1. From the results of the Securities and Exchange Surveillance Commission’s investigation into MRI (released on April, 26 2013):

- MRI International, Inc. (“MRI”) creates funds in the United States (Nevada) to invest in MARS (medical accounts receivable) and markets these funds to investors in Japan. (The funds have been marketed only in Japan.)

- Sales in Japan began in 1998

- In September 2007, with Japan’s Financial Products and Exchange Law going into effect, MRI’s fund business was deemed as a Type II Financial Instrument Business under the law, and it was registered as a Financial Instrument Business in June 2008.

2. Evaluation of MRI’S financial products

(1) MARS investment in the U.S.

- In the U.S., investments in MARS are very well known, and many companies exist to provide factoring services (MARS collection agencies) to hospitals and clinics. Because the U.S. health care industry is so large, and because most medical expenses are paid either by government insurance or highly rated private insurance companies, factoring services are attractive and have become a large business.

- Securities firms and other financial institutions combine debts amassed by MARS collection agencies into debt securities with MARS as collateral, and they market these securities to institutional investors. In fact, U.S. institutional investors hold composite debt securities as one type of product in their portfolios.

- MRI, in its explanatory material for investors, describes itself as specializing in MARS collection, saying that its strength is its superior ability to collect MARS. Of course, if MRI’s MARS collection ability is as good as described in its explanatory material, debts amassed by MRI would have higher value, and one imagines that the firm would certainly have been able to sell its funds to U.S. institutional investors (even if MRI didn’t sell directly to institutional investors, it could have marketed to them through securities firms), and it seems there would have been scant necessity to target individual investors in Japan.

(2) MRI’s investment products

- To understand the characteristics of MRI’s investment products, one may look at MRI’s MRI Series Select A Option A as an example. Option B’s characteristics are basically identical.

(a) Interest and currency exchange

Yen-denominated plan (principle and interest paid in yen)
• Investment amount ¥1,500,000, annual interest 6.0%, investment term 2 to 5 years
• Investment amount ¥7,500,000, annual interest 7.0%, investment term 2 to 5 years
• Investment amount ¥15,000,000, annual interest 8.0%, investment term 2 to 5 years

Dollar-denominated plan (principle and interest paid in dollars)
• Investment amount $10,000, annual interest 6.5%, investment term 2 to 5 years
• Investment amount $50,000, annual interest 7.5%, investment term 2 to 5 years
• Investment amount $100,000, annual interest 8.5%, investment term 2 to 5 years

With Option A of MRI’s investment products, interest is paid once annually, and principle is paid at maturation. It is not possible to terminate the investment before maturation.

- With MRI’s investment products, annual interest varies based on the investment amount. The larger the investment, the higher the annual interest. This kind of differentiation in investment returns is not seen in typical fund products. Because fund performance doesn’t differ for each investor’s investment, there is no rational explanation for different handling of investments based on size. One must assume that MRI offered higher annual interest for large investments so that its efforts at raising large amounts of money would be more effective. In addition, MRI documents indicate a client-loss rate of 5 percent between 1998 and 2005, from which we can infer that its renewal rate was a lofty 95 percent. It is believed that many investors, eager for higher returns at the time of renewals, increased their investment levels.

- MRI documents clearly state that MRI bears the risk of currency fluctuations. In general, Japanese individual investors are believed to be averse to taking on currency risk, and this is likely the reason that the majority are believed to have chosen the yen-denominated plan. In that case, since MARS debts are denominated in dollars, in order for MRI to avoid currency risk, it would have been necessary to hedge by purchasing currency futures or other derivatives. However, with a spread in annual interest of only 0.5% between yen-denominated investments and dollar-denominated investments, it would not have been mathematically feasible for the company to hedge currency risk with derivatives such as currency futures. (Hedging costs are based on the difference between interest rates in the U.S. and Japan.) Since hedging would not have been feasible cost-wise, it is believed that MRI was not hedging currency risk. Therefore, as the yen strengthened against the dollar, one imagines that MRI’s operational situation worsened. In fact, while the yen had been trading under the $1 = ¥100 level before 2008′s Lehman Shock, it quickly appreciated afterwards, reaching the high-70s to the dollar in 2011. One can easily infer that, over the same period, MRI’s capital position quickly deteriorated.

