Kelly, Nissan and Japan itself go on trial

TOKYO — Shortly before Thanksgiving 2018, American auto executive Greg Kelly got an urgent message saying he was needed in Japan for important business at Nissan Motor Co., where he was a director.

Kelly initially balked at the idea. The longtime Nissan human resources executive was at home outside Nashville, preparing for the holiday and a spinal surgery that was scheduled for shortly thereafter. But he acquiesced when the company offered to dispatch a chartered jet to pick him up.

Only after the plane landed in Tokyo on Nov. 19 did Kelly realize the trip was a ruse. Prosecutors arrested him that night and took him to jail in a coordinated swoop that also netted his then-boss, Nissan Chairman Carlos Ghosn.

Nearly two years later, Kelly's closely watched criminal case came to trial last week, and the man accused of colluding with Ghosn to hide about $86 million in deferred compensation is fighting back. Also on trial is Nissan Motor Co. itself. And as executives and companies around the world watch the outcome, so is the business culture of Japan.

For Nissan, the Tokyo trial could bring some closure to a corporate scandal that convulsed the automaker and ruffled its 20-year alliance with French partner Renault.

For Japan, the trial turns an unflattering spotlight on its society, its legal system and its attractiveness as a place to do business.

For Kelly, who turned 64 the day his trial began, Tuesday, Sept. 15, the case will decide whether he returns to the U.S. as a free man or spends perhaps the next 10 years in a Japanese prison.

The crux of the case is whether money earmarked for Ghosn for after retirement was decided each year as part of his overall compensation or whether it was a separate pool of money to keep him on board with Nissan after retirement, perhaps as an adviser. If the funds were actually part of his compensation while he was CEO and chairman, Nissan would have been required to report them in its financial reports. It did not.

Prosecutors maintain the funds were indeed part of Ghosn's compensation and that Kelly orchestrated how they were handled. In his defense, Kelly maintains that Ghosn's post-retirement compensation plans had not been decided or finalized and, more significantly, that Kelly was not even involved in arranging all of them. Other Nissan executives had a hand as well, he says.

At one time, Ghosn was expected to be present here last week, too, defending himself on the same charges and helping to corroborate Kelly's defense. But instead, the indicted former chairman evaded court by jumping bail last December and fleeing to Lebanon in a daring escape.

Kelly was joined in the defendant's dock last week by Nissan Motor Co. as a corporate entity. Like Kelly, Nissan is accused of failing to file financial reports that accounted for Ghosn's full compensation. Kelly pleaded not guilty; Nissan said it won't contest the charges.

Kelly said his work on Ghosn's post-retirement compensation was strictly legal and called his ex-boss an "extraordinary executive" who needed to be retained so he wouldn't jump to a competitor. It was for Nissan's benefit, he added, because of Ghosn's influence over Renault.

"This was all in the best interests of Nissan," Kelly said in court, dressed in a dark suit and red tie and wearing a mask to guard against COVID-19. "I was not involved in a criminal conspiracy."

Ghosn, for his part, has maintained that the charges were fabricated by Nissan in an attempt to block him from following through with greater integration of Nissan and Renault.

For Nissan, the stakes are high. Some executives, past and present, are privately concerned that a not guilty verdict for Kelly would further tarnish the company's reputation after it spent a year and a half trying to clean up fallout from the Ghosn scandal. They worry that, in the court of public opinion, a courtroom victory for Kelly would be tantamount to a not guilty verdict for Ghosn as well.

The reality is more complicated.

Ghosn was indicted on two additional charges of breach of trust, accused of diverting company money for his private use. Kelly has nothing to do with those charges, and since Ghosn has fled Japan, they likely will never be hashed out in court.

But Kelly will still likely be seen as Ghosn's surrogate.

As the trial began, Nissan issued a statement expressing confidence in a guilty decision.

"Based on substantial and convincing evidence found in the investigation, Nissan established that Carlos Ghosn and Greg Kelly intentionally committed serious misconduct and significant violations of corporate ethics," Nissan said.

"The company contends that the facts surrounding the misconduct will be shown during the court proceedings and the law will take its course."

Japanese prosecutors have a lot riding on the Kelly case as well.

It is reportedly the first time anyone in Japan has been prosecuted on charges of filing false compensation reports. It is also a test run for the plea bargaining system that Japan has only recently adopted.

