Ex-Livedoor executive says Horie knew of fraud

TOKYO, Sep 15 (Reuters) Takafumi Horie, the 33-year-old Internet entrepreneur once lauded as a brash new model for corporate Japan, pressured aides to inflate earnings at his firm Livedoor in 2004 and was kept informed of its crooked accounting, a former company executive told a court today.

Ryoji Miyauchi, a tax accountant who as Livedoor's financial director helped Horie rise from college dropout to celebrity billionaire, made the claim in widely anticipated testimony at Horie's trial for securities fraud.

The testimony came eight months after prosecutors first raided Livedoor's headquarters, rattling financial markets and embarrassing Prime Minister Junichiro Koizumi, who had tapped Horie to run for office as a symbol of economic reform.

''He was very strict when it came to the numbers,'' Miyauchi, 39, said in his first appearance as a prosecution witness.

He described how Horie insisted on raising Livedoor's interim 2004 recurring profit forecast to five billion yen from three billion yen based on gains from the sale of Livedoor stock held in a Hong Kong-based investment fund.

Counting the gains as revenue was illegal, prosecutors say.

''Let's make it five billion. Do something to make it work,'' Miyauchi quoted Horie as saying. He added that Horie was kept informed of the stock-sale scheme and of another plan to inflate Livedoor's sales through phantom orders from allied firms.

Miyauchi's appearance had been billed as a showdown between the two men, who have given sharply different accounts of the origin of Livedoor's reporting problems.

Horie has maintained that he knew nothing of the spurious accounting. He pleaded not guilty on September 4 to charges of conspiring to file false financial statements.

The trial has drawn intense media attention in Japan, where opinions about ''Horiemon'' -- a nickname derived from Horie's resemblance to a rotund cartoon cat -- had been divided even before his arrest.

Horie's attempt to buy a baseball team in 2004 and a rare takeover battle with a larger media group last year won him admirers among young people but enemies among Japan's conservative business leaders.

''NO CONNECTION WITH REALITY'' Miyauchi, who has also been charged in the affair, said he came up with a plan to take phantom sales orders from two companies after it became clear that Livedoor would miss its five billion yen profit target even after including the stock-sale gains.

Livedoor was in talks to buy the two firms at the time.

''These orders had no connection with reality. There was no substance to them,'' he told the court. ''It was window-dressing.'' Although the plan did not come from Horie, Miyauchi said the chief executive had asked whether ''something could be done to raise the numbers,'' and had approved of the phoney-sales scheme when Miyauchi proposed it to him.

''We have no choice,'' Miyauchi quoted Horie as saying.

Horie is expected to take the stand in November, and a verdict is likely to come early next year. In addition to Miyauchi, three other Livedoor executives arrested in the case have admitted to at least some of the charges against them, according to media reports.

If convicted, Horie faces up to five years in prison and fines of up to five million yen (,510). He also faces lawsuits from shareholders over the five billion in market value shed by Livedoor following his arrest.

A dropout from the elite University of Tokyo, Horie set up Livedoor's predecessor, Livin' On the Edge, a decade ago with ,000 in capital and turned it into a sprawling Internet empire.

Livedoor's stock had been a favourite of small investors, and the January raid sparked a sell-off that swamped the Tokyo Stock Exchange's computer system. The bourse took three months to return to normal trading after the so-called Livedoor Shock.

The firm was de-listed in April after its share price sank to just 94 yen (80 cents).

REUTERS AB VV1600