In December 2011, the Yomiuri Shimbun reported: Olympus Corp.'s long years of covering up huge investment losses was orchestrated by three consecutive presidents and continued behind closed doors by a handful of executives involved in financial affairs. This is the conclusion drawn by a third-party investigation panel set up by the world's biggest endoscope maker and revealed in its report made public. [Source: Yomiuri Shimbun, December 7, 2011]

The report lambasted the company's corporate culture and governance. "That the personnel system, under which people involved in the cover-up could move up the corporate ladder, was grossly flawed," the report said, adding, "Board of directors and auditors meetings became a mere facade and thus could not perform their check functions."

The panel, consisting of five lawyers (including former prosecutors and judges) and a certified accountant, spent about one month interviewing Olympus executives nearly 200 times and poring through accounting data. We believe the investigation was thorough.

The report says Olympus chalked up about 100 billion yen in investment losses due to the burst of the asset bubble and employed tobashi scheme of transferring losses to overseas funds- because the company was required to report latent losses in its earnings after new accounting rules obligating companies to value financial assets at market prices were introduced in 2000. In addition, Olympus tried to mask the losses in one swoop by taking advantage of its acquisitions of foreign and domestic companies and transferring exorbitant acquisition expenses to overseas funds. The report also found that three previous presidents were informed of the wrongdoing.

The report by a third-party concluded that Olympus nurtured a "yes man" corporate culture executives and harshly criticized the optical equipment maker, saying, "The management core was rotten." It also said the company has created "a lineup of yes men who couldn't voice objections." [Source: Yomiuri Shimbun, December 8, 2011]

The head of six-member panel, Tatsuo Kainaka, said, "Because the authoritarian management system continued for a long time and those [involved in the cover-up] were treated well, the flow of information was blocked."

Detail of the Olympus Scandal Transactions

In December 2011 the Yomiuri Shimbun reported: The panel found that part of about 17 billion yen--the difference between the 134.8 billion yen Olympus spent for two corporate buyouts and the amount used to hide the investment losses--was used to pay a former employee of a major securities company who had proposed the cover-up scheme. It concluded the former employee plus Yamada and Mori were the chief cover-up practitioners.

Three former employees of securities companies who instructed Olympus Corp. how to hide losses exchanged more than 2,000 e-mails with Olympus executives and received over 1.1 billion yen in compensation, according the report. Among others, they exchanged e-mails with and were compensated by Hisashi Mori, former vice president of Olympus. According to the report and other sources, a former president of a Japanese unit of an investment advisory company mediated Olympus' acquisition of Gyrus Group PLC, a British medical device maker. [Source: Yomiuri Shimbun, December 10, 2011]

The man was an employee of Nomura Securities Co. and then moved to a foreign-affiliated securities firm. In the 1980s, he was involved in the investment of Olympus' assets. During this period, the man became acquainted with Hideo Yamada, a former full-time auditing officer of Olympus who worked in the company's accounting department at the time. The man introduced Yamada to the head of a U.S. investment advisory firm, who was also a former Nomura Securities employee.

In 1998, just before Japan introduced a new accounting rule that requires companies to calculate asset values based on market value, Yamada asked the two to cooperate to transfer Olympus' losses to a fund. The two established the fund in the Cayman Islands some time before March 1998. The head of the U.S. firm played the leading role in the loss-hiding scheme with the acquisition of Gyrus. At Mori's request, he sent documents and e-mails to Olympus in which the U.S. firm demanded greater compensation, money that was actually funds to hide the losses.

Based on the demand from the U.S. firm, Mori explained to Olympus' board of executives that the investment advisory firm had asked for cash to cushion the blow of the Lehman shock. Mori persuaded the board of directors to pay a total of 65 billion yen to the U.S. firm as compensation. The money was actually used to cover the losses.

Another former Nomura Securities official, now president of a business consultant firm, advised Olympus on investments. He left Nomura Securities in 1998 after serving as a branch head. Yamada also asked him to help transfer the losses, and he introduced Yamada to an official of a bank in Liechtenstein. This was to provide the fund with money to buy financial products with latent losses. The consultant firm president himself ran the fund that was used for the loss transfer. He also proposed that Olympus take over three Japanese companies, acquisitions that were used to make about 73 billion yen to cover the losses.

