeda Branch, women employees at the front desk or reception desk of the above-mentioned Branch received the Plaintiff.

Further, the Plaintiff participated in almost all lecture meetings on stock-trading and tax seminars held at the Defendant’s Ikeda Branch.

(iv) The Plaintiff was advised by Mr. Ihara to actually receive (to have the actual shares

delivered without reselling them to the purchaser) 35,000 shares out of the 48,000 shares of Tokyo Nissan Jidosha the Plaintiff had newly purchased in margin transactions from August 4, 1989 to around the 14th of the same month, and to borrow the funds for this from Japan Securities Finance Co., Ltd. (hereinafter, “Japan Securities Finance”). He borrowed 68,000,000 yen from Japan Securities Finance and had the 35,000 shares delivered.

(v) Accrued profit and loss from the Transactions amounted to a profit of

approximately 2,350,000 yen at the end of July 1989, but the loss amounted to approximately 10,430,000 yen at the end of August of the same year.

As the number of short-term loss settlements and number of contracts for the transactions for August of the same year of the Plaintiff were large, on September 11 of the same year, the Defendant’s Head Office Marketing & Inspection Division (Eigyo Kosa-ka) urged the Defendant’s Ikeda Branch to pay due attention to the status of the transactions in the Plaintiff’s account and to confirm his intentions regarding his transactions.

On around the 28th of the same month, Mr. Ihara presented the Plaintiff with the document entitled “Inquiries by Customers” printed out by computer (status of transactions from August 1 of the same year to September 28 of the same year, details of securities in custody, and details of open positions on around the same date) (Evidence No. Otsu-13-1) and asked the Plaintiff to affix his signature and

29

seal impression on the document, but in doing so he failed to inform the Plaintiff that he had been cautioned by the head office, and the Plaintiff affixed his signature and seal impression on the document to confirm that there were no errors in the content of the above document.

The document entitled “Customer Confirmation Report (for January)” (Evidence No. Otsu-34-1) indicates that the status of profit and loss was confirmed with the Plaintiff on September 20 of the same year, but there is no objective evidence indicating that the status of profit and loss of the Transactions was confirmed on the same day, and therefore, the above indication cannot be adopted in light of the Plaintiff Statement, and the above fact cannot be acknowledged.

(v) The Nikkei Stock Average appreciated from July 1989 to December of the same

year and reached a record high on the 9th of the same month. However, the accrued profit and loss from the Transactions of the Plaintiff was as

follows: loss of approximately 26,660,000 yen as of the end of September of the same year, loss of approximately 28,550,000 yen as of the last day of October of the same year, loss of approximately 58,390,000 yen as of the last day of November of the same year, loss of approximately 84,550,000 yen as of the last day of December of the same year, and continuously increasing losses thereafter.

However, when asked about the profit and loss status of the total Transactions by the Plaintiff, Mr. Ihara merely replied that there were only slight losses.

Mr. Ihara testified that, about once a week, when the Plaintiff visited the Defendant’s Ikeda branch, Mr. Ihara presented the Plaintiff with a detailed statement indicating the details of transactions, the cash balance, the balance of his open position in margin transactions, and the appraisal of unrealized profit and loss for the relevant month, printed out from the computer terminal of the branch, and that the above detailed statement had the appearance of Evidence No. Otsu-13-1 (Ihara Testimony), but there is no appropriate objective evidence that the Plaintiff had accurately learned of the loss from the Transactions from Mr. Ihara, and the above evidence cannot be immediately adopted in light of the Plaintiff Statement.

(vi) Following the recommendations from Mr. Ihara, the Plaintiff purchased the shares

of Nihon Godo Finance, a so-called OTC issue, from around October 20, 1989 to the end of December of the same year, and sold those shares in the weeks leading up to February 1990, and was able to acquire a total profit of over 100,000,000 yen from the sales.

30

On Mr. Ihara’s recommendation, the Plaintiff purchased Asahi Beer warrants on around November 15, 1989 and a Toyota warrants on around January 28, 1990. On these occasions, too, Mr. Ihara offered no explanation on warrants.

Accrued loss from the Transactions decreased to approximately 15,930,000 yen at the end of January of the same year from the sales profit of the above-mentioned Godo Finance stock and Keiyo stock, and, further, accrued profit of approximately 12,320,000 yen was recorded at the end of February of the same year.

