Analysts say the departure of Watanabe and Chief Operating Officer Takumi Shibata raises questions about the bank's commitment to overseas markets since both men were the architects of Nomura's troubled acquisition of Lehman Brothers' business in Europe and Asia in 2008.
Nomura has struggled to integrate the bankrupt Wall Street firm and has since scaled back its global expansion plans, hit by the same headwinds buffeting other investment banks. Its stock has lost three-fourths of its value since the acquisition. Watanabe's replacement, Koji Nagai, said on Thursday he would not dismantle the global franchise but would carry out a review to find the "appropriate size" for the bank.
For many inside Nomura the question was simpler: How did things unravel so fast for Watanabe?
Nomura declined to comment on the events leading to Watanabe's resignation. Neither Koga nor Watanabe could be reached for comment on this article.
MANAGERS SUMMONED TO EMERGENCY MEETING
Although Watanabe had begun talking within the bank since May about management changes, many inside Nomura believed he intended to remain CEO until early 2013, a compromise that would allow him to retire at 60 rather than resign early.
At 3 a.m. on Thursday, the day of a scheduled board meeting, top managers were sent an email ordering them to an emergency meeting in a few hours time. The reason was not disclosed, but one hour earlier the Nikkei newspaper had broken the news on its website: Watanabe was out.
With the exception of a handful of people closest to Watanabe and Nagai, the shake-up came as a shock, senior executives told Reuters. By the time reporters arrived at Watanabe's house in Chiba outside Tokyo just after dawn, a security guard was in place to tell them he was not at home.
"I had no idea," one high-level executive said.
Later that day, Watanabe told a news conference he had decided to resign after setting up a new compliance system intended to stop further breaches of confidential information from the bank's underwriting department.
But a more nuanced picture emerges from interviews with 10 regulatory and company sources about the tension-filled weeks that preceded Watanabe's announcement as the cost of the scandal grew and Koga opened a backchannel to regulators.
In the past two months, at least nine Japanese issuers have dropped or demoted Nomura as a bond or stock underwriter.
That included Nomura's relegation to a lesser role in the $8 billion initial public offering of Japan Airlines (JAL), which will be the world's second biggest this year after Facebook's $16 billion IPO. Nomura had been working on the JAL deal as a global coordinator for a year when the decision was made. JAL has declined to comment on the matter.
"KOGA WRAPPED IT ALL UP FOR US" - FSA OFFICIAL
Against that backdrop, Koga, the chairman, stepped forward to smooth Nomura's ties with the FSA and head off costlier sanctions, which could range from an order to improve compliance to a damaging suspension of some operations for weeks, sources with knowledge of the situation said.
Koga, who had been Nomura chief executive for five years before handing the reins to Watanabe in 2008, also led the decision to appoint Nagai as CEO and Atsushi Yoshikawa, Nomura's head of U.S. operations, as COO, sources said. The reshuffle contained a key provision -- Watanabe would stay on as an advisor but not get involved in decisions made by the new team.
"Koga wrapped it all up for us," a senior FSA official told Reuters, speaking on condition that he not be identified.
The insider trading scandal was not the only reason regulators wanted fresh leadership at Nomura. Some senior FSA officials and company executives felt Watanabe and Shibata should be held accountable for pursuing a global expansion that hurt the bank's earnings, sources said.
Watanabe had called the Lehman deal a "once in a generation opportunity" in 2008. By 2011, markets had turned against him and he launched a $1.2 billion cost-cutting drive, mainly targeting the ailing European operations.
There are still Nomura executives who believe the logic behind the deal was sound. Watanabe's supporters say it would have been difficult to predict the extent of the European debt crisis and how tough industry conditions would become.
"Among Japanese financial institutions he was the only leader who really had the ambition to build a global franchise," one person close to Watanabe said. "I really wanted him to succeed."
KOGA'S RESPONSE SHAPED BY PAST
In the late 1990s, Koga was Nomura's liaison to the Finance Ministry and learned about the importance of dealing carefully with Japan's powerful bureaucracy.
In 1997, Koga watched then chairman Masashi Suzuki navigate a scandal triggered by Nomura's admission that it had made illegal payments to a gangster to stop him causing trouble at a shareholders' meeting in 1995.
