Last updated: February 16, 2012 5:57 pm

Former Olympus executives arrested

Japanese authorities arrested seven people on Thursday in connection with a $1.7bn accounting fraud at Olympus, including the camera company’s former chairman and outside financial advisers suspected of helping executives hide lossmaking investments.

Prosecutors said they believed the former chairman, Tsuyoshi Kikukawa, and the other men had broken Japan’s Financial Instruments and Exchange Act by filing false reports to tax officials. The arrests were the first in a four-month-old case that has shaken corporate Japan.

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Olympus has admitted that it secretly moved more than Y100bn ($1.3bn) of securities-related investment losses off its books over the years, then used acquisitions as cover to square the hidden accounts. Including money that the advisers kept in return for their services, roughly Y135bn was “appropriated to maintain the scheme”, a civil investigation commissioned by the company concluded in December.

Two other disgraced Olympus executives, Hisashi Mori and Hideo Yamada, were arrested along with Mr Kikukawa. All three men left the company after the scandal broke in October, and had been named by Olympus as the central organisers of a loss-hiding scheme whose origins date to the 1990s.

None has spoken publicly since leaving, and lawyers or other representatives could not be reached for comment on Thursday.

The other four arrested men worked for financial firms that advised Olympus on acquisitions connected to the alleged fraud.

“After going to hell and back this is a day to remember,” Michael Woodford, Olympus’ former president, said in an email. Mr Woodford, a Briton, first exposed the accounting problems after he was sacked by the company in October. He has not been accused of involvement in the fraud and is suing Olympus over his dismissal.

The company is suing 19 former and current executives, including its current president, Shuichi Takayama, for Y3.61bn in damages, in a lawsuit initiated by its statutory audit committee.

Two of the arrested financiers, Akio Nakagawa and Nobumasa Yokoo, previously worked at Nomura, the Japanese investment bank, before leaving to found boutique financial advisory firms. Mr Nakagawa ran Axes, which was involved in Olympus’ purchase of the UK medical device group Gyrus in 2006, while Mr Yokoo was head of Global Company, a firm that arranged Olympus deals in Japan.

The arrests follow a global investigation involving agencies in the US and the UK and spanning jurisdictions from Florida and the Cayman Islands to London and Hong Kong. One other financier who has come under scrutiny in the case, Hajime Sagawa, is a US resident, but it was unclear whether authorities outside Japan also planned legal action.

If convicted, the seven men could face to up to 10 years in prison. Although it is common for white-collar criminals in Japan to avoid jail with suspended sentences or fines, Hideaki Kubori, a lawyer and corporate governance specialist, said the scale and severity of the Olympus fraud made it appear “much more egregious” than past cases.

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