On the other hand, on February 20 of the same year, the Defendant’s Head Office Marketing & Inspection Division (Eigyo Kosa-ka) alerted the Defendant’s Ikeda Branch about the transactions of the account of the Plaintiff during January of the same year and asked the Ikeda Branch to confirm the intention of the Plaintiff, as both the number of margin transactions and number of short-term loss settlements were large and the rate of loss settlements was also large.

On around March 1 of the same year, Mr. Ihara presented the document entitled “Inquiries by Customers” (status of transactions from January of the same year to March 1 of the same year, details of securities in custody, and details of his open position on or around the same date) (Evidence No. Otsu-13-2) and asked him to affix his signature and seal impression on the document, and the Plaintiff affixed his signature and seal impression to confirm that there were no errors in the content of the above documents.

The “Status of Confirmation Column” in the “Customer Confirmation Report” (for January) (Evidence No. Otsu-34-2) submitted by the Defendant’s Ikeda Branch to the Eigyo Kosa-ka above had already been completed before Mr. Sugata assumed his post. Mr. Ihara requested the Plaintiff to enter “confirmation date: February 28 of the same year” in the column, in order to match the above completion date with the confirmation date on the “Inquiries by Customers”, and the Plaintiff complied with the request.

(vii) At or around the end of February 1990, Mr. Sugata came to assume his post as

Branch Manager of the Defendant’s Ikeda Branch. On or around March 15 of the same year, noticing that the Plaintiff had come to the

above branch, Mr. Sugata ordered the manager of another section to confirm the Plaintiff’s intentions regarding the transactions.

The above manager presented the document entitled “Inquiries by Customers” (status of transactions from January of the same year to March 15 of the same year, details of securities in custody, and details of his open position on or around the

31

same date) (Evidence No. Otsu-13-3) and asked him to affix his signature and seal impression on the document. The Plaintiff affixed his signature and seal impression to confirm that there were no errors in the content of the above documents.

On March 23 of the same year, the Plaintiff repaid 5,000,000 yen to Japan Securities Finance.

Further, the Plaintiff was advised by Mr. Ihara to transfer the cash in the matured fixed deposit accounts to the transaction account of the Plaintiff at the Defendant’s Ikeda Branch, and he deposited 37,000,000 yen on May 7 of the same year, 10,000,000 yen on the 14th of the same month, 2,000,000 yen on the 15th of the same month, 20,000,000 yen on the 25th of the same month, and 27,000,000 yen on June 6 of the same year, or a total of 96,000,000 yen, to the above account.

Further, on Mr. Ihara’s recommendation, the Plaintiff purchased warrants of Japan Fire and Marine on or around April 2 of the same year, but no explanation was given regarding warrants this time, either. On this occasion, the Plaintiff affixed his signature and seal impression on the document entitled “Confirmation of transactions for domestic subscription warrants and foreign subscription warrants” (Evidence No. Otsu-6) in accordance with Mr. Ihara’s request.

(viii) (1) As the number of positions with insufficient collateral, the number of buy and

sell trades, and the number of short-term loss settlements for the transactions of April of the same year of the Plaintiff were all large, and as the ratio of stock brokerage commissions to the operating assets of the stocks was high, on May 16, 1990, the Defendant’s Head Office Marketing & Inspection Division (Eigyo Kosa-ka) urged the Defendant’s Ikeda Branch to alert the Plaintiff about his account and confirm his intentions regarding his transactions.

(2) As the Plaintiff was a major private customer of the Defendant’s Ikeda Branch, Mr. Sugata held a dinner on May 28 of the same year to exchange greetings on the occasion of his new posting and to confirm the intentions of the Plaintiff regarding his transactions. He met with the Plaintiff together with Mr. Ihara at the “Kogane”, Japanese-style restaurant near the Defendant’s Ikeda Branch and recommended that the Plaintiff reduce his margin transactions as much as possible, i.e., to a level where his potential gains would amount to no more than some extra money, and to conduct mainly spot transactions.

