TOKYO — Top executives at Olympus, the Japanese maker of cameras and medical equipment, devised an elaborate scheme to cover up investment losses involving at least $1.7 billion and should face legal action, a third-party panel said Tuesday in a highly anticipated report that called the company’s management “rotten to the core.”
The panel’s findings appeared to vindicate, to a great extent, the company’s ousted president, Michael C. Woodford, who had made public allegations and called for an inquiry into a series of exorbitant acquisition payments made by the company before his tenure. Mr. Woodford has called for the entire Olympus board to resign and has said he is in talks with shareholders to help install fresh management at the company.
The report also highlights the role played by three former Nomura bankers in arranging the cover-up, as well as alleged failings of Olympus’s auditors, especially KPMG’s Japan affiliate, in exposing fraud at the company. It alleges that several banks, including Société Générale, submitted incomplete financial statements to auditors, in effect aiding the cover-up.
“The management was rotten to the core, and infected those around it,” said the report, more than 200 pages long with appendices.
Still, concerns remain over the true independence of a panel appointed by the Olympus board, as well as just how fully a monthlong investigation could have investigated a complicated program involving numerous overseas funds and financial advisers. The panel cleared the cover-up of alleged links to Japan’s notorious criminal underworld, for example, despite acknowledging that it did not know for sure where some of the money ended up or whether individuals had pocketed money.
The possibility of organized crime involvement in the cover-up had become a critical issue in the investigation, as any proof of mob links could wipe out all shareholder value in the company by causing its shares to be delisted from the Tokyo Stock Exchange. The Japanese police are investigating possible links to organized crime, according to several people close to the inquiry.
Tatsuo Kainaka, the panel’s chairman and a former judge of Japan’s Supreme Court, acknowledged that a forensic accounting by Olympus’s auditors, as well as an investigation by the Japanese and overseas authorities, was needed to bring all facets of the scheme to light.
“We do not know for sure where funds ultimately flowed to and how,” Mr. Kainaka said at a news conference after the report’s release. But the panel “could not find any evidence of a flow of funds to organized crime,” he said.
In a separate statement, the Tokyo Stock Exchange warned that the company could still be delisted if it failed to meet a Dec. 14 deadline to submit its latest financial statement. Olympus shares have already lost half their value in the scandal.
According to the report, Olympus executives plotted with several former investment bankers to hide ¥117 billion in losses made from investments that went sour in Japan’s stock bubble crash in the early 1990s.
The company later used a series of acquisition-related payouts to settle those losses, including an outsize $687 million in fees paid to a now-defunct fund incorporated in the Cayman Islands for Olympus’s takeover of a British medical equipment maker in 2008. Olympus also paid $773 million for three companies in Japan that appeared unrelated to its main business, including a face cream maker, only to quickly write down the bulk of their value.
The report denied speculation that those acquisitions had been made solely to cover up losses. However, Olympus executives saw the purchases as an opportunity to hide irregular transactions, the report said.
The report also alleged that Olympus’s auditors KPMG AZSA and Ernst Young Nippon had not done enough to expose Olympus’s financial maneuvers. In 2009, KPMG AZSA raised serious concerns with the company’s recent acquisitions, the report said, but backed down and gave Olympus’s finances the all-clear when the company insisted that a third-party inquiry had found nothing wrong.
Article source: http://www.nytimes.com/2011/12/07/business/global/banks-aided-in-olympus-cover-up-report-finds.html?partner=rss&emc=rss
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