Olympus used takeover fees to hide losses

Olympus has acknowledged wrongdoing for the first time in a scandal involving more than $1bn in acquisition-related payments contested by its former chief executive, saying the money was used secretly to cover losses on investments dating back to the 1990s.

In an affair that has shone a harsh light on Japanese corporate governance, the camera maker had defended the payments – including a nearly $700m advisory fee paid in a 2008 acquisition in the UK – since they were revealed more than three weeks ago by Michael Woodford, then chief executive.

Olympus sacked Mr Woodford on October 14 after he pressed fellow board members for information about the deals, which had been made under his predecessor.

“It has become clear that advisory fees and funds used to buy back preferred shares in the acquisition of Gyrus, as well as funds used in the purchase of three new domestic businesses . . . were used, among other things, to dispose of unrealised losses on securities, the reporting of which had been put off,” Olympus said.

Shuichi Takayama, company president, bowed deeply at a news conference and apologised for the “highly inappropriate disposal” of the losses.

The share price, which had fallen by half since Mr Woodford’s dismissal, lost 29 per cent of its remaining value on Tuesday. The Tokyo Stock Exchange said Olympus risked being put on supervisory watch for a possible delisting if it turned out to have falsified earnings reports.

Mr Takayama declined to say whether he thought the company or its executives had committed crimes but said he believed that three directors named by Olympus as having orchestrated the scheme possessed “an awareness of illegality”.

Authorities in Japan, the UK and the US are investigating.

“I imagine the losses were big enough that, had they been reported, it would have been a major blow to the company,” he said.

The three executives had not made the initial investments, Mr Takayama said, but had “inherited” the task of covering up the losses and had acted with the company’s best interests at heart.

Olympus sacked one of the men, Hisashi Mori, deputy president, on Tuesday and said another, Hideo Yamada, had resigned. The third, Tsuyoshi Kikukawa, stepped down as chairman last month.

Mr Takayama, who appeared alone at the news conference, offered few details about the lossmaking investments or the process used to hide them, saying it would be up to an Olympus-appointed committee of legal experts to establish the facts.

He said he had known “absolutely nothing” about the scheme until Mr Mori spoke to him on Monday.

According to Mr Taka­yama, Mr Mori acknowledged the truth after evidence emerged in documents that Olympus was preparing for the investigating committee.

Mr Mori told him none of the money had been used for the personal gain of Olympus executives or outside financiers, he added, though that claim has not been verified.

The limited explanation that has been offered invites comparison to Japanese corporate scandals of the 1990s, when securities brokerages helped companies stung by the asset bubble of the previous decade to hide losses in temporary off-balance-sheet havens – a trick known as tobashi, which means “to make fly away”.

In many cases the losses would be paid off over time, in quiet deals with the brokers or third-party investors that saved companies from embarrassing – and in some cases potentially bankrupting – one-time disclosures. That might explain how Olympus was solving a 1990s problem by overpaying for acquisitions in the late 2000s.

Ken Kiyohara, a lawyer at the firm Jones Day, said: “There hasn’t been such a glaring case [of tobashi] in years.”

Olympus is sticking to its insistence that it sacked Mr Woodford because he was a “high-handed” manager who failed to master Japanese business culture. Mr Takayama said he still believed that Mr Woodford was unsuited to running the company and had been wrong to make its problems public.

Mr Woodford on Tuesday reiterated his demand that Olympus’s entire board resign over the affair. “It’s extraordinary that they could claim that only three people knew what was going on,” he said. “The eyes of the world are on Olympus and on Japan.”

Additional reporting by Lindsay Whipp and Michiyo Nakamoto in Tokyo

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.