US embassy cable - 05TAIPEI2984

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, Finance, Foreign Policy 
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