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Oct. 25, 2024 TSE Designation of Security on Special Alert and Imposition of Listing Agreement Violation Penalty: Wellco Holdings Corporation

 

TSE has designated a stock as a Security on Special Alert and imposed a listing agreement violation penalty as follows.

*This decision is based on the results of the examination by Japan Exchange Regulation.

1.Issue Name Wellco Holdings Corporation stock
(Code: 7831, Market Segment: Standard Market)
2.Date of Designation of Security
  on Special Alert
Oct. 26, 2024 (Sat.)
  Reason
  (Related Clause)
Due to falling under a case where TSE deems that the listed company has violated the provisions of timely disclosure and that the improvement of the internal management system of such listed company is highly necessary
(Securities Listing Regulations, Rule 503, Paragraph 1, Item (3))
3.Listing Agreement Violation
  Penalty Total
JPY 14.4 million
  Reason
  (Related Clause)
Due to falling under a case where TSE deems that the listed company has violated the provisions of timely disclosure and has undermined the confidence of shareholders and investors in the TSE market
(Securities Listing Regulations, Rule 509, Paragraph 1, Item (1))
4.Details of Reason Wellco Holdings Corporation (hereinafter "the Company") disclosed an investigation report prepared by a third-party committee regarding inappropriate accounting processing at the Company on Jul. 10, 2024, and disclosed corrections to its financial results for past fiscal years on Sep. 6 of the same year.
These disclosures revealed that the Company and one of its subsidiaries had been fraudulently receiving employment adjustment subsidies, which were exceptionally distributed in light of the impact of COVID-19, for a long period of time due to the involvement of a director and founder of the Company (hereinafter referred to as the "Director"), and that they had conducted inappropriate accounting processing as a result such as understating their personnel expenses and not posting significant impairment losses. As a result, it was found the Company had made disclosures that were deemed to be false and in violation of the listing rules in its earnings reports and other documents for the second quarter of the fiscal year ended Oct. 2020 to the second quarter of the fiscal year ending Oct. 2024. Due to the resulting corrections to financial statements, it was discovered that the Company had significantly falsified its financial results, such as that the net loss attributable to owners of the parent company for the fiscal year ended Oct. 2020 increased by more than JPY 2 billion, and that the reported positive operating income, ordinary income, and net income attributable to owners of the parent company for the fiscal year ended Oct. 2023 turned negative.

The following points were identified as the main reasons for these disclosures.
- The Director was the de facto head of the Company and his awareness of compliance was severely lacking, such as in that he actively instructed employees to work while on leave (teleworking), which would be misconduct.
- The Director was referred to as the "owner" of the Company, and there was a corporate culture that regarded instructions and orders from the Director as absolute. As a result, there was company-wide misconduct, such as repeated requests for leave that differed from the actual working situation in multiple departments, based on instructions from the Director.
- Despite the fact that several full-time directors, such as the representative director & president and a member of the audit and supervisory committee, were in a position to be aware that company-wide misconduct was taking place based on instructions by the Director, they did not point out the misconduct or call for corrective actions against it, and instead allowed the misconduct to continue unchecked and tacitly approved of it. As a result, the checks and balances function as well as the monitoring function among directors were rendered dysfunctional.

As described above, this is a case in which the Company made disclosures deemed false that have a significant impact on investors' investment decisions as a result of the Company's long-term failure to take action against the improper receipt of employment adjustment subsidies, and that improvements to the Company's internal management system, etc. are highly necessary. As such, TSE designates the stock as a Security on Special Alert.
Moreover, due to the above, this case involved the continued publication, over a long period, of incorrect financial information that is highly important for investment decisions. TSE deems that this case has undermined the confidence of shareholders and investors in the TSE market. Therefore, it shall impose a listing agreement violation penalty on the Company.

DISCLAIMER: This translation may be used for reference purposes only. This English version is not an official translation of the original Japanese document. In cases where any differences occur between the English version and the original Japanese version, the Japanese version shall prevail. This translation is subject to change without notice. Tokyo Stock Exchange, Inc. and/or Japan Exchange Regulation shall individually or jointly accept no responsibility or liability for damage or loss caused by any error, inaccuracy, misunderstanding, or changes with regard to this translation.

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