(b) Investment safety

MRI advertised that it used escrow accounts and other methods to ensure that its investment scheme was safe. However, the reason debt products based on MARS collateral are sold to institutional investors is that institutional investors have an obligation, as trustees, to confirm the safety of investment schemes. Furthermore, it is assumed that institutional investors have the ability to perform such validity due diligence. On the other hand, individual investors do not have the capabilities of institutional investors. In fact, there is virtually no way for an individual investor in Japan to verify the safety of an investment scheme in the U.S. One can imagine the reason why MRI chose to market its products to individual investors in Japan.

- In MRI’s investment scheme, MRI branch offices in Japan were not involved at all in the flow of funds. Investors would deposit funds directly into accounts at MRI’s U.S. bank, and disbursements were wired from the U.S. to investors’ domestic Japanese bank accounts. Because Japanese investors deposited investment funds to MRI’s U.S. bank accounts, it is extremely difficult to understand how the assets were used.

- According to results of the Securities and Exchange Surveillance Commission’s investigation into MRI, from at least as early as 2011 on, the majority of capital entrusted by investors was not used for MRI’s stated business but was instead diverted to make payments to other customers. In addition, the company did not manage separation of accounts. This was an investment scam in which new funds were raised to make payouts. It is highly likely that the reason damage from the scam increased was that MRI continued to raise funds in order to avoid bankruptcy.



Taniguchi Partners, Accounting & Tax Office does not provide any tax advice. Any tax statement herein regarding any US federal tax is not intended or written to be used, and cannot be used by any taxpayer for the purpose of avoiding any penalties. Any such statement herein was written to support the marketing or promotion of the transaction(s) or matter(s) to which the statement relates. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
These materials have been provided to you by Taniguchi Partners, Accounting & Tax Office in connection with an actual or potential mandate or engagement and may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with Taniguchi Partners, Accounting & Tax Office. In addition, there materials may not be disclosed, in whole or in part, or summarized or otherwise referred to except as agreed in writing by Taniguchi Partners, Accounting & Tax Office. The information used is preparing these materials was obtained from or through you or you representatives or from public sources. Taniguchi Partners, Accounting & Tax Office assumes no responsibility for independent verification of such information and has relied on such information being complete and accurate in all material respects. To the extent such information includes estimates and forecasts of future financial performance (including estimates of potential cost savings and synergies) prepared by or reviewed or discussed with the management of your company and/or other potential transaction participants or obtained from public sources, we have assumed that such estimates and forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of such management (or, with respect to estimate and forecast obtained from public sources, represent reasonable estimates). These materials were designed for use by specific persons familiar with the business and the affairs of your company and Taniguchi Partners, Accounting & Tax Office assumes no obligation to update or otherwise revise these materials. Nothing contained herein should be construed as tax, accounting or legal advice. You (and each of your employees, representatives or other agents 7) may disclose to any and all persons, without limitation of any kind, including opinions or other tax analyses) that are provided to you relating to such tax treatment and structure. For this purpose, the tax treatment of a transaction is the purported or claimed US federal income tax treatment of the transaction and the tax structure of a transaction is any fact that may be relevant to understanding the purported or claimed US federal income tax treatment of the transaction.
These materials have been prepared by Taniguchi Partners, Accounting & Tax Office. Accordingly, any information reflected or incorporated herein, or in related materials or in ensuing transactions, may be shares in good faith by Taniguchi Partners, Accounting & Tax Office and its affiliates with employees of Taniguchi Partners, Accounting & Tax Office.
Taniguchi Partners, Accounting & Tax Office
A Japanese certified public accountant and Tax Attorny
Minami Azabu Centre 2F 4-12-25 Minami Azabu
Minato-Ku, Tokyo 106-0047
+ 81 3 6277 0009