A total of 2,159 e-mails were exchanged between the three and the Olympus side--Yamada and Mori. The investment advisory firms received 1.18 billion yen in compensation. "They involved themselves in the scheme, knowing their actions were illegal accounting deals, and helped hide losses for many years," the committee said in its report. About 20 overseas funds and financial firms took part in Olympus' loss-hiding scam. The company's losses, which amounted to 96 billion yen in 1999, ballooned to 117.7 billion yen in 2003. The accused Olympus executives covered the losses with 134.8 billion yen made through the acquisitions of the three Japanese companies and Gyrus, which took place between 2006 and 2010.

Losses for Olympus in the 1980s and 90s

According to the report, Olympus suffered a significant fall in operating profit due to the strong yen in 1985 when former Chairman Toshiro Shimoyama, 87, was at the helm as president. The then executives realized the strategic importance of a speculative financial management technique, called zaiteku. Former senior corporate auditor Hideo Yamada, 66, who was a chief of Olympus accounting department's funds section at that time, was tasked with carrying out these speculative investments. In 1987, former Executive Vice President Hisashi Mori, 54, began working under Yamada, and the speculative investments were conducted by the company's finance section only. They became involved in the resulting cover-up of losses.

When Japan’s stock-market bubble burst at the end of 1989, it purchased high-risk products and structured bonds in an effort to recoup the loss. In late 1990, the company had a little less than 100 billion yen of unrealized losses, and this swelled to 118 billion yen by 2003, it said.

'Tobashi' Details of the Olympus Scandal

In December 2011 the Yomiuri Shimbun reported: "Quick Progress" was the name Olympus Corp. gave one of the investment funds it used to hide losses in a practice known as "tobashi," expressing executives' wish to quickly write off huge losses from the past, investigation sources said. According to the sources and the committee, Olympus started aggressive investments in the mid-1980s but incurred huge losses due to the collapse of Japan's bubble economy in the early 1990s. [Source: Yomiuri Shimbun, December 22, 2011]

Initially the losses amounted to about 40 billion yen. But Olympus used riskier financial products to cover the losses, and the total loss amount ballooned to 95 billion yen around 1998. Under the corporate accounting rules in force at the time, assets could be recorded at the values they had when they were purchased, and companies did not have to record such losses in their securities reports.

In 1998, the government announced a rule change whereby companies would be obliged to report asset values based on market prices. Olympus executives then feared the firm's losses would be exposed. Hideo Yamada, now 66, a former standing auditor who was then chief of the company's general affairs and financial department, and his subordinate officer Hisashi Mori, now 54, who later became executive vice president, consulted two officials of an investment advisory firm who had previously worked for a major securities company.

As a result, they decided to hide the losses with a tobashi scheme. Yamada asked the two former securities company officials to establish funds that were not covered by Olympus' consolidated account settlements so the losses could be transferred into the funds in the form of financial products. By March 1998, two funds--Quick Progress and Central Forest--were set up in the British territory of the Cayman Islands.

Yamada and Mori told the company's investigative committee the name Quick Progress was chosen to reflect their wish that the illegal practice would end as soon as possible.After the two confessed their wrongdoing to the committee, their faces brightened and they said they had been mentally suffering but were now relieved, according to the sources. In 1999, when he was a board director in charge of company finances, former Olympus Chairman Tsuyoshi Kikukawa, now 70, heard of the loss-hiding schemes from former Chairman Masatoshi Kishimoto, now 76. After Kikukawa became president in 2001, he received reports on the funds' investment results from Yamada and Mori about twice a year.

From 2006 to 2010, Olympus made a total of 134.8 billion yen through acquisitions of three Japanese firms and Gyrus Group PLC, a British medical equipment maker. The Olympus executives used that gain to offset the past losses. The sources said Kikukawa told Yamada and others at the time, "If this is successful, [the losses] will be greatly reduced," and "I hope this will be the end."