The Plaintiff stated that he possessed assets equivalent approximately to 300,000,000 yen, so his objective was to increase the assets to 400,000,000 yen, and that if the assets were increased to 400,000,000 yen he would delegate 200,000,000 yen each to

32

Mr. Ihara and Mr. Abe of the Defendant’s Kyoto Branch, and let them compete. The Plaintiff said that there was no need to worry about the margin transactions; that Mr. Sugata may have been the branch manager but was actually a little chicken-hearted; and that Mr. Ihara was the topnotch. He wished to be recommended the stocks they thought to be hopeful, and to sell immediately if the purchased issues proved to be wrong, in order to lock in profits and quickly limit losses. He stated that this was the secret of margin transactions and flatly refused the recommendations of Mr. Sugata.When Mr. Sugata referred to the stocks of Nihon Godo Finance, the Plaintiff said that that had been a “homerun.” He told Mr. Sugata to hit more of such homeruns in the future.

Of the Plaintiff Statements, the parts contrary to the facts mentioned above cannot be adopted.

(3) However, with respect to the accrued profit and loss of the Transactions, profit decreased to approximately 7,620,000 yen at the end of March of the same year and fell into negative territory to a loss of approximately 18,550,000 yen at the end of April of the same year, and a loss of 43,660,000 yen was recorded at the end of May of the same year.

(4) On or around June 1 of the same year, Mr. Ihara presented the document entitled “Inquiries by Customers” (Background of transactions from April 2 of the same year to June 1 of the same year, details of securities in custody and details of his open position on or around the same date) (Evidence No. Otsu-13-5) and asked him to affix his signature and seal impression on the document; according to the request made by Mr. Ihara, the Plaintiff affixed his signature and seal impression as of May 30 of the same year on the above document to confirm that there were no errors in the content of the above document.

The document entitled “Customer Confirmation Report” (for April) (Evidence No. Otsu-34-3) indicates that the status of profit and loss was confirmed with the Plaintiff on May 18 of the same year at the Defendant’s Ikeda Branch, but there is no appropriate evidence indicating that the above fact had been recognized and the part indicated above cannot be adopted in light of the statement of the Plaintiff.

(ix) Accrued profit and loss from the Transactions amounted to a loss of 16,410,000 yen as of the last day of June 1990.

On or around the 29th of the same month, Mr. Sugata learned that Mr. Ihara had been conducting considerably large transactions in the name of the Plaintiff without obtaining the Plaintiff’s approval. He urged Mr. Ihara to change this and prohibited transactions with retrospective approval, short-term loss-cutting purchases and

33

sales, and trading with insufficient collateral in margin transactions. Further, Mr. Sugata decided not to go outside for marketing activities but to stay

inside the office, in order to personally oversee the Marketing Division (Eigyo-ka) of the Defendant’s Ikeda Branch and make sure that transactions with retrospective approval would not be conducted there. He made the Accounting Manager of the Defendant’s Ikeda Branch investigate the status of trading profit and loss with respect to margin transactions and spot transactions of the stocks traded in the Transactions up to the same date. He received a report that loss amounted to approximately 7,000,000 yen at that point on the same day.

However, Mr. Sugata did not confirm the intentions of the Plaintiff regarding Mr. Ihara’s transactions with retrospective approval and did not communicate to the Plaintiff that he had directed Mr. Ihara to prohibit transactions with retrospective approval or shot-term loss-cutting purchases and sales.

4. Circumstances from around July 1990 to around February 1991 (time of

termination of the Transactions) (i) The number of margin transactions between the Plaintiff and Defendant decreased

substantially from July 1, 1990, and the circumstances were as indicated in Table 1. From July of the same month, Mr. Ihara did not recommend short-term loss-cutting

purchases or sales to the Plaintiff as much as he had before. However, Mr. Ihara had decided on the selection of the issues, quantities, prices

and timing of disposal with respect to the Transactions as before and conducted a substantial number of short-term loss-cutting purchases and sales (refer to Table I No. 185 and below; refer to Table II, 296 and below).

Further, on Mr. Ihara’s recommendation, the Plaintiff purchased Mitsubishi Coporation’s warrants on around 19th of the same month and Sumitomo Metal’s warrants on around the 26th of the same month, but again he received no explanations on warrants from Mr. Ihara.

(ii) With the invasion of Kuwait by Iraq on August 2, 1990, stock market conditions

worsened drastically. However, the Plaintiff’s bullish attitude remained unchanged, and the Plaintiff told Mr. Ihara that stock prices would rise after going down, that when a valley was deep the mountains were high. Hussein probably would not last long, he said.

