A raid by prosecutors on Internet company Livedoor Co. on suspected securities violations rattled Japan's stock market Tuesday, sending the benchmark index down nearly 3 percent.
The overnight search on the Tokyo startup company spooked investors who rushed to dump Livedoor shares and other Internet-related issues, including Softbank Corp., Rakuten Inc. and Yahoo Japan.
But traders also said investors had been waiting for an excuse to sell stocks and lock in profits after the Tokyo Stock Exchange's extended rally.
"The Livedoor incident triggered this correction," said Masayoshi Yano, senior market analyst at Tokai Tokyo Research Center.
The Nikkei 225 index plunged 462.08 points, or 2.8 percent, to close at 15,805.95 points, marking the biggest single-day drop since May 10, 2004, when the index lost 554.12 points, or 4.8 percent.
Within an hour after trading began, Livedoor shares fell 14.4 percent to their lowest allowed price for the day of 596 yen (US$5.18). The price was frozen there all day as sell orders of 255 million shares overwhelmed buy orders of just 2.9 million.
The Tokyo prosecutors' office, which raided Livedoor's offices Monday evening, said the company is suspected of violating securities laws in spreading false information, but refused to elaborate.
Livedoor offers various Internet services, including consulting, telecommunications, mobile sites and software development. It also has also bought up chunks of other companies and managed to raise money by offering more of its own stock.
The company's 33-year-old chief executive, Takafumi Horie - a celebrity in Japan for his iconoclastic style, bold buy-out attempts and frequent television appearances - denied wrongdoing.
Kyodo News agency reported that Value Click Japan Inc., the predecessor of a Livedoor subsidiary, carried out illegal stock swaps with Japanese publisher Money Life in 2004.
Value Click, now Livedoor Marketing Co., also inflated profit figures in its financial statement released the next month to improperly raise its stock prices, Kyodo said.
The investigation triggered expressions of concern from top political and economic officials, the AP reports.
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