Olympus for a time suspended the "tobashi" scheme after auditors noticed the questionable practice, but later resumed it in a way that was more difficult to detect. As a result, the company suffered even greater losses, according to the panel. According to the panel, the auditing firm--which has now been identified as KPMG Azsa LLC--was tipped off in September 1999 that Olympus was using an accounting gimmick to transfer its losses. When the three admitted that Olympus had sold financial products with latent losses at book value to foreign investment funds, the auditing firm urged the company to stop dealings with the funds. Initially, the three ignored the request, saying they were unable to contact the then president, Kishimoto--who later became the chairman--because he was "on a business trip overseas."

Afterwards, the auditing firm once again demanded Olympus stop the illegal dealings, and the company finally complied. However, Olympus later resumed transferring its losses. This time, the company had different investment funds obtain loans with company savings deposited at overseas banks as collateral. The funds then used these loans to purchase Olympus' financial products with latent losses at book value. As a result, Olympus' off-the-book debts expanded to 117.7 billion yen in 2003 from 96 billion yen in 1999, according to the third-party panel.

Olympus Report Only Deepens the Mystery

Jake Adelstein wrote on The Atlantic Online: An independent investigative, which stated that Olympus had covered up to ¥134.8 billion ($1.7 billion) in losses since the 1990s, panel noted Olympus had also paid off “cooperative individuals” to help hide the losses, and that a great sum of money had “flown outside of the company on a continuous basis.” But while those admissions are astonishing---they amount to one of the largest corporate frauds in Japan’s history ---the report only deepens the mystery of how so much money could disappear and who the "cooperative individuals" were. [Source: Jake Adelstein, The Atlantic Online, December 6, 2012]

During a hastily held press conference, Tatsuo Kainaka, a former judge and chairman of the panel was repeatedly unable to account for who was paid to assist in the cover-up, how much they were paid, or where the billions of yen used to cover up the losses had gone. But he did insist that no money had gone to “anti-social forces,” a term used by Japanese law enforcement and regulatory agencies to refer to any group of criminals, including Japan’s yakuza. Kainaka was nervous at the press conference, stumbling over accounting terminology and unable to recall when the former CEO of Olympus, Toshiro Shimoyama, had actually left the company and whether or not he was implicated in the financial fraud.

A source on the joint task force made up of investigators with the Financial Services Agency, the Tokyo Metropolitan Police Department, and the Tokyo Prosecutor’s office said of the panel’s findings, “It’s a mystery to us how Mr. Kainaka can claim to not have a full understanding of where the money went and definitively say that no anti-social forces were involved.”

According to the written report, the bulk of the ¥134.8 billion loss came from failed financial speculation which by 2003 totaled ¥117 billion ($1.5 billion). After 2003, the company spent billions of yens on more bad investments, selling off shares of their investment firm ITX at a loss, and in pay-offs to keep the losses from becoming publicly known. The panel did not give a figure for how much money was spent in covering up past investment losses. The report itself was written in obtuse Japanese terms, making it unclear whether the total losses possibly exceeded the ¥134.8 billion figure cited.

Olympus Inflated Net Assets by $418 Million and Later Restated Earnings, Showing Loss

In November 2011, the Yomiuri Shimbun reported: Olympus inflated its net assets by $418 million dollars in the consolidated financial statement for the business year ended March 2011 according to documents the company compiled for financial institutions it has transactions with.The company said it would correct the financial statement, in which it had inflated the "goodwill" value of Gyrus Group PLC by 33.4 billion yen--if the figure is converted at 80 yen to 1 dollars when it purchased the British medical equipment maker in 2008. "Goodwill" refers to a company's agreed intangible value beyond its assets. [Source: Yomiuri Shimbun, November 18, 2011

According to the documents, the company's consolidated net assets at the end of March 2011 would be revised down to 133.4 billion yen from 166.8 billion yen. However, the correction is unlikely to result in the company's debts exceeding its assets. The Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corp. plan to continue providing financial support to Olympus, Japanese Bankers Association Chairman and BTMU President Katsunori Nagayasu said during a press conference Thursday. "It's natural for a firm's main banks to support it when the firm's experiencing hardship," Nagayasu said.