Two other Nissan executives were able to avoid prosecution by cooperating with investigators. They were accused of helping Kelly and Ghosn conceal deferred compensation.

Other flashpoints of criticism: the Japanese system's penchant for jailing suspects at length without bail; not allowing defense attorneys to be present when suspects are interrogated; and the practice of keeping suspects waiting long periods for trial — in Kelly's case, some 22 months.

Japanese prosecutors wield substantial power. Days before trial, Kelly's defense team said it was still waiting for the government to share some 70 boxes of evidence. And the prosecutor's office also won't even publicly disclose the names of the attorneys prosecuting Kelly in court.

Jeffrey Sonnenfeld, senior associate dean at Yale School of Management, said Japan's legal system and its handling of the Ghosn and Kelly affair make it a less appealing place to do business.

"Who won't think twice before taking an assignment in Japan, now that their justice system has been revealed to be so unfair to foreigners?" Sonnenfeld wrote this year in Chief Executive magazine after Ghosn fled to Lebanon. "What are the next paths countries such as China and Japan and other nations may take in holding business leaders in harsh conditions without charges or counsel, in systems far more reminiscent of kidnappers or pirates than modern states?"

Three U.S. senators also published a letter in support of Kelly, calling his predicament a "cautionary tale" for Americans working in Japan.

"If Americans and other non-Japanese executives question their ability to be treated fairly in Japan, then that most important bilateral relationship in the world is at risk," Sens. Roger Wicker of Mississippi and Lamar Alexander and Marsha Blackburn of Tennessee said in the March letter published with RealClearPolitics.

Executive search firms in Japan say those concerns are overblown, though the saga is sometimes a topic in recruiting foreign talent.

"Ghosn's issue comes up, but it's not the decisive factor," said one headhunter in Tokyo. "But it makes us all want to never have to deal with the authorities. You want to cooperate."

Last week, Japanese prosecutors said Kelly plotted with Ghosn to effectively hide more than half of his compensation by deferring payouts until after he retired.

Prosecutors alleged they did so beginning in 2010, the year Japan changed its corporate reporting rules to require executives with big pay packages — those totaling more than ¥100 million ($947,000) a year — to disclose their individual compensation. Ghosn, long under fire for pulling down one of the highest salaries in Japan, wanted to hide his full pay to avoid public criticism, authorities say.

Kelly listened to an English interpretation of the proceedings through an earpiece. His wife, Dee Kelly, sat front and center. Kelly has been barred from leaving the country since the day of his arrest, and in order to be with him in Japan, his wife maintains a student visa by studying Japanese.

Kelly described how Nissan was on the verge of bankruptcy in the late 1990s, only to be saved by the tie-up with Renault and the arrival of Ghosn, who went on to become CEO and chairman.

"Mr. Ghosn was an extraordinary executive," Kelly said. Even though most industry watchers thought Nissan was doomed, Kelly said, "Mr. Ghosn proved the experts wrong."

The prosecution and the defense agree that efforts were made to pay Ghosn more.

Kelly said that he, former CEO Hiroto Saikawa, other executives and internal and outside attorneys brainstormed ways to keep Ghosn on board, and they only considered measures that were legal.

In the end, nothing was finalized. Thus, the defense argued, there was no requirement to disclose any of the arrangements in financial reports.

The fact that other Nissan executives, most of them Japanese, also worked on compensation plans for Ghosn but evaded prosecution should be a red flag, Kelly's American lawyer James Wareham said before the proceedings.

"The statute is hopelessly vague. And it's being used in a racist and unfair way against Westerners and not against Japanese citizens," he said.

Kelly may have to wait another year to learn his fate. The trial is expected to run through July, and a verdict may not come before autumn 2021. In the meantime, he has yet to see his 9-month-old grandson. And the pandemic prevented his sons from visiting him in support during the trial.

Isolated in Japan, where he lives with his wife in a downtown apartment, Kelly stays connected with the States via video calls. His wife said she would make a pesto dinner at their home away from home to celebrate his birthday and the end of his first day before the Tokyo District Court.

"He's not guilty. He didn't do anything wrong," she said outside the courthouse. "And he really cares about Nissan, still.

"I don't root for the disaster that [Nissan is] facing right now. I think it's terrible. But I think they lost their perspective."