Ryoji Miyauchi, who was chief financial officer of the once high-flying Internet firm, exchanged eye contact with the 33-year-old Horie at the trial at the Tokyo District Court.

The testimony of Miyauchi, 39, who has admitted allegations in a separate trial, is key ammunition for prosecutors in the case against Horie, a fallen icon of a brasher Japanese corporate culture.

Miyauchi said he believed Horie understood proposals for window-dressing, including a plan to borrow Livedoor stocks from Horie for a stock-swap because Livedoor lacked ample funds.

"I think he understood and he recognized what was going on," Miyauchi said.

Horie, who has pleaded not guilty, and his former associates are accused of falsely reporting a 5.03-billion-yen (42.95-million-dollar) pretax profit for the year to September 2004 to conceal actual losses.

The scandal briefly sent the Tokyo stock market into free-fall earlier this year.

Miyauchi testified that Horie attended a series of Livedoor meetings and ordered his officers to improve the firm's earnings announcements.

Prosecutors also accused Livedoor under Horie of illegally booking profits from sales of its own shares to "dummy" investment partners.

At one meeting in November 2003, Horie specifically ordered changes to financial figures with a hope it would bring up Livedoor stock, Miyauchi said.

Horie had revelled in thumbing his nose at the establishment during his meteoric ascent as one of Japan's leading Internet stars but has seen a brutal fall from grace.

He sent tremors through Japan's corporate circles when he tried unsuccessfully to take over the nation's most watched TV network and ran for parliament last year with the blessing of Prime Minister Junichiro Koizumi.

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