At Olympus, Scandal and Rising Calls for a Purge

The company’s stock fell 29 percent on Tuesday, and 20 percent more in early trading on Wednesday in Japan, to hit a new low. Shareholders said they were worried that the company could be delisted from the Tokyo Stock Exchange, which could threaten access to financing. Since mid-October, the company’s market value has plunged by 70 percent.

Southeastern Asset Management, the American owner of the second-biggest stake in Olympus, also demanded an extraordinary meeting of shareholders to call for a clean sweep of the board of directors and the firing of top executives.

External investigations of the company’s handling of the merger payments and losses are under way in Japan and in the United States, where the Federal Bureau of Investigation and the Securities and Exchange Commission are looking at the fees, according to people briefed on the matter. With broad investigations still open, it was likely that not just investors, but suppliers and customers, would reconsider doing business with Olympus.

The crisis at Olympus, which has a multibillion-dollar global business making digital cameras and medical equipment, began in mid-October, when the board fired the British chief executive and president, Michael C. Woodford.

The company’s chairman, Tsuyoshi Kikukawa, blamed a culture clash, but Mr. Woodford, a 30-year Olympus employee, said he was fired after trying to force an investigation into a series of acquisitions made before he was appointed chief in September.

Less than two weeks after Mr. Woodford was fired, Mr. Kikukawa resigned. On Tuesday, an outside committee appointed by Olympus concluded that more than $1 billion in merger payouts had been used to hide years of losses on investments, perhaps dating to the 1990s.

The company’s new president, Shuichi Takayama, acknowledged “inappropriate dealings,” but said that no money had flowed out of the company. Hisashi Mori, an executive vice president, had been fired over his involvement in the cover-up, and Hideo Yamada, the corporate auditor, offered his resignation, Mr. Takayama said. In an interview Tuesday, Mr. Woodford said that despite the public admission of mishandling, he was not feeling vindicated because Olympus was still being run by a board of insiders. Mr. Kikukawa and Mr. Mori — as well as Mr. Woodford himself — remain as directors.

“I feel very worried the company still has those individuals at the helm,” he said in a phone interview from London.

The American stakeholder calling for the extraordinary shareholder meeting, Southeastern Asset Management, also said Olympus still needed an overhaul.

Josh Shores, a senior analyst and principal for Southeastern, said Mr. Kikukawa “is definitely in the thick of it. If Kikukawa is still there, he is still exerting massive influence.”

Southeastern also suggested that it did not believe the entire story behind the hidden investment losses had surfaced, saying the company needed to explain the details “as soon as possible.”

Southeastern, which holds an approximately 5 percent stake in Olympus, is an investment firm based in Memphis. It has been managing funds invested in the company since 2004.

Olympus, which is based in Tokyo, had denied any wrongdoing over the deals, made from 2006 to 2008. The admission on Tuesday was a “change of gears” for investors, Mr. Shores said.

It was “something that could negatively impact the value of the medical business,” for example, where Olympus Medical has a 70 percent market share globally in flexible endoscopes, he said.

“This has been a question about what happened to some of that cash flow, and all of a sudden the core medical franchise is at risk of being negatively impacted,” he said. “You are at the point where damage is likely to be done.”

When asked whether he thought Olympus could survive the scandal, he said: “Keep in mind before all of this happened, the stock was 2,500 yen a share. We still thought it was cheap.” The only thing that needs to be changed, he said, is the people running it and an accounting of where the money went.

Mr. Woodford, too, said Olympus still had value. “It’s a good business. You can rebuild the company,” he said.

The developments cast a harsh light on Olympus’s auditors, which have signed off on financial statements that may now be suspect. The auditors, KPMG and Ernst Young ShinNihon, have not been accused of knowingly signing inaccurate statements.

KPMG was Olympus’s auditor for years until it had a falling out with management in 2009. A year earlier, KPMG had advised Olympus against awarding unusual fees to an obscure brokerage firm that advised on a deal. Cash payouts were preferable, the auditor said, but the financial adviser “strongly resisted the cash payment on the grounds that this will crystallize an immediate tax liability,” according to a document provided to The New York Times by Mr. Woodford.

A spokesman for the American arm of Ernst Young, which replaced KPMG in 2009, did not respond to a request for comment. For now, Olympus is still a client.

The payments in question involved $687 million in fees Olympus paid to an obscure financial adviser over its acquisition of the British medical equipment maker Gyrus in 2008. That fee amounted to roughly a third of the $2 billion acquisition price, a fee amount more than 30 times the norm.

Ben Protess contributed reporting.

Article source: http://www.nytimes.com/2011/11/09/business/global/at-olympus-scandal-and-rising-calls-for-a-purge.html?partner=rss&emc=rss