Olympus Hid Losses With Acquisition Fees
By Mariko Yasu and Naoko Fujimura – Nov 8, 2011 8:57 AM ET
Olympus Corp. said three executives helped conceal decades of losses by paying inflated fees to takeover advisers, the first admission of wrongdoing since accusations from its former chief executive officer engulfed the Japanese camera maker four weeks ago.
Olympus shares plunged by the daily limit and pulled other Japanese equities lower on concerns the country hasn’t escaped corporate governance weaknesses that have dogged it since the stock market bubble burst at the end of 1989. Allegations by Michael C. Woodford have wiped 70 percent from the value of the company’s stock since he was axed as CEO on Oct. 14.
“Institutional investors will stay away from Japan’s market until they confirm this is an isolated case,” said Koichi Kurose, chief economist in Tokyo at Resona Bank Ltd. Some “investors probably think that if there’s one cockroach, there may be 10 more,” he said.
Former Olympus Chairman Tsuyoshi Kikukawa was involved in the cover-up, President Shuichi Takayama told reporters in Tokyo today. Executive Vice President Hisashi Mori, who was fired today, and auditor Hideo Yamada also took part, he said, reversing weeks of denials of any wrongdoing in the 2008 purchase of Gyrus Group Plc and three other takeovers.
Japanese and U.S. regulators are probing allegations by Woodford that more than $1.5 billion was siphoned through offshore funds. That money may have been used to cancel out non- performing securities that Olympus was keeping off its books, according to a report in the Shukan Asahi magazine, which cited people familiar with the process.
Olympus released a statement this morning saying an independent investigation found advisory fees and takeover payments were used to hide soured investments from the 1990s.
Olympus’ revelations echo the practice of hiding losses known as “tobashi” that became widespread in Japan in the late 1980s and led to the failure of Yamaichi Securities Co., according to Yasuhiko Hattori, a professor at Ritsumeikan University in Kyoto. Yamaichi used overseas paper companies to hide problematic securities, until it failed in 1997 with 260 billion yen ($3.3 billion) in hidden impairments.
Takayama declined to comment on the involvement of any securities firms in Olympus’ cover-up. The Topix Securities and Commodity Futures Index fell 11 percent, the most of any industry group in the broader gauge. Nomura Holdings Inc. tumbled 15 percent to the lowest in 37 years; Daiwa Securities Group Inc. dropped 7 percent.
Olympus plunged 29 percent in Tokyo trading, closing at 734 yen. The Topix ended 1.7 percent lower, the worst-performing Asian stock index.
The Tokyo Stock Exchange said it’s considering moving the shares in Olympus, the world’s biggest maker of endoscopes, to a watchlist for possible delisting. Takayama pledged to continue with the investigation into the losses, which he said were probably inherited by Kikukawa.
“The investigation must continue to determine how much rot there is,” said David Herro, chief investment officer of Harris Associates LP. “All responsible must, at a minimum, leave. Also, since the management’s credibility is nearly nonexistent, all of what they say must be verified.”
Woodford should return to run the company and conduct the “house cleaning,” Herro said in an e-mailed comment to Bloomberg News and on Bloomberg Television. Harris held 10.9 million Olympus shares as of June 30, a 4 percent stake that makes it the company’s second-biggest overseas investor.
While Olympus President Takayama today spoke of the anger he felt over the losses, he said there’s no plan for Woodford to return.
“There are about 45,000 workers,” Woodford said in a Bloomberg TV interview today. “I feel a great sense of obligation to them and would go back — as president and CEO.”
Former chairman and president Kikukawa, who had Woodford removed, resigned on Oct. 26 as investors increased pressure for a review of the deals. Kikukawa denied any wrongdoing when he stepped down and said he intended to stay on the board.
The company set up a six-person independent investigation, including two former judges and a retired prosecutor, to probe the $1.4 billion of writedowns and fees related to acquisitions.
Olympus paid a total of 73.4 billion yen to increase stakes in Altis Co., News Chef Co. and Humalabo Co. between 2006 and 2008, which was also used to hide losses, it said today. Olympus wrote down 55.7 billion yen, or 76 percent of the acquisition value, in March 2009, the company said in a statement Oct. 19.
Olympus last week said the acquisitions of three Japanese companies unrelated to its main operations were part of an attempt to diversify earnings.
After being fired, Woodford went public with his concerns raised with Kikukawa and Mori over $687 million paid in advisory fees in the $2 billion acquisition of U.K. medical-equipment company Gyrus and the writedowns. All the transactions involved payments to Cayman Islands companies or special purpose vehicles whose beneficiaries are not known.
The U.S. Federal Bureau of Investigation is probing the allegations, according to Woodford, who said he has also met with the Serious Fraud Office in London.
The probes center on more than $600 million in fees paid to Axam Investments Ltd., a now-defunct Cayman Islands fund connected to U.S.-based Japanese banker Hajime Sagawa.
Mori, a key official involved in the Gyrus takeover according to U.K. company records, on Oct. 27 declined to name the person who introduced Sagawa to Olympus.
Repeated attempts to reach Sagawa at his registered address in Boca Raton, Florida, have been unsuccessful, as have efforts to trace the owners of Cayman entities paid for the three other acquisitions.
“The money went to those shareholders,” Mori said at the Oct. 27 briefing in Tokyo. “We have no idea who they are.”
To contact the editor responsible for this story: Ben Richardson at firstname.lastname@example.org