Photo/Illutration Police escort Lin Xinhai, center, to the Ushigome Police Station in Tokyo's Shinjuku Ward on Nov. 28. (Koichiro Yoshida)

Tokyo police have made the first arrests in connection with a sprawling and lucrative nationwide scheme involving hijacked brokerage accounts and profits generated from illegal stock trading.

The Metropolitan Police Department on Nov. 28 announced the arrests of Lin Xinhai, 38, who operates his own company in Kawasaki, and Jiang Rong, 42, of Tokyo.

Investigators said they hope questioning of the two Chinese suspects will lead to the ringleader of the scam.

About 3,600 cases of hijacked brokerage accounts have been reported to police around Japan. Because the methods differ, there are likely a number of different groups involved in various schemes, sources said.

The Financial Services Agency said it has confirmed 9,348 illegal transactions totaling 711 billion yen ($4.6 billion) in the first 10 months of this year.

Lin and Jiang are suspected of market manipulation in violation of the Financial Instruments and Exchange Law as well as illegally accessing the computer accounts of other individuals.

According to investigative sources, the two suspects conspired with other individuals to illegally access 10 individuals’ accounts managed online by a securities firm on March 17.

Lin’s company had set up another account at a different brokerage. Over the course of a few hours, buy and sell orders were made between that account and the 10 hijacked accounts for about 2.6 million shares of one specific stock.

Lin’s company account pocketed huge gains made after the share price was artificially hiked through the various transactions, the sources said.

The stock is listed on the Tokyo Stock Exchange’s Standard Market. The stock has a comparatively small trading volume, which made it possible to manipulate the share price through a small number of transactions.

Investigative sources described how the scheme worked.

After obtaining the IDs and passwords of the individuals’ accounts likely through a phishing scam, the suspects gained control of the accounts.

They then sold stock owned by those accounts to secure funds for use in illegal transactions.

Next, they artificially increased the share price of the targeted stock through a series of buy orders at high prices from the hijacked accounts.

Through the coordinated trade with the hijacked accounts, Lin’s company account made huge gains by selling the stock at the inflated value.

The stock’s price increased by about 30 percent, and the company account collected gains totaling about 8.6 million yen.

The hijacked accounts remained in possession of the shares and faced unrealized losses after the stock price dropped back to its original level.

The arrests were based on just this single stock.

Police believe the two suspects were involved in other illegal transactions under the instructions of someone higher up.

Tokyo police were assisted by the Securities and Exchange Surveillance Commission, which oversees records of all stock transactions. The commission narrowed down suspicious brokerage accounts and provided that information to the MPD and nine prefectural police departments.

The MPD further narrowed the accounts and came upon the account held in the name of Lin’s company.

(This article was written by Natsuno Otahara and Takuro Yagi.)

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