Suzuki took over temporarily as president and in one month mapped out a response that included the resignation of 15 senior executives as well as his own.
"Chairman Koga was close to this when it all went down. I think he learned what you have to do to get over a crisis," said an executive at a Nomura group firm.
In May, Koga formed a small team of executives, including Shoichi Nagamatsu, who would soon be drafted to oversee the bank's compliance efforts. Over the coming weeks, Koga made several trips to the FSA, the sources said.
As early as March, some senior officials in the FSA and the Securities and Exchange Surveillance Commission (SESC), which is handling the insider trading investigation, had called privately for Watanabe's dismissal.
In addition to stonewalling on the probe, the sources said, Watanabe appeared to eschew protocol in dealing with regulators.
He annoyed regulators for not alerting them of his plan to name Nagai as the new brokerage unit head and then later in March by not paying a courtesy call on then Financial Services Minister Shozaburo Jimi after the first case implicating Nomura was announced, regulatory and banking sources said.
The FSA does not have the legal power to force management changes but has previously used its influence to oust executives. Watanabe's departure would seem to make it less likely Nomura will face harsh penalties when sanctions are announced in the coming weeks, regulatory sources said.
THE INVESTIGATION CONTINUES
By May, Watanabe had started telling others inside Nomura he was willing to quit if that would resolve the crisis, sources said then.
Pressure to take that step mounted as the investigation expanded and it became apparent Nomura might have to acknowledge its involvement in a wider range of cases.
Since late April, SESC investigators had been inside Nomura, working on the 14th floor of the brokerage's office in Otemachi. Their target was the kind of leak that had become widespread in Tokyo by 2010 when many companies issued new shares to recapitalize. Information on those issues, which dilute the stakes of existing shareholders, had begun to leak to investors who profited by shorting, or selling the shares, market participants and regulators say.
Nomura has said it was involved in leaks of information on three issues in 2010: by Mizuho Financial Group, energy firm Inpex Corp and Tokyo Electric Power.
At the time it was underwriting those share offerings, Nomura's institutional equity sales department was split into two groups -- one responsible for mainly long-only fund management companies and the other for hedge funds.
The early phase of the SESC's probe and Nomura's own internal investigation had focused on the division handling buy-and-hold style fund managers. But as the SESC investigation moved into July, the focus shifted to hedge funds.
On June 29, Nomura published the results of the internal investigation led by outside attorneys that detailed sweeping breaches of internal controls and a raft of measures aimed at preventing further leaks of confidential information.
On the same day, hedge fund Japan Advisory was fined for insider trading, allegedly on a tip provided by Daiwa Securities Group. After that, the FSA ordered all brokers with big underwriting desks to report back on their dealings with Japan Advisory, which regulators believed was paying brokers outsized commissions in return for tips.
Those reports are due to be filed with the FSA by August 3.
That directive put the spotlight on the brokers who worked closely with Japan Advisory and its head, Edward Brogan. Industry sources have said Nomura was one of the banks competing for Brogan's business.
Japan Advisory has declined to comment on its case. Brogan has not returned e-mails and phone calls seeking comment. Daiwa Securities announced on Friday that its own investigation found a former employee had tipped off Japan Advisory but that such leaks were not orchestrated by the brokerage.
In an update to its internal investigation, Nomura said on Thursday there was a "high possibility" its sales staff had leaked inside information on other issues beyond the three in 2010. While Nomura said in the report that it had not identified any cases involving hedge funds, a review of e-mails, chats and phone calls revealed "suspicious contacts" with clients ahead of public share offerings.
As time wore on, the stress on Watanabe grew.
At the June 29 news conference when he insisted he would keep his job, Watanabe appeared sullen and withdrawn.
"I think he was tired. The last one to two months have been grueling," the person close to him said.
His resignation on Thursday was met with relief by investors and regulators. Shares in Nomura, which had lost more than a third of their value since mid-March when the SESC announced the first case implicating the bank, are up 11 percent.
"We hope the reborn Nomura will make a fresh start," Financial Services Minister Tadahiro Matsushita told reporters on Friday.
(Additional reporting by Emi Emoto, Noriyuki Hirata and Taiga Uranaka; Editing by Kevin Krolicki and Dean Yates)