In December 2011, Hiroko Tabuchi wrote in the New York Times: Hours before a critical deadline Olympus released revised financial results, owning up to more than $1 billion in losses it hid for more than a decade. In meeting that deadline for posting revised results, Olympus avoided, at least temporarily, having its shares delisted by the Tokyo Stock Exchange. But the company’s auditing firm was unwilling to give Olympus a clean bill of health, saying the firm had been unable to verify all the money flows involved in the cover-up, which Olympus, based in Tokyo, had admitted began in the 1990s. [Source: Hiroko Tabuchi, New York Times, December 14, 2011]

Ex-Olympus Executives, Including Former Chairman Kikukawa, Arrested

In February 2012, the Yomiuri Shimbun reported: Former Olympus Corp. Chairman Tsuyoshi Kikukawa and two other former executives were arrested on suspicion they falsified the firm's securities reports. In addition, the special investigation squad of the Tokyo District Public Prosecutors Office also arrested Olympus’s former auditor Hideo Yamada, 67, and former Executive Vice President Hisashi Mori, 54. Investigators suspect the former executives covered up about 110 billion yen in investment losses in violation of the Financial Instruments and Exchange Law. [Source: Yomiuri Shimbun, February 17, 2012]

The prosecutors also arrested four alleged accomplices from outside Olympus, who are accused of advising the former executives on how to cover up the investment losses. According to the investigators' announcement, the three former executives and the four external accomplices allegedly inflated Olympus' assets for fiscal 2006 and 2007 by about 110 billion yen each by transferring financial products with latent losses to a fund set up in the Cayman Islands.

The alleged accomplices are: Akio Nakagawa, 61, a former executive of investment advisory firm Axes Japan Securities; Nobumasa Yokoo, 57, president of consulting firm Global Company; Taku Hada, 48, an executive of the consulting firm; and Hiroshi Ono, 50, a former executive of the firm. All are suspected to have been involved in the founding and operation of the fund used for the cover-up scheme.

According to sources close to the company, Yamada and Mori, along with Yokoo and others, came up with a scheme around 1998 to utilize a foreign fund to cover up the firm's losses, according to the sources. Kikukawa reportedly received and approved reports on the cover-up scheme, including the transfer of financial losses to an overseas fund. The three former executives admitted the allegations during voluntary questioning by the special investigation squad. The special investigation squad asked judicial authorities in the Cayman Islands for their cooperation to learn the whereabouts of the head of a U.S. investment advisory company, who remains at large.

Kikukawa played key role in the company's cover-up scheme, according to sources. Kikukawa reportedly signed a contract with a foreign bank that extended loans to the cover-up fund, barring the bank from answering inquiries from audit companies, the sources said. According to the sources, the contract was signed in 1998 between two Olympus executives--Mori and Yamada--and Liechtenstein's LGT Bank, which was introduced by Yokoo. The contract stated the bank would extend loans to the fund Olympus had set up in the Cayman Islands to transfer its financial assets with latent losses, with Olympus' deposits and bonds as collateral.

Using loans from the bank totaling about 30 billion yen, the fund purchased Olympus' financial products with latent losses.The contract made the company unable to freely withdraw its deposits and bonds used as collateral. In addition, if it came to light that the deposits and bonds were used as collateral, the whole cover-up scheme could have collapsed. However, the contract that was signed between Olympus and the bank had a clause that the bank would not answer inquiries from an auditing firm about details of the collateral. When the contract was renewed in 2003, it was signed by Kikukawa, who was then president of Olympus.

Hajime “Jimi” Sagawa, Possible Yakuza Ties and Unanswered Questions

Jake Adelstein and Nathalie-Kyoko Stucky wrote on The Atlantic Online: Sources close to the investigation say that those involved in the Olympus scandal are certainly more than the seven people arrested today and as Michael Woodford has pointed out, there are many questions still unanswered. For example, there still has not been an accounting for the ¥70 billion paid by Olympus between 2006 and 2008 for three Japanese start-ups--Altis Co., an industrial waste disposal firm; Humalabo Co., a health food and cosmetics sales firm; and News Chef Inc., a cookware manufacturer and investment advisor. The money was funneled into six investment funds based in the Cayman Islands and elsewhere. How much of that fell into the hands of criminal elements getting a kickback from the deals (No one covers up financial losses out of the goodness of their heart). Why were three of the chief suspects in the crime former Nomura Securities employees? [Source: Jake Adelstein and Nathalie-Kyoko Stucky, The Atlantic Online, February 16, 2012]

One of those three ex-Nomura boys is Akio Nakagawa, former head of Axes Japan Securities. Although the firm’s website has long since vanished (as has the money they handled)---a peek at their former website in English is enough to make anyone dubious. Admittedly, in Japan, there is a saying, “The customer is God” but it’s a rare thing for a financial services CEO to promise a massage to his best customers.