However, as for the accrued profit and loss of the Transactions, his standing worsened drastically with an accrued loss of approximately 47,610,000 yen at the

34

end of July of the same year and a loss of approximately 75,620,000 yen at the end of August of the same year.

On July 20 of the same year, as the rotation frequency of purchases and sales, the number of short-term loss positions settled, and the number of margin transaction contracts for June of the same year of the Plaintiff were all large, and as the ratio of stock brokerage commissions to the operating assets of the stocks was high, the Defendant’s Head Office Marketing & Inspection Division (Eigyo Kosa-ka) alerted the Defendant’s Ikeda Branch to the transactions of the Plaintiff and urged the Branch to confirm the Plaintiff’s intentions regarding the transactions.

On around August 20 of the same year, Mr. Ihara presented the document entitled “Inquiries by Customers” (Customer account, etc. from June 1 of the same year to August 8 of the same year) (Evidence No. Otsu-13-5) to the Plaintiff and asked him to affix his signature and seal impression on the document, and he affixed his signature and seal impression to confirm that there were no errors in the content of the above document.

(iii) Stock market conditions worsened further in September 1990, and the accrued

profit and loss of the Transactions was a loss of approximately 120,830,000 yen as of the last day of the same month.

The Defendant delivered to the Plaintiff a notice of balance collation as of the 14th of the same month, and the Plaintiff received a reply that there were no errors in the content of the above notice as of the 18th of the same month (Evidence No. Otsu-8).

At the end of the same month, Mr. Sugata advised the Plaintiff to settle his margin transactions, but the Plaintiff did not change his bullish attitude and did not comply with this.

(iv) On or around October 4, 1990, the Plaintiff inquired about the amount of loss from

the Transactions at the Defendant’s Ikeda Branch and was stunned to learn that loss had accrued beyond his expectations. Discouraged, he told Mr. Sugata that he would conduct margin transactions at a reduced level in the future, and that he wished to heed the advice of Mr. Sugata, as well. On or around the 8th of the same month he told Messrs. Sugata and Ihara at his home that he wished them to bear a part of the loss from the transactions.

On or around the 9th of the same month the Defendant presented the Plaintiff with the “Inquiries by Customers” document (transaction account, details of securities in

35

custody, etc. from the 2nd through the 9th of the same month), whereupon the Plaintiff wrote on the document that there were no errors in the document and affixed his signature and seal impression.

On the 9th of the same month, the Plaintiff repaid 69,000,000 yen to Japan Securities Finance.

(v) On October 14, 1990, in order to ease the frustrations of the Plaintiff, Mr. Ihara

invited him to Arima Onsen (spa). The Plaintiff started to purchase issues recommended by Mr. Sugata in and after that month, but the amount of transactions decreased significantly compared with the amount prior to this period.

The Transactions were not settled in October of the same year, but as a result of disposition of stocks held and open positions in the process of reducing the transactions in and after November of the same year, a large amount of realized loss accrued: the accrued profit and loss amounted to losses of approximately 160,790,000 yen at the end of November, approximately 198,900,000 yen at the end of December, approximately 225,260,000 yen at the end of January 1991, and approximately 223,540,000 yen on the last day of February of the same year. Finally, everything was terminated in February 1991.

Of the Plaintiff Statement, the dispositions contrary to the facts mentioned above cannot immediately be adopted in light of the Sugata Testimony.

II. Whether or not the Transactions fall under illegal excessive transactions (First

Issue) 1. (i) Fundamentally, investments in products having market value including

securities transactions (spot and margin transactions of stocks, warrant transactions, investment trust transactions, etc.) should be conducted on the investor’s own judgment and responsibility, and losses accrued as a result thereof should be attributed to the investor himself (principle of self-responsibility).

However, the prices of stocks, warrants, etc. fluctuate due to various political, economic, and social factors intricately linked with each other. Further, a margin transaction of a stock is a kind of futures transaction, and appropriate investment cannot be conducted without judgment on the timing of the disposition of open positions; and likewise, with regard to a warrant transaction, appropriate investment cannot be conducted without judgment on the timing of the exercise of rights. When conducting these securities transactions, advanced knowledge, and the ability to collect and analyze information, etc. are all required to make appropriate

36

investment judgments. Secur