TRADING SCANDAL DAMAGES TAIWAN'S FSC

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 002984

SIPDIS

DEPT PASS TO AIT/W AND USTR
DEPT FOR EAP/TC, EAP/EP AND EB/IFD/OIA
TREASURY FOR OASIA ZELIKOW,WISNER AND OCC AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE BOARD OF GOVERNORS,
SAN FRANCISO FRB AND NEW YORK FRB

E.O. 12958: DECL: 07/08/2020
TAGS: ECON EFIN PINR PREL TW
SUBJECT: TRADING SCANDAL DAMAGES TAIWAN'S FSC

Classified By: AIT ACTING DIRECTOR DAVID KEEGAN, REASON 1.5 B


1. (C) Summary and comment: The Taiwan High Court
Prosecutors' Office is currently probing Lee Chin-cheng,
Director of the Financial Supervisory Commission (FSC)
Examination Bureau (EB),on his possible connection to an
illegal insider trading operation involving other government
officials, and media reporters. The case touches on the
endemic problem of political-business-media collusion in
Taiwan. Whether Lee is eventually found guilty of breaking
laws or not, the reputation of the FSC as an independent and
honest regulatory agency has been undermined. End Summary
and comment.


2. (SBU) The Economic Crime Crackdown Center attached to the
Taiwan High Prosecutors' Office (ECCC, aka: the "Black Gold
Investigation Center") questioned FSC EB Director Lee
Chin-cheng on June 27 in an attempt to clarify his connection
with Lin Min-da, a stock market trader currently under
investigation for insider trading. An ECCC search of Lin,s
residence on June 23 had turned up an FSC memo that linked
Lee to Lin, and to a ring of stock price manipulators.


3. (SBU) According to Lee, the FSC EB (which despite its
name, is an investigative unit) also suspected that insider
trading by the same group of stock traders had occurred in a
number of the stock issues on Taiwan's market since late last
year. Lee claims that in May 2005 he jotted down on a memo
some of the unusual stock trading records from reports
submitted to him by the FSC Securities and Futures Bureau
(SFB). He then gave this memo to a friend and asked the
friend to help identify those involved in the trades. This
was the memo found by the ECCC in Lin,s residence. In all,
three separate government agencies are investigating the
Power Quotient insider trading, without coordination, or even
informing each other. In addition to the ECCC and the FSC
EB, the Taipei Prosecutors' Office had launched its own
investigation.


4. (SBU) In early December 2004 the ECCC began investigating
the trading of shares in the Power Quotient International
Company, a high-tech electronics firm charged with falsifying
its and financial statements to boost share prices. Insider
trading by a group stock traders nicknamed "vultures" had
apparently taken place before the falsification charges were
made public, earning the hawks enormous gains from short
selling of the Power Quotient Shares. ECCC investigators
believe Lin Min-da provided financial resources for the
vultures to purchase stocks. Other suspected group members
included government officials of financial and law
enforcement agencies and journalists. Several press
reporters have been publicly identified (and fired). When
the ECCC found Lee's memo on insider trading in Lin,s house,
the information was leaked to the media and it was widely
reported that the ECCC would include Lee on its list of those
charged. According to reports in the United Daily News, Wu
Nai-jen, Chairman of the Taiwan Stock Exchange and former DPP
Secretary General, is among those under suspicion.

SIPDIS


5. (SBU) The ECCC questioning of EB Director Lee Chin-cheng
on June 27 instantly triggered a confrontation between the
FSC and the Ministry of Justice (MOJ, parent agency of the
ECCC.) On June 28 FSC Vice Chairman Lu Tung-ying openly
supported Lee, noting that the insider trading case occurred
before Lee became EB Director in January 2005. Lu said that
officials in sensitive positions were often the targets of
attacks.

Inter-agency Lack of Coordination Becomes Open Hostility
-------------- --------------


6. (SBU) FSC Chairman Kong Jaw-sheng was upset by the
Prosecutors' Office leaking to the press information obtained
during its questioning of Lee. Kong denied a press report
that the Prosecutors' Office had offered to drop its
investigation of Lee if he dismissed him as head of the EB.
The confrontation between the two agencies escalated to the
point that the FSC pulled back three of its officers that had
been assigned to the ECCC. The FSC also set up a special
task force of over 300 persons (but not Lee) to investigate
the Power Quotient insider trading case and vowed to identify
all the vultures before the Prosecutors' Office does.
However, the MOJ has refused to subpoena individuals the FSC
wants to question.

Premier Hsieh Intervenes
--------------


7. (SBU) In his weekly cabinet meeting on July 6, Premier
Frank Hsieh asked the FSC and the MOJ to stop bickering and
stop making statements to the press about the case. He
requested the two agencies to work together in fighting
economic crimes and to quickly resolve the Power Quotient
case. Both the FSC and the MOJ instructed their personnel to
keep details about the case strictly confidential.

Can the FSC Still be an Effective Regulator?
--------------


8. (C) The case highlights once again the widespread popular
concern of increasingly prevelent corruption among regulatory
bodies and government corporations since the DPP took power
in 2000. The ECCC's investigation of EB Director Lee has
also undermined the credibility of the FSC to act as an
independent regulatory agency by highlighting its lack of
authority to serve subpoenas or use other law enforcement
investigative tools. Finally, the debate surrounding this
case has led both the Executive Yuan and the Legislative Yuan
to publicly question the FSC,s independence. FSC Chairman
Kong attends weekly cabinet meetings and reports regularly to
the Premier. The FSC is expected to follow the EY's economic
development policies, and answered the EY's call for economic
stimulating measure in May 2005 by encouraging banks to
increase lending. The FSC Chairman and his senior staff are
also required to testify before the LY, which has the
authority to cut its budget. The LY has refused to provide
the funds needed to resolve the serious problems of Taiwan
financial institutions, a top FSC priority.


9. (SBU) AIT/T will continue to follow the case and report
developments.
KEEGAN