Adelstein and Stucky also reported: In January, the Japanese government formally asked the US Department of Justice to cooperate with the investigation, which involves possibly illegal payments made to individuals in the United States and the Cayman Islands. The primary suspect in the US, Hajime "Jim" Sagawa, was also a former Nomura Securities employee. The FBI White Collar Crimes Division is handling the case, although the Asian Organized Crimes Division wanted to take the lead and was rebuffed, according to US Department of Justice sources. The Asian Organized Crimes Division, fueled by President Obama’s executive order declaring the yakuza an enemy of the state, are anxious for a chance to investigate Japanese organized crime influence in the international financial market. Due to FBI internal hierarchies, the White Collar Crimes Unit will probably remain the lead. However, internal squabbling as to which direction to take the Olympus case is not limited to the US.

Bloomberg reported in December 2011: Hajime Sagawa, who was a director of Axam, the investment company that was paid $670 million in fees as part of the Gyrus buyout, left Florida for the Cayman Islands according to his brother-in-law. Sagawa divorced his wife a month before and sold her their Boca Raton home for $10. Sagawa, who hasn’t made a statement since Axam’s role in the Olympus scandal was revealed, and Akio Nakagawa were named by the panel as key figures who aided Olympus to structure its loss-hiding schemes. “He’s down in the Cayman Islands,” Gary Nevis, Sagawa’s brother-in-law, said in a Dec. 1 telephone interview, citing a conversation he had last week with his sister, Sagawa’s ex-wife. Investigators in Japan, the U.S. and U.K. are still probing the transactions. The panel said it found no evidence that money was funneled to criminal gangs. [Source: Mariko Yasu and Naoko Fujimura, Bloomberg, December 6, 2011]

Olympus Sues Executives Over Cover-Up, but Does Not Dismiss Them

In January 2012, Hiroko Tabuchi wrote in the New York Times: Olympus said that it was suing 19 current and former executives and board members, including its current president, for around $50 million over an accounting scheme to hide losses going back more than a decade. Shuichi Takayama, president of Olympus, is among the executives being sued for their roles in an accounting scandal. But in the latest indication that the Olympus scandal continues to follow a distinctly Japan Inc. approach to corporate governance, the company is letting the discredited president and the implicated board members stay on until later this year. [Source: Hiroko Tabuchi, New York Times, January 10, 2012]

The president, Shuichi Takayama, was a longtime lower-level Olympus executive and board member until last November, when he was promoted to replace Michael C. Woodford, a Briton. Mr. Woodford was fired after blowing the whistle over the $1.7 billion accounting fraud. Olympus said on Tuesday that Mr. Takayama, who has contended he knew nothing of the scheme, was being sued for 500 million yen, or about $6.5 million, on contentions that he failed to meet his fiduciary duties as a director while the fraud was under way. Olympus defended its move. “The plan is for the current board members who were found responsible and are subject to lawsuits to complete passing on their roles to avoid any impact on business,” the company said in a statement.

Based on the panel’s findings, Olympus said it was seeking up to 3.6 billion yen, or $47 million, in damages from 19 past and present executives. The brunt of the damages sought will be from the former chairman, Tsuyoshi Kikukawa; the former executive vice president, Hisashi Mori; and the former internal auditor, Hideo Yamada, the company said. A separate third-party investigative panel appointed by Olympus said last month that the three had orchestrated the scheme to mask investment losses.

Text Sources: New York Times, Washington Post, Los Angeles Times, Daily Yomiuri, Times of London, Japan National Tourist Organization (JNTO), National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

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© 2009 Jeffrey Hays

Last updated April 2012

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